Institutional Traders vs. Retail Traders

What's the difference?

Trading securities can be as simple as pressing the buy or sell button on an electronic trading account. More sophisticated traders, however, may opt for more complex trades by setting a limit price on a block trade that is parsed over many brokers and traded over several days. The differences lie in the type of trader, and there are two basic types: retail and institutional.

Retail traders, often referred to as individual traders, buy or sell securities for personal accounts. Institutional traders buy and sell securities for accounts they manage for a group or institution. Pension funds, mutual fund families, insurance companies, and exchange traded funds (ETFs) are common institutional traders.

Several of the advantages institutional traders once enjoyed over retail investors have dissipated. The accessibility of sophisticated online brokerages, the ability to trade in and receive more diverse securities (such as options), real-time data, and the widespread availability of investment data and analysis have narrowed the gap.

The gap has not completely closed, though. Institutions still have numerous advantages, such as access to more securities (IPOs, futures, swaps), the ability to negotiate trading fees, and the guarantee of best price and execution.

Key Takeaways:

Institutional traders buy and sell securities for accounts they manage for a group or institution.

Retail traders buy or sell securities for personal accounts.

Institutional traders usually trade larger sizes and can trade more exotic products.

Online brokerages and other factors have narrowed the gap between institutional and retail traders, which once gave institutional traders an advantage.