Understanding and Testing Iceberg Algorithmic Trading Strategy

Abstract

As Technology has advanced in recent times, it also has impacted the Trading requirements that modern day traders have. Trading now is not a simple Buy and Sell of a Security, but it is way complex involving complex mathematical algorithms programmed to execute Trades at much faster rates and using different trading strategies, also called Algorithmic Trading strategies. Traders’ selection of algorithmic strategy/ order types is a critical decision that significantly influences the execution quality and outcome of trades. In this Paper, we will specifically study one of the commonly used Algorithmic strategy/ order type called Iceberg Order. We will try to understand why Iceberg Orders are required, how they are executed with the help of different examples and what Testing should be done to ensure we deploy a Defect free Iceberg Order Strategy to production. A small issue in execution of trading strategy can result in big losses to the company, regulatory fines and reputational loss. So, Test Scenarios to be considered and testing requirements for Iceberg Orders should consider different scenarios which will be discussed in detail in this paper.