Why "Institutional Price Action" is an Oxymoron

I don't mean to pick on anyone but...

Thought I’d mix things up a bit and pass comment on an X post I came across, no offence to the original poster here but there’s a ton of misinformation on markets out there and I couldn’t help but do my small part to combat it:

I’m not exactly sure when ‘institutional’ started being thrown around in regards to intraday trading, sometime in the last 5-7 years I think. Whenever you hear this in regards to day-trading, or ‘smart money’, it’s usually a good sign to run a mile. It’s a buzzword and nothing more.

The vast majority, in dollar terms, are not looking at DOM, Time & Sales either. In the prop firm side, sure. And I suppose these can be called institutions. We’ll take institutions to mean multi-national organizations like investment banks (who don’t trade like you or I), asset management firms, and the advisors who invest on behalf of national or multinational companies.

In my time in the industry, I’ve advised clients ranging from £200k to £6BN in size so I’m somewhat qualified to comment on this, and have previously been on the FCA register to advise clients. The number of clients I’ve had over the years is easily in the several hundreds. I must stress that I don’t work in this capacity and haven’t for a few years so, nothing here should be construed as investment advice or otherwise purchase or sell any security.

I’ve never seen technical analysis deployed once, or even spoken about. Or even order-flow analysis. This is simply not how large clients invest. This is the domain of retail and prop-firm traders and that’s where it starts and ends. I haven’t worked in a Sales & Trading role for an Investment Bank, but have done internships in investment banking divisions which hasn’t got much to do with the day to day buying and selling of securities, so I can’t comment much here. Their job is largely to find best execution for clients who wish to, say, perform a large foreign exchange transaction without moving the market, whilst the IBD side handles IPOs, M&A, and so on. I suspect chart patterns play almost no role here (IB trading), but I can’t be 100% sure, but not in my experience. They don’t really run proprietary trading anymore, this has all but completely been spun off to their asset management arms after 2008.

The largest single block of money invested in the S&P500 is held by pension funds, investing through pooled funds. The rest is made up of privately held mutual funds, sovereign wealth funds, passive index funds. Retail traders, prop firms and the like, make up a tiny percentage compared to these.

This is a statement of the obvious, but if you hold any private pension fund, the vast bulk is usually invested in accordance with a benchmark, like the MSCI benchmarks. This is usually drawn from your income and matched by the employer for defined contribution funds. Defined Benefit schemes are largely, if not completely closed to new entrants, and are significantly more challenging to invest and administrate, and there’s a lot of actuarial work involved. This is the role of investment consulting, to marry the actuarial work and the actual investment of funds in the market to reach a funding goal, and then work it out with the company to make up the shortfall.

The chain of events is like this. You contribute to your pension fund through your salary, impartial Trustees are appointed by the company to make sure these funds are not mismanaged, and the Trustees are obliged to take advice from Investment Consultants (ICs for short). The ICs then work out how aggressively or not the funds should be invested to meet a funding target, find appropriate asset managers for each asset class (usually several per asset class), and then perform the actual transfer of funds. The buckets tend to be equities, bonds, alternatives, and the typical large fund might be spread across 30 different pooled funds. There is no day to day buying and selling of individual names. This is performed by the asset manager, who more often than not are long only. It’s then the ICs job to assess how skilled or not the asset manager is through research and various metrics, and line up AMs for Trustees to have the final say (in a process oddly termed a ‘beauty parade’). Trustees then agree to invest with a particular manager, usually on a rating basis provided by the IC. The two biggest IC firms are Mercer and Towers Watson globally, and there are smaller ones like Hymans Robertson. If you have a pension with a large company there’s a good chance Mercer or Towers are involved.

The underlying asset managers, the vast bulk are long only and use fundamental research, not technical, as their holding time-span is much larger than a day-trader. Usually this falls under an investment philosophy of ‘Value’ or ‘Growth’. Growth by far and away has tended to outperform passive investment, the last time I checked Value started underperforming around the time money printing or ‘quantitative easing’ ramped up, and the usual Value metrics ceased being useful measures of a companies fair value.

Usually some percentage is allocated to hedge funds in the alternative buckets, and usually long/short strategies are deployed here. Many of these aren’t available to the general public, only HNW individuals. Retail hedge funds usually have some moniker like ‘Global Macro’. Again, they’re not trading bullflags and head & shoulders. This is where a lot of quantitative work is done, options strategies, and long term fundamental analysis is done, aiming to maintain steady performance in bear markets as a diversifier in portfolios. LIBOR +5% would be a typical target (whether they met this or not is a different story, the performance of retail hedge funds has been largely disappointing, with a few exceptions).

So, in a nutshell, institutional price action is a silly oxymoron. This is simply not how institutions participate in markets. They have a time horizon that runs into the decades, not minutes or hours like we do.

Is that to say price action, or technical analysis is totally useless? I don’t think so, but, I’ve tried working with this a lot and don’t know personally any successful long term ‘price action only’ traders. That’s not to say they don’t exist (I’m sure they do), I just don’t know any of them personally. I think this would be more useful in the swing trading, trend following side, but not so much for capturing smaller movements.

Trade Safe

-Z