Institutional Traders vs Retail Traders – What You Need to Know

As you might already know, there are many types of traders out there. They can be day traders or scalpers, traders that like to take big risks, Forex traders, stock traders, and so on.

However, there are two major categories of traders that really make a difference when it comes to analyzing how one trades. Namely, we refer to institutional and retail traders.

The two are extremely different and, on top of that, the status of one of them cannot be easily achieved by the common trader. Let’s take a closer look at the things that you need to know when you compare the two types of traders.

What are Retail Traders?

Retail traders are also known as individual traders and are, basically, the average people that want to trade securities and such. Anyone out there can become a retail trader and there is virtually no requirement to become one.

You just find a broker, create a trading account if needed, and start trading your favorite currencies or stocks. The only thing you need to gather is knowledge and skill, obviously.

What are Institutional Traders?

Institutional traders, on the other hand, operate on a whole different level. They trade – buy and sell stocks, securities, and so on – using the accounts of various institutions and groups. In short, they trade on the behalf of another entity, not for personal gains, so to speak.

When it comes to institutional traders, the most common traders are mutual funds, pension funds, ETFs, and insurance companies. In the past, these institutional traders enjoyed various benefits but, as the trading scene became more and more popular, the difference – in terms of advantages – between the two types of traders is not that big.

What are the Advantages of Institutional Traders?

As mentioned above, the differences between the two types are quite small. However, this doesn’t mean that becoming an institutional trader is easy. For starters, you have to be a professional trader and connected to the institution you’re going to trade for. In short, it’s not an easy thing to accomplish.

Here are some of the benefits that institutional traders enjoy:

  • They have access to various securities that retail traders can’t access. Some of these are swaps, futures, and IPOs. These are extraordinary trading opportunities.
  • Then, probably the most important bit, institutional traders can actually negotiate the trading fees practiced by their broker of choice.
  • Last but not least, due to their status in the market, institutional traders are guaranteed the best price and execution when it comes to a trade. They get the best deal available and, naturally, can make the best of it!

How do Institutional Traders Trade?

We all know how retail traders do their job. But how do institutional traders operate? Obviously, they don’t engage in scalping nor deal with $1000 budgets. Instead, institutional traders manage big funds, trade in larger sizes, and usually deal with exotic types of products.

For instance, when buying shares, institutional traders almost always settle for a minimum of 10k shares. This is one of the reasons why they are never charged distribution or marketing expense ratios.

Trading stocks with multiple screens

Moreover, due to the large volume of shares usually traded, they also tend to split a particular trade over a long time and among multiple brokers. This is so that they don’t make too much of an impact on the market or on a specific security.

The good news, for retails traders, is that institutional traders don’t often interact with small-cap securities and stocks. Why? Well, the truth is they don’t want to own the majority of a certain security or drastically affect its liquidity.

In short, they don’t want to play in a market where they might end up becoming the only player (and where little to no profit is made).

How Easy Can You Become an Institutional Trader?

First of all, it is worth mentioning that an institutional trader is also the type of trader that generally manages the trading account of their family or friends. A retail trader might also cross the border, so to speak, if they get enough capital from investors (as a result of their successful retail trading strategy).

Ultimately, with more investors sheltering their capital with a retail trader, an investment fund is created. This is when the retail trader becomes institutional. But this can happen only when the retail trader has become highly efficient and professional.

The Bottom Line

Institutional trading is often seen as high-stake trading, especially by retail traders. However, considering the capital of large companies, pension funds, and so on, it is really normal trading for them.

The only difference is that the market they have to play in is a bit different from the daily market of the retail trader. As such, it might be very difficult for a scalper to manage the trading account of an ETF.

This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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