A lot is made of the relative advantages that institutional traders have over retail traders.

Some financial professionals even take the view that the disparity between the two groups is so wide that it’s not even worth trading retail.

They say that retail traders’ time is better spent learning a transferable skill while passively investing their money into index funds. 

On the other side of the spectrum, you have the Forex gurus who tell you that their buddy worked at a bank once and told them the ultimate bank trading secrets which retail traders can use to exploit the banks and make outsized profits. 

Both of these groups are on extreme ends of the spectrum and their declarations typically say more about social media’s ability to get people to say disingenuous things in order to gain an audience, then it says about reality. 

The simple truth is that institutional traders have significant advantages over retail traders on almost every level. In some cases, these advantages aren’t worth mounting an offense against for retail traders, and in other cases, there are rare cases of truly exploitable and predictable flows from institutions that smart retail traders can exploit for a limited time.

In neither case is it as simple as either side of the spectrum makes it seem, however. 

So in this article we’re going to get into the advantages that institutions have over retail traders, as well as some of the less appreciated advantages that retail arguably has over institutions. 

Institutional Advantages Over Retail

Trader Development

Institutional traders are paid to learn.

The average salary for a trading intern at a large investment bank is around $80,000 a year (prorated since most internships typically last for the summer). When they get a job as a full-time junior trader, their base salary might be significantly lower, but if the desk does well, their bonus will be much larger. 

Compensation is just one part of the massive investment that institutional trading desks make into their traders. Once the trader reaches junior status, meaning he can put on some risk, the senior traders invest significant time and effort into mentoring the junior trader. They’re all on the same trading desk, so the senior traders are more invested in

New traders have the benefit of not being allowed to put on any risk until the senior trader decides that he is ready. As interns they’re typically fetching lunch and performing menial tasks for the more senior traders and learning through osmosis. When it comes time to join a desk as a full-time member, they’ve already absorbed so much of the culture, trading style, rules, structure, etc., without ever putting a trade on. 

So institutional traders go through a ton of training, mentorship, and absorption before they ever start putting on trades. They not only start at a higher level of competency, but they’re given the resources throughout their career to improve on those skills at a faster rate than retail traders. 

It’s hard to overemphasize this advantage. Imagine being side-by-side with highly successful traders who have regularly managed portfolios worth hundreds of millions of dollars for several years? 


If you look at a job board like LinkedIn or Indeed for institutional trader positions, you’ll find that they’re quite specific in what they’re looking for. Hardly do they recruit simply “traders,” but perhaps energy traders, or agricultural traders, or options traders. 

At the institutional level, traders are given specific products to trade and they have clear guidelines on how they’re going to be trading them. For example, a trader at a Chicago proprietary trading desk might only trade options on corn futures, rather than trading a range of currencies, equities, and commodities. As a result of this specialization, institutional traders are experts in the dynamics driving their market. 

Compare this to the average retail trader. They might be trading crude oil options one day, then a mid-cap stock the next day, and trading the S&P 500 at the end of the week.

There’s no opportunity to grow a core competency trading like this. Of course, there’s tons of successful traders like this and there’s far more opportunities available when you cast a wide net, but we have to acknowledge that at the very least, the probability of success is probably far higher for traders who specialize in one market. 

A retail trader is a jack of all trades, and master of none. As an individual, often with suboptimal education, they have to be all of these roles simultaneously: 

  • Portfolio manager
  • Execution trader
  • Risk manager
  • Researcher
  • Quant 

All five of these are roles that would each demand over $100,000 a year at a senior level on a trading desk. 

Massive Budgets

Institutions are willing to pay for any piece of research, whether that’s an advisory service, a newsletter, software package, etc., that they think has potential to create P&L. When you have so much capital to put to work, just one good trade idea from research pays for itself in multiples. 

An easy to grasp example is watching the TV show Billions. Several times throughout the show, the hedge fund is using alternative data like credit card spending trends, satellite imagery, etc.

They also spend top dollar to get the best computer hardware, trading platforms, trade execution, algorithms, and task automation. All of these things either save the trader valuable time, allowing him to spend more generating trade ideas, or make the process of generating ideas easier or better. 

Other People’s Money

An institutional trader isn’t trading with their own money. If they make a big losing trade, they might lose their job or get their bonus cut, but the firm isn’t withdrawing those losses from their bank account. It’s like a call option: capped losses, unlimited gain potential. 

Using the firm’s money also means they have access to huge amounts of capital, allowing them a ton of leeway in their strategy implementation. They can run an arbitrage strategy with a modest edge that would never move the needle for a retail trader, but when lots of capital is deployed, produces a high Sharpe ratio. 

On the other hand, every tick in the market affects a retail trader’s personal wealth. That’s a serious psychological difference than soberly using a billion dollar firm’s money which expects frequent trading losses as part of doing business. 

Advantages Retail Traders Have Over Institutional Traders

Traders endlessly talk about how much power institutions have over them. The widespread support of the WSB short squeeze mania is evidence of that. But I think retail traders miss how they actually have some significant advantages themselves. 

Depending on the trader, these can actually be negatives. They’re only really pluses when the trader is competent. 

Small Fish in a Big Pond

Think about a large hedge fund–let’s $50 billion in assets under management. What would you do in their shoes? How could you possibly allocate that much capital, where do you put it all? 

Well, microcaps and small-caps are out. Even mid-caps are going to be tough for the most part. So you’re left with large and mega cap stocks and highly liquid futures contracts. They probably can’t go overseas and find unappreciated cash flow machines in out-of-favor small countries.

Most importantly, they can’t trade in and out of their positions quickly. Day trading? No. Swing trading? No. Arbitrage? Not if it’s short-term. Event driven trading? Probably not. 

So you can see, while these large funds have massive advantages in talent, process, infrastructure and information, they can’t utilize it completely. They can’t play the same game as you.

And you’re completely free to play in a completely different league as them. Nobody said that you had to play in the NHL. The easier stuff pays too, and oftentimes much more because of lack of competition. 

Think of the retail trader with anywhere from $1,000 to a few million in their trading account. For the most part, they can get out of any position in minutes. Uncovering that needle-in-the-haystack microcap can be life changing if it multiples in value like you think it might. 


We touched earlier on how a retail trader is forced to be a jack of all trades but a master of none. A portfolio manager, execution trader, risk manager, and so on. But that has a flipside too. 

Say you’re an institutional trader who trades sugar. Hypothetically, let’s say the sugar market just dries up for several years and only the producers and banks are significant players. Not much volume or flows to take advantage of. You’re kind of stuck. You’re an expert in a dead market with no choice other than a job change to get out of it. 

But a retail trader? The week that sugar’s volatility goes down they can close their position and move onto where the action is: volume and volatility.

They can trade the Turkish Lira as it crashes, the stock market in March 2020, crude oil as it goes on a run amid inflation, and so on. Of course, this would require serious work in understanding several markets and being able to trade them well. But you have that freedom that career traders do not. 

As said before, this is a gift and a curse. It’s very easy to start throwing on feeler trades in any asset that’s moving quickly without senior traders questioning your motives or your risk manager warning you, or even worrying about getting scrutiny from the other people on your trading desk. 

No Sharing

Institutional traders get paid to use the firm’s money on the firm’s computer in the firm’s office while using all of the firm’s infrastructure. They don’t do that to be nice to traders. Institutional traders often get a small percentage of their P&L as a bonus at the end of the year. 

Retail traders eat what they kill. They risk 100% of their P&L and keep 100% of it, for better or worse. 

Bottom Line

Despite this article adding to the problem, traders probably care too much about the methods of institutional traders.

Ultimately, they have different goals. Retail traders are looking to speculative build their wealth while institutional traders are working a career. They both love trading and have lofty goals, but the direction the two diverging goals go means they shouldn’t copy off each other’s test. 

There are tons of individual traders who manage just fine with a standard retail brokerage account, a charting package, and free internet tools like Yahoo Finance and the SEC’s EDGAR database. And there’s tons of institutional traders who are given all the advantages in the world and still can’t hack it.

Advantages always help, but they’re not the be-all-end-all.