Understanding Non-Institutional Investor Impact on Stock Market Volume
As of my last update in August 2023, non-institutional investors, often referred to as retail investors, account for a smaller portion of overall stock market trading volume compared to institutional investors. Estimates suggest that retail investors contribute around 15 to 25 percent of total trading volume, although this percentage can fluctuate based on market conditions, trends, and the level of retail participation at any given time.
High Frequency Trading: A Dominant Force
High Frequency Trading (HFT) accounts for about 50 percent of all the volume in the stock markets today. This raises the question of whether trading bots should be classified as institutional investors. While not all HFT firms are traditional institutions, most probably are.
I don't have an exact figure, but as an active trader, I observe volumes of trade on my screen that far exceed what individuals are likely to be trading. Additionally, many individual investors buy Exchange-Traded Funds (ETFs) and Mutual Funds, which are ultimately managed by institutional investors on their behalf. Therefore, it can be estimated that retail investors likely account for less than 10 percent of market volume.
Market Volume Dominated by Institutions
Considering the data and observations, it is clear that the majority of market volume comes from institutions. This is why on low volume days, the general assumption is that institutions are sitting on the sidelines for some reason, which is often not a good sign.
On most stocks, institutional investors hold around 90 percent of the volume. This suggests that large institutional sellers can affect market prices significantly faster than retail investors can execute their trades. For example, institutions can sell large blocks before retail investors can even contact their brokers, leading to less risk for institutional investors and more risk for retail investors.
Manipulation and Disparity in Market Power
While some individual investors may be caught in scams or manipulations, the overall landscape tilts heavily towards institutional investors. Major institutions like JPMorgan Chase have been involved in manipulating markets and have managed to avoid significant penalties despite the scale of their operations. Even when they face fines, these are often seen as mere costs of doing business, and the perpetrators still enjoy impunity.
The message here is clear: do not trust Wall Street. Analysts' bullish ratings on stocks can quickly turn negative in the market, as seen with Twitter, which lost a quarter of its value in a short period after positive analyst ratings.
Similarly, avoid trusting banks. Banks often save money by using automated teller machines (ATMs) and then charge customers for withdrawals, even though the money belongs to the depositor and the bank is risking it however it pleases.
In summary, while non-institutional investors play a role, the stock market remains heavily dominated by institutional investors. Understanding these dynamics is crucial for both retail and institutional investors to navigate the market effectively.