The disclosed quantity feature allows traders to disclose only a percentage of their overall order quantity, which helps to minimise market impact. Using disclosed quantity, traders strategically disclose parts of their orders, lowering impact costs and improving execution.
In this article, we will look at what the disclosed quantity is and why it matters to traders. Let us look into this essential component of stock market trading.
Impact cost
The impact cost is the difference between the actual price at which an order is executed and the price of the share at the time of order placement. This expense is especially substantial for traders who deal with large quantities of shares.
Consider placing a market order to buy 500 shares at Rs. 100 each. However, by the time your order is processed, the price has increased to Rs. 100.5 per share. In this instance, the effect cost would be Rs. 0.5 per share, totalling Rs. 250 for the order. If you place a limit order at Rs. 100 per share and later change it to Rs. 100.3 to get a fill, the difference between the intended and actual execution prices is the impact cost.
As the size of your order increases, so does the impact cost. This means that traders who deal with large volumes of shares are more likely to face higher impact costs. Impact costs frequently outweigh other charges, such as brokerage fees, exchange transactions, and even the Securities Transaction Tax (STT).
It is important to understand the influence impact cost has on your trading strategy, especially if you are dealing with a significant number of shares. Understanding and factoring in the impact cost allows you to make informed decisions that lower your trading expenditures while increasing your returns.
How to use the disclosed quantity feature
Understanding how to leverage tools like the disclosed quantity feature can be helpful in your trading strategy. Let us break down how you can use this feature effectively to your advantage.
- Accessing the disclosed quantity option: To begin, when you place an order, you will see an option called "Disclosed Quantity." This is where you will specify how much of your total order quantity you wish to disclose to the market depth.
- Inputting the desired quantity: In this section, simply enter the amount you want to disclose. This could be a percentage of your overall order or a set number of shares, depending on your trading approach and preferences.
- Strategic disclosure for optimal execution: The disclosed quantity feature is unique in that it allows you to selectively reveal certain portions of your order to the market. By gradually releasing parts of your order, you can decrease market impact while increasing the likelihood of optimal execution.
- Mitigating impact costs: As we previously highlighted, impact costs can have a substantial impact on your trading results, particularly when dealing with larger orders. Using the disclosed quantity function, you can offset these expenses by disclosing fewer amounts of your order at a time, lowering the overall impact on market prices.
- Understanding price-time priority: It is vital to understand the "price-time priority" principle that exchanges operate upon. This means that after a segment of your order is completed, the following segments will be placed based on their price and time of submission. This ensures a fair and orderly execution process.
- Optimising your trading strategy: Whether you are an experienced trader or just starting out, adding the disclosed quantity feature into your trading strategy can be beneficial. It gives you complete control over the execution of your orders while reducing market effect and increasing your chances of getting favourable rates.
- Consult your sub broker: If you are unclear about how to use the disclosed quantity function or its implications for your trading, do not hesitate to contact your sub-broker for assistance. They can provide helpful insights based on your specific trading goals and preferences.
- Adhering to exchange regulations: Finally, it is essential to follow exchange regulations regarding the use of the disclosed quantity feature. Different exchanges may have different criteria and restrictions. Therefore, it is important to familiarise yourself with these principles to ensure compliance and avoid potential problems.
Example scenario
To explain the use of the disclosed quantity feature, consider the following scenario: a buy order for 20,000 shares of an organisation with a disclosed amount of 3,000. In this instance, only 5,000 shares are initially displayed in the market depth, with the remaining 5,000 shares exposed only after the first segment is completed. It is important to remember that exchanges use a "price-time priority" principle, which ensures a fair and efficient execution procedure by placing succeeding order segments based on their importance.
Did you know
While the disclosed quantity feature is useful in shares trading, it is important to understand its limitations and alternatives. Notably, disclosed quantity orders cannot be used in futures or options trading. Traders can, however, use alternate strategies, such as Iceberg orders, to attain similar goals. Furthermore, different exchanges have different requirements for the minimum disclosed quantity, emphasising the importance of full understanding and adherence to exchange regulations.
Conclusion
The disclosed quantity feature is a powerful tool for traders looking to manage the intricate nature of the stock market effectively. Traders can reduce impact costs, improve execution, and protect themselves from price manipulation by carefully exposing parts of large orders. To fully utilise this feature, it is essential to strictly adhere to exchange regulations.
