4 Advantages That Retail Traders Have Over Big Institutions


RETAIL trading witnessed a significant surge in volumes during the course of the pandemic, when millions found themselves confined to their homes and flush with cash from stimulus checks, burning a hole in their pockets. 

While it has long been held, and still holds true to a certain extent that the odds are stacked against the small guy, things are changing rather quickly on Wall Street.  

The edge is slowly but surely shifting in favor of retail traders, and nothing highlights this better than the whole GameStop frenzy in 2021, when a small trading community on Reddit drove one of the largest hedge funds in the world to insolvency within a few short weeks. 

With technology, education, and the free-flow of information, retail traders are consistently gaining on their institutional counterparts. In addition to this, they have a slew of other advantages over large institutions, which we will be covering extensively in this article.

Flexibility & Agility

Institutional traders, often backed with millions of dollars in trading capital, best-in-class research and execution, will also have to deal with bureaucratic hurdles and drawn out decision making processes that are largely customary for institutions of a certain size.

Retail traders on the other hand are perfectly poised to take advantage of short-term price movements, by acting quickly, on their own discretion. Add to the fact that they can now invest with as little as $5, with fractional shares, margin trading, and CFD instruments becoming commonplace, the lack of capital is hardly a concern any more.

When markets change course, or move against them, they can make quick decisions to cover their positions, instead of being bogged down by discussions, permissions and approvals, as is the case with most large banks and financial institutions.

Regulatory / Compliance Requirements

When you’re dealing with billions of dollars in investor funds, you can expect to be regulated to the teeth by various governing bodies such as the Federal Reserve, SEC, etc. 

Today, as a result of the Volcker Rule, banks and financial institutions aren’t allowed to engage in proprietary trading, which means they aren’t allowed to trade stocks, bonds, commodities, and derivatives using their own proprietary funds.

Similar rules and compliance requirements increasing weigh on hedge funds, mutual funds, and the broader asset management industry. On the other hand, all a retail trader needs to do is open a trading account, deposit funds, and start trading, with no other headaches to worry about.

Focus On Niche Markets & Emerging Assets

Big institutions tend to prioritize large and established markets, which limits their ability to explore niche markets and emerging assets. 

Retail traders, on the other hand, can capitalize on their nimbleness to identify and exploit gaps in these markets, which are more often than not, brimming with opportunities. 

Retail traders can focus on specific sectors, such as renewable energy, biotechnology, or cryptocurrencies, where their knowledge and expertise give them an edge. By staying attuned to emerging trends and innovative assets, they can often uncover investment opportunities that the big institutions tend to overlook.

Higher Returns & Reduced Market Impact

Firms with billions of dollars in trading capital find it difficult to take advantage of small price movements like retail traders. Even if they can, the returns are often inconsequential considering the size of their funds, and the market volumes.

It is easier to turn $100 into $120 over the course of a year, than it is to turn $1 billion into $1.2 billion. This largely has to do with the scale of impact these large firms have on the market itself, as their buying and selling pressures can move the entire market, often resulting in high transaction costs and low returns.

Such large positions are also harder to liquidate when a trade starts going against the flow. Retail traders on the other hand, face no such issue, and can get in and out of a trade within minutes or seconds, without making any dent, or even getting noticed by the broader market.

Final Words

These are undeniably exciting times for retail traders, with plenty of opportunities and advantages going in their favor. With the right education, planning, and execution, small traders working from their homes can easily give the Wall Street giants a run for their money.

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