Sniping is a tactic for capturing liquidity whilst minimizing signalling risk. Effectively, it’s a way for liquidity demanders to hide their strategy.
Alternatively, it’s just a version of the seeking tactic for visible liquidity, to reduce the potential for signalling risk we will use marketable limit orders with the specific fill instructions. This gives us price control and limits our footprint on the order book.
Note that for sniping either immediate or cancel or fill or kill instructions can be equally useful, based on whether we want partial fills or not.
The seeking tactic is all about finding hidden liquidity. Market participants are constantly monitoring the state of order book and comparing this with the reported trades to try to spot hidden liquidity. Based on this data we can create models to estimate the probability of how much volume is hidden at the various price levels throughout the order book.
Another important concern when searching for liquidity is keeping our own orders hidden, otherwise we may be exposed to considerable signalling risk.
We want to fill our own orders at the best price possible without giving away information about our actual requirements.
So a persistent order will not do, instead we will need to use either market orders or marketable limit orders with specific fill instructions. Assuming we want to be able to control our market impact then we can rule out market orders.
If sufficient hidden liquidity is available then the behavior of our liquidity seeking order will be the same , regardless of whether we use an immediate-or-cancel or a fill -or- kill instruction.
In comparison, a fill or kill order would have failed to cross since there’s insufficient hidden liquidity, therefore the order would be immediately cancelled leaving the order book still looking.
Thus immediate or cancel orders offer a way of probing for hidden liquidity that minimizes their footprint on the order book and may partially fill ,even if our estimate for the amount of hidden liquidity is wrong. Fill or kill orders are less forgiving in this last respeet due to their 100% completation requirements. Partial fills are important since by the time we resubmit an order someone else may have already found and consumed any hidden liquidity.