Decoding Institutional Trading: A Beginner's Guide

Miltos Skemperis
9 Min read

Surely, you’ve heard of institutional trading. For example, on the occasion of an IPO in which the shares were reserved only for institutional investors. If you’re still not sure what this type of investment entails or you are just a retail trader, in this article we are going to clarify it and explain the difference between institutional trading and retail trading.

Institutional trading | Definition

What is institutional trading? Institutional trading consists of the purchase and sale of financial assets by institutions through their traders. This definition of institutional trading applies to institutional equity trading, institutional stock trading, institutional options trading - any subcategory.

Institutional trading is practised by large companies that have teams divided into analysts and operators in such a way that the former are dedicated to making technical and fundamental analysis and the latter study the information and put into practice the strategies and operations that they consider most convenient.

To do this, institutional trading involves large amounts of money, which allows traders to have a great capacity to diversify their investments to avoid large losses.

In addition, by operating with large volumes of operations, traders in institutional trading have access to better prices in the market and can even directly influence the price movement of the assets they exchange. In fact, a battle is being fought among institutional traders to try to control the market and drive it towards their interests. The impact of institutional trading on stock prices can be substantial.

How do they get this control? If they believe a market is going to rise, they enter long, as any retail trader would, but by entering with large amounts of capital they can influence the confirmation of that trend.

Let's now look at a real example.

Black Wednesday: George Soros vs British Pound

In 1992, a very famous phenomenon occurred in the investment world that offers a clear idea of ​​how institutional Forex trading can influence the market. Let's provide some context: in 1990, in the middle of the recession, the British government decided to join the ERM (Exchange Rate Mechanism), a mechanism by which some European countries established a fixed exchange rate referenced to the German mark.

Shortly after, in the process of reunification, the German government was forced to raise interest rates to control inflation, so the rest of the countries subject to the European system had to do the same. The Bank of England was under heavy pressure at the time and had two options: either devalue its currency or abandon the common monetary system.

What did George Soros do then? He anticipated this decision and invested 1 billion dollars short against the British pound and increased, on the night of September 15 to 16, his investment. The Bank of England wanted to counteract this movement with the purchase of 1 billion pounds, but it was hardly noticeable on the market so it decided to raise interest rates from 10 to 15%, a desperate move that did not work either. A few hours after raising rates, the Bank of England announced its exit from the ERM.

That day, September 16, 1992, the pound fell 15% and Soros made more than a billion dollars. Since then, that day has been called 'Black Wednesday' and it was the day that Soros became a legend in the world of institutional traders.

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Types of institutional trading

In general terms, we can talk about four types of institutional trading. They are as follows:

Hedge funds

Hedge funds are those funds whose managers work with complete freedom. That is, they freely choose the assets in which they invest, hence they are also called free management. In this way, they can opt for complex strategies with derivative instruments to try to optimize the potential gains in both bullish and bearish scenarios.

As the name suggests, these types of funds often use hedging strategies, simultaneously buying and selling correlated instruments. It’s also very common for them to use arbitrage strategies.

To be able to access these funds, high levels of capital are required, hence, their clients are companies, pension funds or investment funds. That is, their clients are working in institutional trading, as we’ll see later. Hedge funds offer higher returns but also carry higher risks and high fees.

Mutual or investment fund managers

Mutual or investment funds are those that gather capital contributed by different investors, both individual and collective, to invest in different assets grouped in investment portfolios. The main advantage is that in this way you can access a wider range of assets under more advantageous conditions. A company will be in charge of managing the investment portfolios, which are previously designed in the mutual fund contract, so it does not have the freedom that hedge fund managers enjoy.

The positive part of these funds is that they are simple instruments that allow diversification under the criteria of professionals. In addition, it does not require large amounts of capital to invest in them, making it accessible to a retail trader. This means that a retail trader can get involved with institutional trading in this way.

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Pension fund managers

Pension funds are similar to investment funds, although in this case, they manage money from their clients' contributions to pension plans to try to offer returns. These funds, which can instrumentalize one or more pension plans, are managed by a managing entity that will determine where, how and when to invest. These funds can be considered a part of the institutional trading sector. 

Investment banks

Investment banks are financial intermediaries that offer advisory services in market-related transactions, such as an Initial Public Offering (IPO), subscriptions, mergers or reorganizations, sometimes acting as brokers. Examples of investment banks are JP Morgan Chase or Morgan Stanley. These can also be considered a part of the institutional trading sector.

Institutional trading vs retail trading - Differences

Although you may have already noticed that there are notable differences between institutional trading and retail trading, we’re going to retrieve them below for clarity:

  • Retail trading consists of buying and selling assets through a personal or individual account. Institutional trading also involves buying and selling assets but does so for institutional or company accounts
  • Although a retail trader now has access to financial instruments that were previously only reserved for institutional traders, there are still options far out of their reach, such as IPOs or some futures contracts that are only accessible to large investors.
  • Institutional trading has better advantages in terms of commissions and prices when dealing with larger amounts of capital when compared to retailer trading.

Even if you’re not Soros nor working in institutional trading and you would like to become a retail trader, you can practice this and other strategies with virtual money through a demo account. With Admirals you can open a free demo account right now by clicking on the following banner:

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Institutional trading - Advantages and disadvantages for an institutional trader

  • Institutional trading manages large amounts of capital
  • Great diversification capacity when managing large capital
  • Access to lower rates and prices
  • Access to large financial news portals
  • Access to better technological means
  • If you use leverage, greater capacity
  • Institutional trading can involve little flexibility in the choice of assets
  • High risk
  • In some cases, regulation is very strict and prohibits institutional trading in some markets.

As we have pointed out above, the gap between institutional trading and retail trading, in terms of ease of access to financial markets, has narrowed thanks to technological advances. For example, any retail trader now has access to derivative products such as Contracts for Difference (CFDs).

Now that you know more about the difference between an institutional trader and a retail trader, you only need a real trading account through a fully regulated broker. If you want to start trading with these and other instruments, click on the following banner and open a live account with Admirals:

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Frequently Asked Questions (FAQ)

What is institutional trading?

Institutional trading consists of the purchase and sale of financial assets by institutions through their traders. This definition of institutional trading applies to institutional equity trading, institutional stock trading, institutional options trading - any subcategory. 

What are the types of institutional trading?

There are four types of institutional trading: Hedge funds - Mutual or investment fund managers - Pension fund managers - Investment banks


About Admirals

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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