Retail investors are constantly reminded of how institutions have an edge over them, and that only professional investors/traders can win in the market. Nonetheless, the playing field has been made more even for retail investors, especially with the improvement in technological tools. Let’s examine the edge that retail investors have compared to the institutions.
What Is An Institution?
In a general sense, institutional traders/investors refer to firms which trade in the financial markets for a living. That would include banks, hedge funds, mutual funds, proprietary trading firms, and so on. Thus the definition is very broad, with varying business models between them.
For example, within the category of hedge funds, there is a multitude of strategies that can be employed. Some deal in public markets, others in private markets, and others only focus on certain asset classes. The edge or advantage that each institution has really varies from case to case.
What Do Institutional Traders Actually Do?
Focusing on banks, which are typically the largest institutional traders, they are primarily in the business of market making. This means that a bank equity trading desk would provide a buy and sell price for various stocks to their clients, with their profit coming from the spread between the two.
Bank traders have access to a wide range of research tools (which also varies across banks) and platforms (that provide better pricing), which offers them a serious advantage over retail traders. They also have access to the interbank market, which offers cheap funding and the ability to deal in large lot sizes.
What Advantages Do Retail Traders Have?
Despite the above, retail traders still have certain advantages that cannot be found in institutions.
Firstly, retail traders have the freedom to choose what to buy and when. This is a tremendous advantage, especially during high periods of market stress. If you think that the stock market is going to sell off, you can always liquidate your portfolio, no questions asked. For a trader at a bank, you may be forced to take certain positions (often in the wrong direction) as your clients would be looking to offload what they have.
Next, the improvement in technological tools for trading in the past decade has been astounding. Today, all you need is a PC with an internet connection to buy a stock. Prices are typically competitive (with so many retail brokers around) and fees are kept lower. For the technical analysis guys, price charts can be displayed within a second and indicators easily plotted. These are all advantages only institutional guys had access to in the past.
Top Image Credit: DollarsAndSense.sg
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