Retail, Institutional and High-Frequency Trading

Bitstamp
Bitstamp
Aug 18 · 4 min read
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The crypto market caters to many types of investors, from those trading in their spare time to full-time investors. The advent of technology brings investment opportunities into our homes. Nowadays everyone can easily become a retail trader (a non-professional investor). The investment options that used to be reserved only for institutional investors (professional traders and companies) are no longer limited to the exclusive elite. Even advanced high-frequency trading (or HFT) is now available to just about anyone.

RETAIL, INSTITUTIONAL AND HFT ESSENTIALS

Retail investors are non-professional investors who trade in small amounts.

Institutional investors are organizations that trade in large quantities and often have access to advanced financial instruments.

High-frequency trading uses computers to conduct many trades in a small amount of time.

Retail investors

Retail investors are non-professional investors who usually trade infrequently and in relatively small amounts. Investing is not their full-time occupation or a major source of income. When it comes to cryptocurrencies, they do most of the trading through online exchanges.

Traditionally, the trading volume of a retail investor was measured in round lots (lots of 100 shares). However, contemporary exchanges allow for even smaller numbers. When it comes to cryptocurrency giants, such as BTC, it is not just possible, but common, to trade in single digits or even decimals. The trading volume with which retail investors operate is not big enough to have an impact on the price of what they’re trading.

Retail traders are considered to have limited expertise and ability to research the market. They are vulnerable to behavioral biases, such as FUD (fear, uncertainty and doubt that prevents a trader from executing a trading action) or FOMO (fear of missing out on a price surge). To a retail trader, the early performance of an ICO (initial coin offering — crypto’s version of IPO) can be crucial for their investment choices. In order to protect them, traditional markets and exchanges employ a series of protective regulations.

However, in the crypto industry, regulation leaves something to be desired. Many crypto projects have no ambition or intention to be subject to regulation, with some avoiding it intentionally. Only a handful of actors, with Bitstamp among those taking a leading role, are at level of regulation the likes of which can be encountered in traditional markets.

Institutional investors

Institutional investors are usually not individuals, but organizations that trade in large quantities on behalf of their members. Institutional investors have always had access to advanced trading options. They are considered more knowledgeable and better able to protect themselves, so they face fewer protective regulations.

Institutional investors conduct much larger trades than retail investors. The arbitrary limit in trade volume that makes one an institutional investor is 10,000 — that’s how many shares there are in a block trade. Whether shares or units of crypto, this kind of volume makes them eligible for preferential treatment and lower commissions at exchanges.

Such trades can also have a substantial impact on the price of the asset they’re investing in. There have been several instances when a whale (a large investor) caused a noticeable shift in the market trend of a cryptocurrency. In order to lessen their impact, institutional traders often split their trades across multiple exchanges and conduct them over an extended period of time.

High-frequency trading

High-frequency trading (or HFT) takes the reins of trade-making out of people’s hands and hands them over to powerful computers. These use advanced algorithms to carefully analyze market trends and conduct a huge number of trades in a matter of seconds. Their speed is what sets them apart from personal trading. Lightning-fast execution translates into profitable trades.

HFT is not only desirable among traders for its profit-making potential, but it also benefits exchanges on account of its ability to add liquidity to the market — it was popularized by exchanges incentivizing market liquidity. HFT also goes a long way to eliminate human error, trusting only complex mathematical processes to conduct trading.

However, the liquidity that HFT produces can come and go in only a couple of seconds. Many claim it is therefore not beneficial at all and call it “ghost liquidity.” Furthermore, HFT users place unconditional trust in the infallibility of its algorithm. But the algorithm is only as good as the person who wrote it. Should there be an error, millions can be lost in the blink of an eye.

On account of its accessibility and round-the-clock operation, the crypto market has been attracting all sorts of traders. Whether you’re a retail investor, trade as an institution or employ computer algorithms to trade, the crypto market has something for all.

Bitstamp

Written by

Bitstamp

The world’s longest-standing bitcoin exchange. Providing a safe and transparent trading venue since 2011. www.bitstamp.net

Bitstamp Blog

World’s longest-standing bitcoin exchange.

Bitstamp

Written by

Bitstamp

The world’s longest-standing bitcoin exchange. Providing a safe and transparent trading venue since 2011. www.bitstamp.net

Bitstamp Blog

World’s longest-standing bitcoin exchange.

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