July 2024


Retail versus institutional flows: Relationships and implications 

Our Markets and Financing Research Retreat offers a wide range of academic expertise and timely market insights.

At our Markets and Financing Research Retreat in Boston, Robin Greenwood, professor of Finance and Banking at Harvard Business School and State Street Associates academic partner, shared findings from new research that examines how institutional flows relate to two broad groups: corporate issuers and retail investors.

As market participants adapt to evolving investment environments, understanding the interplay between retail and institutional flows can help inform decision-making and effective portfolio management.

Investor types and market dynamics

“By comparing retail and institutional flow data, there’s the potential to gain a more comprehensive understanding of market dynamics, investor sentiment and predictive future movements,” Greenwood said.

He noted that until recently, the process of tracking retail investing trends in a quantitative fashion was challenging. However, new algorithms combined with publicly available data have simplified and enhanced the ability to study the dynamics of retail flows. When aggregated at the sector or industry level, retail flows appear to be positively correlated with benchmark institutional flows, which is intuitive, while the relationship between retail flows and active institutional flows is potentially more complex to decipher.

Understanding the nature of stock issuance by companies, which are liquidity providers to both institutional and retail investors, is also important for developing a complete picture of the market, according to Greenwood.

The path forward

As Greenwood observed, there are interesting patterns to uncover by comparing flows across different investor groups. Incorporating retail trading data, especially at medium horizons, has the potential to enhance investors’ understanding of market trends and improve their forecasting ability.

This type of analysis may help investors design better trading strategies, anticipate market trends and understand the underlying drivers of market behavior. Synthesizing many perspectives on flows and their implications for demand and price pressure is an exciting avenue of research that can ultimately help practitioners make better decisions to manage the return and risk of their portfolios.

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