Warrior Trading Blog

Hidden Seller Definition: Day Trading Terminology

Hidden Seller photo

A hidden seller is a seller who is using the capacity to hide sell orders provided by their broker. Hidden sellers can employ 3 separate functions that can help to mask their trade and minimize its impact upon the market.

The Purpose of Hidden Sellers

Hidden sellers attempt to mask the size and/or origin of a sell order to minimize the order’s impact on the price of the security. Certain order sizes or origins can quickly push the price of a security lower, which would mean a loss of value for the hidden seller.

3 Methods for Hidden Sellers

There are 3 distinct methods that hidden sellers can employ separately or in conjunction to help mask the size and origin of their sell order.

The first and second methods that hidden sellers use are to break their larger sell order up into a number of smaller sell orders at different prices and also set to execute them in quick succession using algorithms.

While a large block order can influence the market, human traders will be less influenced by the same volume being split up among various smaller orders, though algorithms are unlikely to be affected. The second method is even more effective when the smaller orders are then set to be executed in succession using an algorithm, though the actual trade execution may be weakened as volumes are missed during the execution process.

The third method that hidden sellers can use is to literally hide their sell orders from the market.

Certain exchanges will allow brokers to input hidden orders. However, these orders are generally pushed to the back of the execution queue for any given price, so the hidden seller is again likely to face poorer execution as a cost of attempting to mask their trade.

Hidden Sellers and Trading

As most day trading strategies are highly influenced by trading execution, unlike longer-term trading strategies, day traders can be heavily affected by the presence of hidden sell orders.

Unfortunately there is little that most day traders can do in the presence of hidden sell orders except to be aware of their general existence and trade with the full knowledge that what is displayed on the book is often not the true extent of the trades that are currently at play in the market.

While it is often useful to observe the open orders for a security, that should never be the reason for executing a trade. Rather, the existing open orders should be just one source among many for executing trades, and they should always be considered in light of the fact that hidden sellers do exist.

Day traders can also take advantage of the hidden seller function themselves when executing large orders. However, the hidden seller function will only be needed by most day traders when trading in securities with small and illiquid markets.

Final Thoughts

Hidden sellers use a variety of means to mask the size and origin of their sell orders from other traders.

Day traders should be aware of the existence of hidden sellers, and trade as if the order book is not displaying all the sell orders that are currently in play.