The majority of traders on the stock market are retail traders like you and me. Although we outnumber institutional traders, they control a significant portion of the total assets traded in financial markets.
Institutional traders dominate the market due to their substantial capital, sophisticated strategies, and access to exclusive financial instruments. They manage large trade volumes, which gives them significant market influence.
Despite all this, retail traders have been catching up since the COVID-19 pandemic, and their impact is more substantial. Below, we will find out more about institutional and retail traders.
Table of Contents
What Are Institutional Traders?
Institutional traders are professionals who buy and sell securities on behalf of large organizations or institutions rather than for personal accounts. They include commercial banks, mutual funds, pension funds, hedge funds, insurance companies, and other financial institutions.
Some popular examples are Vanguard, BlackRock, and Fidelity. They make money by charging their clients fees and commissions. Here are a few characteristics of institutional traders.
Trading Characteristics
- Trading volume: Institutional traders deal with much larger securities volumes than retail traders. Generally, they trade blocks of at least 10,000 shares.
- Market impact: Due to the size of their trades, institutional traders can significantly influence market prices and trends.
- Access to resources: They generally have access to more sophisticated research, data, and advanced trading technology than individual traders. However, many platforms (TradesViz, Equitybee, Qtrade, IC Markets, Betterment, Investors Underground, SoFi) have emerged with advanced tools and personalized features in recent years.
- Investment horizon: Institutional traders typically focus on longer-term investment strategies, which can vary depending on the institution’s goals.
- Regulatory environment: They are subject to stricter regulations and compliance requirements than retail traders.
- Types of securities: Institutional traders can invest in a wider range of securities, including more complex financial instruments like commodities, IPOs, forwards, and swaps. In the past, these investments were unavailable to retail traders. Many platforms have made them available to certain investors in the last few years. Don’t be surprised if, in a few years, retail traders will have the same access as institutional traders.
- Cost structure: They can negotiate lower fees and faster transaction execution times due to their large trading volumes.
- Expertise: Institutional trading firms employ analysts and operators who study market trends, write detailed reports, and make trading decisions based on extensive research.
- Algorithmic trading: In recent years, many institutional traders have shifted towards using algorithms for a significant portion (75-80%) of their trading activities. This is also available to retail investors thanks to some trading platforms.
Market Impact of Institutional Traders
In the early 2000s, mutual funds and ETFs weren’t popular yet. Therefore, institutional investors accounted for only about 50-60% of trading activity. That number grew as mutual funds, hedge funds, pension funds, and more sophisticated trading strategies became available.
In the US markets today, institutional investors account for a much more significant portion of all stock trading activity, but that number is slowly decreasing.
Before the pandemic, they represented around 85-90% of all stock trading activity. Since the pandemic, that number has decreased to between 80-85%.
It may not seem like a big difference, but the daily average volume in the US surpasses $500B. Every 1% the retailers take represents a huge amount of money.
Institutional investors still significantly impact market trends and stock prices despite the changing market dynamics. Their dominance will likely remain strong for the foreseeable future.
What Are Retail Traders?
Let’s move on to retail traders. They are individual traders or small investors who participate in trading for personal accounts, generally with smaller amounts of capital than institutional traders.
Retail traders use trading platforms that give them access to stocks, bonds, options, futures, and other financial vehicles. With the rise of new trading platforms like SoFi or Robinhood, some retail investors can access IPOs, commodities, cryptocurrencies, and more.
You’re mistaken if you think retail traders are always shorthanded compared to institutional traders. To a certain degree, they have more freedom with their money.
They can use various strategies, such as day trading and swing trading. They can also use technical & fundamental analysis, social media discussions, or market sentiment analysis to make trading decisions.
In short, retail traders have more flexibility in their trading decisions and can invest in a wider range of securities without the constraints that institutional traders face.
Psychology
However, one aspect can negatively impact retail traders’ trading success: psychology and emotions. Unlike institutional traders who have a strategy and must follow it, retail traders often don’t follow a set plan and trade irrationally with their emotions.
If you follow the WallStreetBets subreddit, you’ve likely come across many apes and degenerates who post their daily/weekly YOLOs that no institutional trader would dare invest in.
Market Impact of Retail Traders
In recent years, retail traders have become a more prominent force. We first noticed this during the pandemic, during periods of high market volatility and notable events like the GameStop and meme stocks short squeeze.
Collectively, these actions can lead to substantial market movements, although institutional traders generally maintain a larger share of the overall market due to their resources and capital.
Institutional vs Retail Traders
Below is a table summarizing the major differences between institutional and retail trades.
| Characteristic | Institutional Traders | Retail Traders |
|---|---|---|
| Trading Volume | Large blocks (10,000+ shares per trade) | Smaller, individual trades |
| Capital | Manage large sums of money | Limited personal capital |
| Market Influence | Significant impact on market prices and trends | Minimal impact on market prices individually |
| Information Access | Comprehensive market research, proprietary data, and analysis | Limited to publicly available information and resources |
| Technology | Advanced trading platforms, algorithmic trading, HFT | Basic to intermediate online trading platforms |
| Fees | Lower fees due to high volume, better price execution | Higher fees, especially through brokers, and slower execution times |
| Regulations | Stricter regulations, compliance requirements | Fewer regulatory constraints but limited access to some instruments |
| Investment Horizon | Often long-term strategies, but varies | Depending on individual goals and risk tolerance, it can be short-term or long-term. |
| Types of Securities | Access to a wide range of securities, including IPOs, swaps, commodities and more | Limited to securities offered by the broker |
| Market Access | Can trade in multiple markets globally | Primarily limited to domestic markets, with some access to international markets |
| Risk Management | Sophisticated risk management strategies and tools | Basic risk management, often self-directed |
| Expertise | Teams of professional analysts, researchers, and traders | Varies widely and often self-taught or reliant on online resources |
| Flexibility | Less flexible due to large positions and regulatory constraints | More flexible, can quickly enter and exit positions |
| Liquidity | Provide significant market liquidity | Contribute to market liquidity but on a smaller scale |
| Market Impact | Can move markets, especially in less liquid assets | Generally, there is no significant market impact individually (unless they’re Warren Buffet or Elon Musk!) |
| Education | Often have formal education in finance, economics, or related fields | Varies widely, may have formal education, or be self-taught |
| Decision-Making Process | Data-driven, often involving complex models and analysis | Can be influenced by market sentiment, news, and social media |
| Strategies | Use of advanced strategies like arbitrage, hedging, and derivatives | Often use simpler strategies like day trading, swing trading, and buy-and-hold |
| Market Participation | Dominant in terms of volume and influence | Growing in number, especially with the rise of online trading platforms |
Final Thoughts: Institutional Traders
To conclude, institutional traders are not taking over the stock market, at least not in the US. They represent a significant percentage (80-85%) of the trading volume and money moving on the stock market, but retail traders also have their word to say.
Since the pandemic, retail traders’ voices have been heard louder, and that impact can be felt almost daily. Thanks to the rise of various platforms, they have access to many financial instruments, data, and asset types to compete with institutional traders.
The gap is slowly narrowing, but that doesn’t mean all retail traders succeed in their stock market journey.
If you want to learn more about profiting from the stock market, head to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.
Frequently Asked Questions
Institutional traders make money by charging their clients fees and commissions.
Some large institutional investors include Vanguard, BlackRock, and Fidelity.
They emphasize long-term value and diversification. They have a plan and stick to it.
