Absorption

Absorption is above average trading that takes place at a particular price level or levels.

A single order can get absorbed at a single level, or a trend of orders can get absorbed at several levels. Various strategies can be used to absorb orders: stacking, iceberg orders, and synthetic iceberg orders.

Stacking

Stacking is the catch all term for limit orders added to the book. Iceberg orders and synthetic iceberg orders can be a form of stacking.

Iceberg Orders

Exchanges like CME offer iceberg orders to protect investors from being front-run by traders. Showing large orders on the book can often effect their ability to fill negatively.

These orders have a ‘head’ and a ‘tail’, once the head is traded, the limit will be replenished with the iceberg orders refresh quantity. All refreshed orders are added to the back of the book. An iceberg order cannot exist without a visible head.

Synthetic Iceberg Orders

Synthetic iceberg orders are limit orders injected into the book client side. This allows traders and investors more ‘real-time’ control over their orders. The exchange treats them as limit orders. This is stacking in response to trades.

Absorption on a footprint chart

Absorption doesn't have to be in a singular order as well. In the candle below, we can see the increased volume it takes to move the price. The candle moved up a total of 5 ticks, closing 4 ticks up with a total of 88 buys traded at one level.

Further Reading

For those interested in programatically monitoring absorption, see our example on Iceberg Detection.