The "Institutional" Approach
Hey team. The S&P 500 rose for the first time in three weeks, driven by signs of easing inflationary pressures and strong earnings from major banks.
Today’s article provides some insights into what it's really like behind the scenes regarding the methods employed by institutional investors, in contrast to retail trading.
Impact Snapshot
Unemployment Claims - Thursday
Manufacturing/ Services PMI - Friday
Consumer Sentiment - Friday
Markets will be closed Monday in observance of Martin Luther King Jr. Day.
President-elect Donald Trump is scheduled to take office Monday.
Macro Viewpoint
U.S. stocks surged on Friday, capping off a strong week as optimism grew about the economy's health and the direction of interest rates. Investors were also preparing for a slew of policy changes with the incoming Trump administration.
This week's data helped ease concerns about a possible resurgence in inflation, while expectations have increased that the Federal Reserve could accelerate both the timing and size of interest rate cuts this year.
Consumer inflation data for December showed an unexpected slowdown in core inflation, providing further reassurance.
The market largely anticipates that the Federal Open Market Committee will keep interest rates unchanged later this month.
Small Fish, Big Fish
The following article shares insights on some of the key differences between retail and institutional trading that you should be aware of as a short-term trader.
What is an Institutional Investor?
An institutional investor is a legal entity that accumulates the funds of numerous investors (which may be private investors or other legal entities) to invest in various financial instruments and profit from the process. In other words, an institutional investor is an organization that invests on behalf of its members.
A Retail Trader’s Dilemma
Short-term (retail) traders often make a big mistake thinking about investment information versus trading information. (e.g. economical catalysts, corporate earnings, legislative shifts, geopolitical developments that influence markets over months or years).
They often have problems trading because they haven’t made that disconnect between being an investor and a trader. They are so dissimilar in nature and if you start crossing those, it’s going to give you very poor returns.
Institutional investors need a long time horizon to buy or sell positions, otherwise they’ll start to impact the price of those securities. This is why they need high liquidity. Investment banks provide that liquidity to clients that are looking to execute large trades so they quote them a fixed price.
Investment managers don’t act immediate to economical data numbers. They will have meetings, review the data and might take 3-4 days before any evidence of change they might want to make surface.
Your Approach vs. Institutional Investors
Risk Management
Retail
Often take on concentrated risk in fewer positions.
Use stop-losses and tight risk controls.
Institutions
Employ diversified portfolios to manage risk across asset classes.
Use advanced hedging techniques (BSM Model, options, futures) to mitigate risk.
Market Impact
Retail
Have negligible market impact varies considerably due to market make up.
Emotional driven and have “herding” behaviour in the market.
Institutions
Their large orders can significantly move markets.
Must break up trades into smaller increments or use dark pools to minimise market impact.
Objective
Retail
Focus on short timeframes (minutes to days).
Aim to capitalise on small price movements, often through day trading or swing trading.
Prioritise liquidity and quick profits over long-term positions.
Institutions
Operate mostly on longer timeframes, and use high-frequency trading for short-term strategies.
Focus on building substantial positions to meet portfolio or fund objectives (e.g., pension funds, mutual funds).
Prioritise stability and alignment with broader investment goals.
99% of active retail traders never reach long-term consistent profitability
There are not many successful traders. All the evidence we’re getting over the years is that it’s a pretty small and competitive space and there are not going to be a lot of people that make it and can do that competition.
The majority of people that manage their own money on a long-term basis, underperform the professional money manager by about 40%.
The professional money managers basically stay fully invested most of the time. Big cash positions may only be 3-4% for big, long-term money managers.
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