Institutional vs Retail Market Participants

MATUOG

World is in your grip.

Education & TrainingFinance & Economics

Institutional vs Retail Market Participants

A.G. Traders World

Broadly there are two categories of participants in the financial markets. The Institutional participant and the retail participant. Let’s discuss about each of them one by one.

First, let us understand the retail participants. They have the following characteristics:

  • They are individuals who trade with smaller amount of money, typically to the tune of few thousand or few Crores of Rupees.
  • They are mostly the general public such as self-employed individuals, salaried individuals, Housewives, Students, etc.
  • They follow information acquired through TV, newspapers, magazines, peers, brokerage houses, analyst recommendations, investment advisors, etc for taking decisions regarding buying/selling of financial instruments.
  • Some of them follow Technical analysis or fundamental analysis to take their buy/sell decisions
  • They don’t have the power to move the market or decide the direction of prices. This is a key noteworthy characteristic.

Now let’s discuss about Institutional participants. They have the following characteristics:

  • They are Large Institutions who trade or invest with thousands or even lakhs of Crores of money
  • They could be Banks, Hedge Funds, Insurance Companies, Mutual Funds, Pension Funds, Endowment Funds, etc.
  • They are often referred to as “Smart Money”.
  • They literarily move the market due to their sheer money power/Order flow and hence have the power to decide the direction of prices.
  • They could be Foreign Institutions (FII) or Domestic Institutions (DII).

Let us now take a look at how some of these institutions function internally by looking at Mutual Fund institutions.

All Mutual Funds have a Fund Manager who is responsible for the performance of the fund. He usually heads many teams within the organization but prominently we shall highlight two teams, the Research or Valuation Team and the Trading Team. The Research or Valuation Team is responsible for analyzing various companies in terms of their financial performance, management stability, balance sheets, key ratios, etc  and to come up with a fair value/price of the company’s stock using various financial models. Once they arrive at the fair value/price, then they compare it with the current market price to ascertain whether the stock of the company is over-valued/under-valued/fair valued. Accordingly, in consultation with Fund Manager they decide whether to buy/sell/hold a company stock in their Fund portfolio. If they decide to buy a stock for their Fund, they then decide what quantity (Percentage of their Fund) they want to buy and at what Average Price. In accordance with that, they decide a price range within which the desired quantity of the stocks must be bought. They create a report of this and hand it over to the Trading Team. The trading team’s task is now to buy the given company’s stock from the market. They have to buy within the given price range so that the average buy price is realized.

Here are some of the challenges faced by the Trading teams of institutions while completing their task:

  • Trading Teams are tasked to buy/sell large quantity of a given stock at a given price range
  • They have to buy/sell hundreds or thousands of Crores worth of a stock which mean they have very large quantity to fill within a price range
  • They find it difficult to get a fill for their orders given the huge quantity they require
  • If they buy/sell large quantity in a single order then that will cause price to move away rapidly without giving them complete fill
  • If they want to buy a stock then who will sell to them? Answer: Other institutions or Retail traders. But fighting other Institutions is difficult and getting fill from Retail traders is easy for them
  • They have to resort to various tricks like Fake outs, Stop Loss hunting, etc to get their orders filled from Retail traders

Let us now take a look at two examples of how institutions play tricks to get their own orders filled against orders of Retail traders.

Example 1: how institutions play tricks to get their orders filled

  • Price rejection happens at candles marked 1 & 2 creating a good Resistance line
  • At the candle marked near 3 price opens Gap up breaking the Resistance line giving a “signal” to Retail traders that price will now move higher
  • Retail traders enter long position (Buy) keeping their sell Stop loss orders below the Resistance line hoping to ride the up move
  • Institutions push price down after the Gap up open to grab the sell Stop loss orders to get their buy orders filled knocking out retail traders in the process.
  • Price then rallys up nicely in the direction Institutions wanted

Example 2: how institutions play tricks to get their orders filled

  • Price rejection happens at candles marked 1 & 2 creating a good Resistance line
  • At the candle marked near 3 price closes above breaking the Resistance line giving a “signal” to Retail traders that price will now move higher
  • Breakout Retail traders enter long position (Buy) keeping their sell Stop loss orders below the Resistance line hoping to ride the up move
  • Institutions next day push price little more up to invite more breakout traders to buy, so that they can get their sell orders filled in good quantities.
  • They then push prices down in the direction they wanted after getting their sell orders filled from Retail traders, a nice move down follows thereafter since the Breakout trader’s sell Stop loss orders get triggered causing price to crash even faster

If you were an Institutional trader tasked with getting large quantities to fill then what would you do? Think!

Your easiest opposing traders would obviously be the Retail trader since they typically have no power to move prices. You would certainly think of ways to get them to sell when you want to buy.

What will prompt them to sell ?

  • Negative news in the media (TV, newspaper, etc)
  • Negative signals on Indicators, breaking of support line, trend line breaks, etc.

Can these be managed? Of course!

You can watch a video on this topic here: https://youtu.be/czt8ofoSOkQ

  • Recent Posts
  • a.g.tradersworld@gmail.com
A.G. Traders is a group of passionate professional traders trading across Stocks, Futures, Options and ETFs. We believe that trading the financial markets is a serious business and not for casual enthusiasts. Our cardinal pillars are Knowledge, Strategy, Risk Management and Right Psychology for long term success in the markets.
×
A.G. Traders is a group of passionate professional traders trading across Stocks, Futures, Options and ETFs. We believe that trading the financial markets is a serious business and not for casual enthusiasts. Our cardinal pillars are Knowledge, Strategy, Risk Management and Right Psychology for long term success in the markets.
  • a.g.tradersworld@gmail.com
Latest Posts
  • A.G. Traders World
  • An Introduction of Price Action Trading in MATUOG
  • Financial Freedom is not FREE by MATUOG2

Comment here