Difference Between Institutional Traders & Retail Traders

The world of securities trading encompasses a spectrum of approaches, from the simplicity of retail trading to the complexities of institutional trading. Retail traders, often individuals, engage in personal securities transactions, while institutional traders manage accounts for groups or institutions such as pension funds, mutual fund families, insurance companies, and ETFs.

Although advancements in technology and access to information have narrowed the advantages once held by institutional traders, certain distinctions remain. Institutional traders still enjoy access to a wider range of securities, the ability to negotiate fees, and assurances of best price and execution.

Institutional traders can delve into complex transactions like forwards and swaps that are typically beyond the reach of retail traders. Moreover, institutions are often presented with investment opportunities in IPOs and can negotiate basis point fees while avoiding marketing or distribution expenses.

Given their substantial trading volume, institutional traders possess the power to significantly impact the share price of a security. To mitigate this influence, they may split trades among various brokers or execute them over time.

The size of an institutional fund influences the market capitalization of the securities it owns, with larger funds generally favoring higher-cap stocks. Smaller-cap stocks pose challenges for institutional traders as their investment might result in majority ownership or reduced liquidity due to limited counterparty participation.

Retail traders primarily engage in stocks, bonds, options, and futures, with limited access to IPOs. They typically trade in round lots, although the flexibility to trade any number of shares exists. Retail traders may encounter higher trading costs if they utilize brokers with flat fees per trade along with marketing and distribution expenses. Given the relatively smaller number of shares they trade, retail traders have minimal impact on security prices.

Unlike institutional traders, retail traders are more inclined to invest in small-cap stocks due to their affordability, facilitating diversified portfolios comprising multiple securities.

Interestingly, retail traders often transition into institutional traders. Starting with personal trading accounts, successful retail traders may expand their scope to include trades for friends and family. Continued success and the accumulation of capital from other investors can lead to the establishment of a small investment fund, paving the way for the transformation into institutional traders.

While institutional traders and retail traders have distinct characteristics, their paths can intertwine as retail traders progress towards managing institutional-level portfolios, exemplifying the evolutionary nature of the trading landscape.