20 September 2021
Historically speaking, institutional or professional traders have held several advantages in the market regarding trade execution. For example, they have better brokerage access and technological applications to aid the process.
The increasing accessibility of user-friendly brokerages online, real-time data, as well as better access to analysis and investment data, has to some degree narrowed the gap between professionals and retail traders. That said, institutional investors still have some advantages. They can negotiate trading fees, access a broader range of securities, and guarantee best execution.
What is the difference between these two types of traders?
Most traders operating in the markets will be retail traders. These are ordinary traders, usually not professional, mostly trading on their own behalf. They will typically invest in various assets, including stocks, bonds, options and futures. They may have very minimal or no access to IPOs. Most trade execution will be made in round lots of 100 shares, but retail traders can trade varying amounts of shares at any particular time.
Retail traders will generally purchase for personal accounts. They are generally more likely to invest in small-cap stocks because their lower price allows for a greater purchase range. This is useful for retail traders looking for affordable ways to achieve a diversified portfolio through cost-effective trade execution.
Trades enacted by retail traders are generally too small to have any market impact. While retail traders begin trading via a personal account, they may start trading for family, friends or work colleagues. In the latter instance, a successful retail trader might even begin to move into territory generally associated with institutional traders.
A critical difference between institutional traders’ approach and retail traders is the volume and scale of the trades that the former will initiate compared to the latter. Institutional trade execution will usually involve blocks of at least 10,000 shares. This is a far higher figure than a retail trader will usually initiate.
It’s not just the size of the trades that differentiate the two types of traders. Institutional traders will invest in securities not usually available to retail traders, including complex transactions such as forwards and swaps.
Institutional traders will usually enjoy some cost advantages over retail traders. Because of the size of their trades, costs can be reduced by sending trades directly to exchanges or via an intermediary. They will negotiate basis point fees for every transaction and will prioritise low latency and best execution. Institutional traders will not be charged marketing or distribution expense ratios.
Institutional traders are less likely to own small-cap stocks, and the larger the institutional fund, the larger the market cap they are likely to hold. There are some practical commercial reasons for this. Significant institutional funds can quickly become majority owners of small to mid-cap companies, or they may decrease liquidity to the point where options to take the other side of the trade could be limited.
Large institutional trade execution can, in some circumstances, have a significant market impact. To avoid this, trades may be broken down into smaller trades submitted over time, perhaps through different brokers.
Our execution-only brokerage services at Global Investment Strategy offer cost-effective market access for a wide range of traders. At Global Investment Strategy, we can execute trades in global markets across all asset classes, 24 hours a day, five days a week.