Institutional Trading: Intro, Examples, Types, Strategies and More

11 min read

By Chainika Thakar

Institutional investors are the trading firms (for example, CitiGroup, J.P. Morgan) which exert a huge influence on the price dynamics of financial instruments because of:

  • Their ability to trade exotic financial instruments (which may or may not be available to private investors)
  • The ability to manage a significant amount of funds for the clients

Let us find out all about institutional investors, their trading practices and much more as this blog covers:


What is institutional trading?

Institutional trading is practised by a legal entity that accumulates funds from several different investors to invest in different financial instruments such as stocks, bonds, real estate etc. In short, institutional trading is done by huge organizations on behalf of their clients.

There are several types of securities such as forwards, swaps, etc. that might not be available to the private traders simply because such tradeable items require huge funding and are mostly successful in long term investments. Moreover, institutional investors get the best price for trades.


Examples of institutional trading

First of all, let us take a look at the examples of firms that trade on the behalf of their clients. Such firms that assist their clients with investment services are known as institutional trading firms. Some of the examples of institutional trading firms are as follows.

Institutional trading firm examples


Service providers used by institutional trading firms

Further, let us find out the service providers that institutional trading firms utilise for the provisions of constant market knowledge. Examples are:

Service providers for institutional trading


What makes institutional trading unique?

Institutional trading
Institutional trading is unique

Institutional traders vs Retail traders

Institutional traders

Retail traders

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

Retail traders buy or sell securities for personal accounts

Trade larger sizes (volume)

Trade smaller sizes of asset 

Can trade more exotic products such as exotic options (barrier options, binary options etc.)

Usually trades usual/vanilla tradeable items 

Institutions have advantages, such as access to more products (IPOs, futures, swap)

Do not have access to futures, swap etc. usually

Holds the ability to negotiate trading fees, and the guarantee of best price for execution

Can not negotiate the trading fees and price for execution

Usually involves in long-term investing

Involves in both long term and short term investing


Types of institutional investors

The several types of institutional investors are the following:


Institutional trading strategies

The strategies of an institutional investor depend on various factors. An institutional investor makes the investment decisions on the basis of:

  • Anticipation of market volatility
  • Forex market conditions
  • Macroeconomic factors such as war, a natural calamity, trade agreement etc.

Some of the strategies that the institutional investors follow are:

  • Index rebalancing
  • Asset allocation
  • Factor investing
  • Investment in exotic instruments such as swaps, forwards etc.

Index rebalancing

Rebalancing of the index is the simple process of realigning the weights of the financial instruments in the portfolio. The rebalancing of the index is nothing but keeping the portfolio balanced by modifying the financial instruments in the portfolio in such a way that the risk remains more or less the same over a period.

For example, changes in economic conditions due to macroeconomic factors such as the Ukraine-Russia war. This can lead to significant changes in prices of underlying assets in the financial markets.

Also, such conditions lead to major changes in related industries/sectors. One current example is an increase in the demand for crude oil recently because of the war scenario.

Asset allocation

The institutional traders implement the asset allocation strategy to balance the risk and reward in the portfolio. This practice/strategy adjusts the percentage of each financial instrument in the portfolio in accordance with the client’s risk tolerance, goals and the decided investment time frame.

Factor investing

Factor investing is an investment strategy that helps create a portfolio by selecting securities based on factors. Factors help in explaining the returns and risk of these securities. Macroeconomic and style are the two types of factors.

  • The macroeconomic factors such as interest rates, inflation, liquidity can help to explain returns across asset classes.
  • On the other hand, the style factors such as value, size, momentum, low volatility, quality can help to explain returns within asset classes.

Using different factors, investors can generate higher returns, reduce risks and increase the diversification of the portfolio.

Investment in exotic financial instruments such as swaps, forwards etc.

The investment in swaps, forwards etc. gives an edge to the institutional investors. Such exotic instruments are not available to retail traders usually since institutional investors have the huge funds needed for such investments.

Hence, institutional investors strategise to invest in exotic instruments in order to diversify the portfolio significantly.


How do you become an institutional trader?

For becoming an institutional trader, you need to begin as a retail trader so that you know the intricacies of the financial market. Let us start with the educational requirements for becoming an institutional trader first.

Educational requirements for institutional trading

Frankly speaking, in order to begin a career in institutional trading, there is no specific course or degree that one needs to opt for. It usually depends on how well versed you are with numbers and calculations.

Most of the institutional traders hold a bachelor’s degree or higher. But, if you are looking to become a professional institution trader working in a high-level position, you need a Masters degree.

Following are a few subjects in which a Bachelors and a Masters can be helpful for institutional trading roles:

  • Finance
  • Accounting
  • Business
  • Economics

Also, an institutional trader benefits by doing a PhD in mathematics, economics, physics and quantitative finance. With the deep-rooted knowledge in the mentioned subjects, advanced knowledge of quantitative calculations is bound to be there which makes for a successful institutional trader.

Job opportunities in institutional trading

After completing your education, you can begin as an intern or an on-the-job training executive.

Some of the big institutional investors, such as Citigroup, train and hire fresh graduates. In case you wish to begin on your own, then starting as a retail trader is the best. Meanwhile, you can opt to study simultaneously.

The role of an Institutional trader is a high demand job that needs niche skill sets because such people are involved in investing and managing money on others’ behalf. There are immense opportunities globally for people with the right skill sets. Organisations mainly look for quick and efficient decision making under pressure and the ability to trade profitably for the client.


How much do institutional traders earn?

For an institutional trader, the earning is performance-based. Let us find out more about the earnings of institutional traders which goes as follows:

  • There is no base salary for institutional traders and it varies across the companies.
  • The base salary depends on the size of an organisation
  • In addition to the base salary, the trader gets a percentage of the returns that he/she brings to the organisation.
  • Moreover, the frequency of bonus payment as well as the percentage of the payment changes in accordance with the change in the returns. Also, some organisations pay quarterly bonuses and others annual.

Advantages of institutional trading

The advantages of institutional trading are as follows:

  • Institutional investing firms employee qualified traders for best performance
  • More qualified traders also perform better risk management practices for the client
  • Improved price discovery is another advantage which implies that the institutional traders can trade at the optimal prices
  • There is more management accountability and increased allocative efficiency by the institutional investors offered to the clients
  • The institutional trading firms provide the markets with liquidity which is the lifeblood of financial markets.

Disadvantages of institutional trading

The disadvantages of institutional trading are as follows:

  • The performance bonus is a big part of a trader's salary. So, the success of the career is solely dependent on the returns a trader brings to the organisation. It's a challenging task to make consistent profits until you master the art of trading.
  • The frequency of payments to the institutional traders also is tricky since it depends completely on the performance of the trader. If you have a bad trading year, you may not receive your performance bonus.

Nevertheless if an individual is driven about becoming an institutional trader and is prepared to face the challenges one can do wonders in this job role.


Resources to learn institutional trading

Although you might find several resources to learn institutional trading for becoming one, we have shortlisted and compiled some of them for you to refer to. The resources we have mentioned below are helpful with regard to equipping one with the required knowledge for institutional trading practice.

An institutional trader is a trader who applies his/her knowledge of financial markets trading plus any additional knowledge with regard to algorithmic trading, quantitative trading etc. for the clientele of the institutional trading firm.

Hence, there is no one resource that can be titled a specific institutional trading resource. Nevertheless, there are several courses, books and podcasts that can help to equip an individual with the necessary information for successful institutional trading practices.

Let us find all these handpicked resources below.

Courses for learning concepts of institutional trading

The online courses that you may choose completely depend on various factors such as:

  • What you wish to learn. For example, if you are going to trade in only options as an institutional trader, you can choose a programme accordingly.
  • What you already are knowledgeable about. Because then only you can find out a course that helps you fill in the gaps in your knowledge needed for institutional trading.
  • How do you wish to learn? This is important to know because there are courses that are comprehensive and not self paced in case you have time on your hands. Whereas, there are other courses that are self-paced (can be completed whenever you have time).

Let us now see the courses which are as follows:

This course equips the individual with the necessary knowledge with regard to quantitative trading practices along with the knowledge and practical application of algorithmic trading concepts.

The knowledge from EPAT programme can be helpful in becoming an institutional trader. EPAT offers a vast knowledge of the contemporary concepts of algorithmic trading and quantitative calculations for increasing the ease and favourable returns while trading in financial markets.

This course is a comprehensive programme that needs 6 months of full dedication and commitment.

The Quantra courses are self paced courses ranging from the concepts of financial markets trading strategies to algorithmic and quantitative trading practices.

With the Quantra courses, an aspiring institutional trader can acquire the required knowledge or can fill the gaps in the knowledge with regard to trading in the financial markets.

Plus, the institutional trader can make the trading practices more convenient and faster with the help of knowledge in algorithmic and quantitative techniques for trading.

The courses are segregated into categories for the convenience of the students but each course is a part of a complete “Learning track” for helping you begin from a basic course and ending with an advanced course.

Also, in case you want to skip the learning track and jump to an advanced course for acquiring any particular financial market’s knowledge for institutional trading, you can do so conveniently.

Books for learning concepts of institutional trading

These books are helpful resources for those who enjoy reading and aspire to become successful institutional traders at the same time. Each book gives you an informative insight into the concepts that are integral for the financial market traders and hence, institutional traders can also benefit from the same to apply the methods for their clientele.

Note: You are responsible for your own trading decisions—this is not financial advice.

Let us see the famous books which are as follows:

This book highlights some of the important concepts that are useful for the latest financial orders and plans. Keeping Graham's unique text in original form, the book focuses on major principles that can be applied in day-to-day life.

All the concepts and principles are explained with the help of examples for better clarity and understanding of the financial world.

A combination of the original plan of Graham and the current financial situation are the reasons behind this book’s preference amongst today’s investors. It is a detailed version with several wisdom quotes that are likely to change one’s investing career and lead to the path of financial safety and security.

Jim Simons is the greatest moneymaker in modern financial history. He is one of the bests amongst legendary investors, including Warren Buffett, George Soros and Ray Dalio.

The financial industry has long craved a look inside Simons's secretive hedge fund, Renaissance Technologies. As Renaissance became a major player in the financial world, its executives began exerting influence on other areas. Simons became a major force in scientific research, education and Democratic politics, funding Hilary Clinton's presidential campaign.

All these reasons are why this book is a must-read for any aspiring institutional trader since it will give a lot of informative insight into the success of Jim Simons in following the strategies.

An aspiring institutional trader can learn a lot from this book. From how to read charts to understanding indicators and the crucial role technical analysis plays in investing, readers gain a thorough and accessible overview of the field of technical analysis, with a special emphasis on futures markets.

Revised and expanded for the demands of today's financial world, this book is essential reading for anyone interested in tracking and analyzing market behavior.

How do the world's most successful traders amass tens, hundreds of millions of dollars a year? Are they masters of occult knowledge, lucky winners in a random market lottery, natural-born virtuosi—Mozarts of the markets?

In search of an answer, bestselling author Jack D. Schwager interviewed dozens of top traders across most financial markets. While their responses differed in the details, all of them could be boiled down to the same essential formula: solid methodology + proper mental attitude = trading success.

In Market Wizards, Schwager lets you hear, in their own words, what those super-traders had to say about their unprecedented successes, and he distils their responses down into a set of guiding principles you can use to become a trading star in your own right.

Podcasts about institutional trading

Learning while listening to or about the most successful traders is something one can enjoy. Let us see the podcast about institutional trading that is the most popular.

Note: You are responsible for your own trading decisions—this is not financial advice.

Chat With Traders is your key to the minds of financial market trading's elite performers. This podcast is a trending one with maximum listeners. Start listening to learn how a diverse mix of traders went from zero to hero, how they successfully trade markets today and get their best tips and pointers for profitable performance, plus much more.


Conclusion

Institutional trading is a concept that many traders wish to know more about. Be it the retail traders wanting to shift to institutional trading or wanting to get employed in the institutional trading firm, there are a lot of questions about the concept. We discussed institutional trading and its intricacies in this blog.

If you too desire to equip yourself with lifelong skills which will always help you in upgrading your trading strategies. With topics such as Statistics & Econometrics, Financial Computing & Technology, Machine Learning, this algo trading course ensures that you are proficient in every skill required to excel in the field of trading. Check out EPAT now!


Disclaimer: All investments and trading in the stock market involve risk. Any decision to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.

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