Sweeping is a term you might have heard whispered among traders or mentioned in discussions about large market moves. 

It sounds mysterious, doesn’t it? Yet, it holds a powerful significance in trading. But, what does sweeping truly mean, and why is it such a crucial concept for anyone in the financial markets? 

Stay with us, because as we look into this, you’ll get to know why understanding sweeping could make a big difference in how you approach your trades.

What is Sweeping in Trading?

Sweeping in trading refers to the process of executing a large trade by filling it across multiple price levels in the order book. 

When a trader places a big order, there may not be enough liquidity (available buyers or sellers) at one price to fill the entire order. 

Sweeping ensures the trade gets executed by moving through the available prices, starting from the best price and continuing to less favorable ones until the order is filled.

This concept is important in fast-moving markets or when dealing with large orders, as it can significantly impact the execution price of the trade.

How Does Sweeping Work?

To understand sweeping, think of it as shopping in a store with limited stock on each shelf. 

If you need 1,000 items and one shelf only has 400, you grab those 400, then move to the next shelf to take another 300, and so on, until you’ve got all 1,000. 

The same thing happens in trading when sweeping occurs.

Example of Sweeping

Let’s say you want to buy 1,000 shares of a stock at the best available price. 

Below is the order book:

When you place a market order to buy 1,000 shares:

• You get 400 shares at $100.
• Then, 300 shares at $101.
• Next, 200 shares at $102.
• Finally, 100 shares at $103.

Instead of paying just $100 for all your shares, you pay a higher average price because your order swept through multiple price levels to get filled.

Why Does Sweeping Happen?

Sweeping happens for several reasons:

1. Large Orders

A big order can exceed the available shares or contracts at the best price in the market, forcing it to move to the next level.

2. Market Orders

These are orders to buy or sell immediately at the best available price, often triggering sweeping because they prioritize speed over price.

3. Low Liquidity

In markets with fewer participants or less activity, there may not be enough shares or contracts available at a single price.

Types of Sweeping

They are:

1. Upward Sweeping (Buy Orders)

Upward sweeping happens when a trader places a large order to buy, but there aren’t enough sellers willing to sell at the current lowest price. 

As the buy order tries to fill, it clears out all the available shares or contracts at that low price, then moves up to the next higher price to find more sellers. This process continues until the entire order is filled.

For example, imagine you want to buy 1,000 shares of a stock, but at the current price of $50, there are only 500 shares available. 

To complete your order, the system will buy the 500 shares at $50 first, then look for more shares at the next price level, say $51. 

If there are another 300 shares at $51, it will buy those, and then move to $52 to buy the remaining 200 shares.

This upward sweeping increases the average price you pay because it starts at the lowest price but gradually moves to higher prices. This is common with market orders, which prioritize speed over price.

2. Downward Sweeping (Sell Orders)

Downward sweeping happens when a trader places a large sell order, but there aren’t enough buyers willing to purchase at the current highest price. 

The system starts by selling all the available shares or contracts at the highest price, then moves down to the next lower price to find more buyers. This continues until the entire order is filled.

For example, if you want to sell 1,000 shares of a stock, but at the current price of $50, only 400 shares can be sold, the system will sell those 400 shares first. 

Then, it will look for buyers at $49 and sell, say, 300 shares, and finally move to $48 to sell the remaining 300 shares.

This downward sweeping causes the average price you receive to drop, as the system starts at a high price but moves to lower prices to complete your sell order. 

Like upward sweeping, this is common with market orders, which focus on execution speed rather than price.

Pros and Cons of Sweeping

In as much as sweeping comes with its advantages, it also comes with disadvantages too, they are:

Pros

• Sweeping ensures that large orders are fully executed without leaving a portion unfilled.
• Speed: It allows traders to quickly enter or exit positions, especially in fast-moving markets.

Cons

• Price Impact: Sweeping pushes prices higher (for buys) or lower (for sells), which can lead to unfavorable execution prices.
• Slippage: The final price may differ significantly from the expected price, increasing trading costs.

How to Reduce the Impact of Sweeping

They are:

1. Use Limit Orders

Instead of a market order, a limit order sets the maximum price you’re willing to pay (for buys) or the minimum price you’re willing to accept (for sells). This prevents sweeping into unfavorable price levels.

2. Break Up Large Orders

Divide a big trade into smaller chunks and execute them gradually to avoid disturbing the market.

3. Trade in High-Liquidity Markets

Choose assets with high trading volumes, where there is plenty of liquidity at each price level, reducing the need for sweeping.

4. Monitor the Order Book

Before placing a trade, check the order book to understand the available liquidity and plan your order accordingly.

How to Manage Sweeping

Let’s say you want to buy 1,000 shares of a stock:

• Option 1: Place a market order. The order sweeps through price levels and gets filled at an average price of $101.50.
• Option 2: Place a limit order at $100. The order will only be filled if shares are available at $100 or lower. You may not get all 1,000 shares immediately, but you avoid paying more than $100.

Sweeping in High-Frequency Trading

In high-frequency trading (HFT), sweeping is common as algorithms execute trades in milliseconds to take advantage of market opportunities. 

While this can create liquidity for other traders, it can also lead to rapid price movements, making it harder for traditional traders to get favorable prices.

Points To Note

• Sweeping happens when a large order clears multiple price levels to ensure full execution.
• It is common with market orders or in markets with low liquidity.
• While it ensures speed and completion, it can lead to slippage and higher costs.
• Traders can minimize the impact of sweeping by using limit orders, breaking up large trades, and trading in liquid markets.