In this guide, we’ll get deeper into understanding characteristics of the big institutional money, and how their very size itself brings certain consequences with it.
Bull– and bear markets, as long-term up- or downtrends of the market are called in jargon, are prolonged and broad up-trends in the stock market average caused by a large groups of stocks moving in parallel in the same direction. As we established, only large buying demand can drive up prices in single stocks, thus their moving as a group suggests that there is very powerful demand for buying and owning stocks across the institutional/big money community, usually due to some adjustment or tipping point in basic economic conditions.
Stock group movements are caused by inflows of colossal amounts of capital, coming from many actors that control big money, acting in unison. That happens around market bottoms, and in new starting up-trends and bull markets, to which we’ll get later.
Who is the ‘big-/institutional money’?
The ‘who’ behind the Big Money have changed over time, but their impact will always remain the same. At the beginning of the 20th century and before, large amounts of capital were controlled only by well-capitalized single speculators, businessmen, magnates, bankers etc., but also by the overt or secret alliances that these players formed – so-called ‘pools’. This was at a time when exchange trading volumes (the number of shares traded per day/week/etc) were very low compared to today. All stocks were relatively thinly traded at that time, and thus easy to manipulate by single large players.
By today, in an age where speculators can easily trade internationally, people are more affluent, and more importantly where much more money is circulating the exchanges, this has changed … but only in scale, not in principle. Nowadays, the overwhelming majority of the large capital flows in the stock market and order activity come from tens of thousands of well capitalized modern types of ‘pools’ – mutual funds, hedge funds, retirement funds, endowment trusts, insurance companies, money management firms, investment banking houses, foundations, large family trust funds, etc.
This group of actors is collectively referred to as institutional money, or the ‘Big Money’. By and large, they each manage at the last a few million dollars, but the average institutional investor controls hundreds of millions to billions of dollar of capital.
As true to the old 80/20 principle, almost all of the money sloshing around in the stock market is controlled by a relatively small number of actors.
Institutional money comprises almost all trading activity
To understand just how much capital institutional investors as a group have control over and thus potential buying power to drive prices up, let’s look at some numbers. In the US alone in 2022, institutional money managers as a group controlled somewhere in the range $50 trillion. That’s a 5 with 13 zeros behind it. Global institutional money comprised more than >$112 trillion. Not all of that goes into stocks of course – there are a lot of other assets and investment vehicles. But still, a very large portion ends up in the equities market, it being one of the most liquid marketplaces together with e.g. fixed-income securities.
A few more numbers: More than 75% of daily trading activity/-liquidity provided (excluding non-relevant order intermediation & facilitation services) on the public U.S. stock exchanges every day is of institutional nature. This 75% accounts for approximately $300-400 billion of institutional money changing hands. $300-400 billion, every single day.
While the ‘retail investor’/amateur does contribute substantially to the daily trading volume in total, each individually does not control a lot of capital. Individual retail traders, even when they organize as a group, cannot achieve the large buying order blocks stretched over time that really move a stock. Retail traders can move a stock for a little time, but when it comes to forming sustainable trends, it is all about institutional money.
The size problem, and the necessity of stretching commitments over time
Even the smallest funds manage upwards of $100 million in capital, with the average equity fund managing between $1-$15 billion to speculate in the stock market.
As we said before, the only things that matter to make or break a trend is the sum of demand versus supply coming to the market, and how long it persists over time.
And there is one thing for sure – if you manage such large amounts of money, because of your size, you cannot just enter or exit the market in a single day, week or even month. In fact, the amounts of money that institutional managers handle are so large that they would crash a market into the ground or blow it into the stratosphere if they tried to do it quickly. This would create disorderly markets, enticing regulators to step in, plus it would end up hurting the money manager himself. Buying too fast will drive the price above levels acceptable for them to buy at, and selling too fast collapses it, leading to a loss on whatever they haven’t sold yet.
Hence, action has to be taken slowly, and it takes them weeks, months or longer to start or exit multi-million to billion dollar positions. This inflexibility has given them the doubtful honor of sometimes being called “whales”.
Institutional players try to mitigate this size problem by diversifying widely into many different stock positions. The large cash reserves have to be spread over many tens or hundreds of individual positions.
However, in the end this still amounts to whopping amounts of money, i.e. hundreds of millions or billions of dollars allocated to single stock commitments. To not move the markets too radically in a short time-frame, a rule of thumb that such fund managers try to adhere to is that their own buying over the time required to enter/exit a position should not exceed 5-10% of the trading activity in a stock in a day/week/etc. (we’ll see later how this is measured).
For such large amounts of money pressure-pumped into a stock, it will take weeks, months or years to build out a position. Thus, institutional buying & selling is stretched out over time, by necessity.
An example of the size problem
Take as an example the ClearBridge ‘Large Cap Growth-1’ fund – an average fund that ran about $12 billion in early 2022, diversified in 41 stock positions.
Assuming an equal 2.4% allocation for each (which is a simplification), the manager would aim to put about $350 million to work in each single stock. Let’s say that the stock is traded actively by the market community, with about $150 million changing hand a day (e.g. stock price at $60, an average daily trading volume of 2.5 million shares).
To not move the market substantially by trying to buy $350 million worth of stock, this purchase would need to be spread over about 50 trading days, almost 10 weeks of a buying spree. (Buying is also dependent on market action, and it will not happen every single day – purchases will sometimes be spread over consecutive days, other times larger portions are bought in very short time-frames, and yet other times there are days/weeks is no buying at all.)
Now remember, that this is only 1 position in 1 fund. In any, but especially in the US markets, there are literally tens of thousands of domestic and international institutional managers actively operating in the market, many managing much more than $10 billion, and usually many thousands of these managers are interested in the same group of stocks.
How big buyers drive trends in stocks
Here, take a minute to imagine not just one money manager trying to pump a few hundred million into a stock. Imagine thousands of them doing this into a selection of stocks. Vast institutional interest in a stock acting in unison leads to colossal inflows of capital into specific stocks. This leads to weeks, months and sometimes years worth of strong and persistent buying demand, and is what drives the long and profoundly profitable trends in stocks.
Now you will start to see why the retail trader, the private small speculator, has almost no bearing in establishing market movements … although they will play a role later in the market cycle, for good or ill.
The bottom line is, due to their sheer size, institutional money managers are not and cannot be short-term traders, and this is a very important factor that you have to remember. It’s an industry standard that the average institutional investor goes into a buying campaign, a stock commitment, with the expectation of holding and supporting stock prices for capital gains commonly over a duration of about 3-5 years.
They may have some trading desks focusing a little capital on short-term trading, but the vast majority of institutional house capital is used to buy and hold stock over weeks, months and years. Thereby, they cause observable trends, especially when many of them act in unison, knowingly or unknowingly.