From the July 01, 2009 issue of Futures Magazine • Subscribe!

How to hide your hand

Going back to the glory days of the floor, traders executing large orders would often show only a small portion of the order so as not to tip off other traders regarding the ultimate size of the position they were initiating or exiting. In the Treasury bond pit, for example, a trader could buy or sell 100 lots at will without causing a blip, but if he showed a 1,000 lot, traders might attempt to sell in front of it and bids could begin to disappear.

Trading electronically allows participants to see current bids and offers and associated quantity. This is an immediate disadvantage to the trader with a large order to fill. In response, the trading platforms of both CME Group and ICE enable the trader to enter an order for just part of the desired quantity and earmark the balance as reserve. The smaller quantity is displayed and, when filled, an identical order is automatically created and sent. This continues until the reserve quantity is filled. In this way, the complete quantity remains hidden, much the same way a floor trader would execute such an order.

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