Institutional traders and retail traders: what is the difference?

Institutional Traders and Retail Traders: An Overview

Trading securities is as simple as pressing the buy or sell button on an electronic trading account. However, more sophisticated traders may choose more complex transactions by setting limit prices on block trades, which are analyzed by many brokers and traded within a few days. The difference lies in the type of traders, there are two basic types: retail and institutional.

Retail traders, usually called individual traders, buy and sell securities for personal accounts. Institutional traders buy and sell securities for accounts managed by them for groups or institutions. Pension funds, mutual fund families, insurance companies, and exchange-traded funds (ETFs) are common institutional traders.

Some of the advantages that institutional traders once enjoyed over retail investors have disappeared. The accessibility of mature online brokers, the ability to trade and receive more diverse securities (such as options), the wide availability of real-time data, and investment data and analysis close the gap.

However, the gap has not completely narrowed. Institutions still have many advantages, such as access to more securities (IPOs, futures, swaps), the ability to negotiate transaction fees, and guarantees of best prices and execution.

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Key points

  • Institutional traders buy and sell securities for accounts managed by them for groups or institutions.
  • Retail traders buy and sell securities for personal accounts.
  • Institutional traders usually trade larger scales and can trade more exotic products.
  • Factors such as online brokers have narrowed the gap between institutional and retail traders, which once gave institutional traders an advantage.

Institutional Trader

Institutional traders have the ability to invest in securities that are not normally available to retail traders, such as forwards and swaps. The complex nature and type of transactions often hinder or prohibit individual traders. In addition, institutional traders are often invited to invest in IPOs.

Institutional traders usually trade at least 10,000 shares of large stocks, and can minimize costs by sending transactions to exchanges independently or through intermediaries.

Institutional traders negotiate base point fees for each transaction and demand the best price and execution. They do not charge a marketing or distribution expense ratio.

Due to the large trading volume, institutional traders can greatly affect the stock price of securities. For this reason, they may sometimes split transactions between different brokers or over time so as not to have a major impact.

The larger the institutional fund, the higher the market value that institutional traders tend to have. It is more difficult to spend large amounts of cash on small-cap stocks because traders may not want to become major shareholders or reduce liquidity to the point where no one may participate in the transaction.

Retail trader

Retail traders usually invest in stocks, bonds, options and futures, and they have little opportunity to participate in IPOs. Most transactions are carried out in whole lots (100 shares), but retail traders can trade any number of stocks at once.

If retail traders trade through a broker, in addition to marketing and distribution costs, each transaction also charges a fixed fee, and their transaction costs may be higher. The number of stocks traded by retail investors is usually too small to affect the price of the security.

Unlike institutional traders, retail traders are more likely to invest in small-cap stocks because their price points are lower, allowing them to purchase many different securities with a sufficient number of stocks to achieve a diversified portfolio.

special attention items

Although retail traders and institutional traders are different types of traders, retail traders usually become institutional traders. Retail traders may start trading for their personal accounts, and if they perform well, they may start trading for friends and family.

If retail investors continue to generate positive returns and accumulate more funds from other investors, they may organize into an institution that is essentially a small investment fund. This growth can continue indefinitely to the point where retail traders are now institutional traders.


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