What is the Difference between Retail & Institutional Traders?

Aside from having slightly different liquidity constraints, markets are an equal playing field for almost all market participants. Since the natural laws of markets dictate that the prices of securities are primarily dependent upon the forces of demand and supply, no single entity can control the market without answering to liquidity.




Fig 1: Image source


This fact aside, market participants are usually divided into two main classes: retail traders and institutional traders. 


It is important to understand the differences between these two types of traders, since they can have unique impacts on the markets. Let’s explore those differences in this article.




What is a Retail Trader?

Fig 2: Image source


Retail traders are individual traders of varying levels of expertise that have one simple goal: to increase their wealth.


Despite being thought of as being the more disadvantaged of market participants with less capital and less access to information, in the current age of technology, markets have never been more open and accessible. With lower fees and high-quality platforms such as Bookmap that were previously proprietary and only available to hedge funds. 


Retail traders actually have many advantages, such as being able to make trades without any market impact, as well as being able to buy and sell almost any financial product without limits, since trades are carried out for themselves and not clients. You can read more about this in our article The Advantages of the Small Trader.




What is an Institutional Trader?

Have you ever read about those trades done for mind-bending numbers in the millions or even billions of dollars? Or perhaps you’ve heard about shady practices such as stop runs or spoofing.


Well, that’s how institutional traders are perceived in the general market. They are big, financially robust, and more financially savvy speculators who manage money on behalf of their clients.




The Common Institutional Traders/ Investors:

Commercial banks, pension Funds, hedge funds, real estate investment Trusts (REITs), exchange-traded funds (ETFs), investment advisors, endowment funds, and CTA funds (Commodity Trading Advisors) are all examples of institutional market participants.


These institutional investors are more sophisticated and scholarly investors who use a wide array of trading techniques, such as:


  • Hedging the risk of adverse future price movements by purchasing derivative contracts
  • Setting a limit price while engaging in block trades
  • Performing short-selling operations 


1. More Capital


Institutional traders have large pools of money that need to be put to good use in search of alpha-generating trades. Despite the vast wealth of some individual traders, it will never amount to the amount of capital that institutional traders have access to.


This comes with its own set of advantages. Not only can they invest their capital across more trading ideas, but in some cases they can influence market sentiment by nudging price in the direction they desire (although this doesn’t come without its cost—since getting trapped in a large position is definitely undesirable). They can also influence the market with their large orders, although some of their practices are not strictly legal, but are still fairly common.


In most markets, it is the institutions that are the dominant players.


2. Better Research


When there are millions of dollars on the line, funding for high-quality research is a given.


Institutional traders have dedicated research analysts and portfolio managers who, day in and day out, perform research such as:


  • Fundamentals of the various listed companies
  • Global macro factors such as interest rates
  • Strategies for expressing their views (e.g. buying a stock and writing an options call) and maximising the overall return with an eye on decreasing risk


Many institutional traders also do some or all of the above quantitatively, with teams of PhDs piling through datasets with a scientific approach.




The Advantages of the Retail Trader

Being small is not always disadvantageous. This is especially true if you are an active day trader. 


There are several advantages that a retail trader enjoys over institutional traders, including:


1. Less Liquidity Constraints


Less capital, more hunger for success! It holds true that retail traders can open or close their positions at will with little to no impact on liquidity. This lifts a lot of weight off a traders’ shoulders, since they can test out ideas without having to worry about being able to close out their positions.


Institutional traders are hindered by their large size, and trading in and out of positions in one go can risk pushing prices against them.


Let’s ingrain this idea with an example.


If the intent to purchase security “A” is leaked to the market, this would immediately tip off the market and then every rational trader would want to buy the asset ahead of this big money.


This would cause security “A” to shoot up in price, resulting in a worse average entry price for the institutional trader, as they end up buying from the earlier market participants who are now selling to them.


2. No Investment Mandates (Can Trade Any Market)


Retails enjoy the ultimate freedom in financial markets: the abilitiy to trade whatever they want. They have no applicable investment mandates, and they are free to trade in any market in the world, for whatever reason they deem reasonable.


On the other hand, institutional investors have to play by the book, often limited to certain juristractions, instruments, or even strategies.


As a simple example, an Index ETF tracking the S&P 500 index must invest only in the securities in this index.





Large or small, retail or institutional. No matter who you are, all that matters is your understanding of the different markets and their nuanced liquidity characteristics. Combine that with some highly-functional order flow indicators and tools, and you havethe workings of a potentially profitable trading approach.


Institutional traders may be more capital-rich, have a more significant influence, and have more knowledge than the average retail trader, but, they don’t have the freeom of less liquidity constraints and the absence of investment mandates, which can give the retail trader that vital trading edge.


Bookmap was originally developed for a HFT trading firm that opened up their product to their world, offering highly sophisticated tools previously unseen on the retail market. Try it for free today.




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