Institutional traders, read that as Big Banks, Hedge Funds and similar entities have access to market information that small investors/traders do not. I am not writing about fundamentals or inside information, but the disposition of trades. That is whether trades are long or short. It includes information about the price of stop losses, their quantities and who holds the stop losses.
Briefly, a long trade is what most people understand about investing. You buy low, expect the price to increase, and you sell at a higher price thus making a profit. A short trade, is the opposite. You are betting the price will decrease and you make a profit. Don't concern yourself with the technical details in how that is accomplished. Just understand that it is legal and has gone on for a long time. It is a fundamental part of the market and is a good thing when not abused.
A stop loss is a type of trade that you place with a broker that instructs the broker to get you out of an existing trade. It is a failsafe. If your original trade is long, you would place a stop loss at a lower price to limit how much you lose. If your original trade is short, you would place a stop loss at a higher price to limit how much you lose.
But let's not get into the technical details, even though what I just wrote is very short of detail. The primary thing to understand is that institutional traders have access to more market information than small investors. Information is power and power is consistently misused to profit.
Additionally, institutional traders have more capital than small investors. They use that capital to move price of financial instruments in the direction they want and when they want. There's nothing inherently illegal about this, but it is illegal when they collude. It is inherently unfair and leads to market manipulation at the expense of small traders.
Wall Street has become a place where institutional traders pick winners and losers through manipulation instead of the market picking winners and losers. They do it for profit. Using the Gamestop example, institutional investors decided to short Gamestop. But they did not just place orders that would result in profit from the market naturally choosing a loser, e.g., the price of Gamestop going down because everyone in the market thought it was a loser. Institutional traders manipulated prices. They employ traders for that sole purpose. They use huge capital reserves to move price in one direction temporarily to accumulate positions, only to have trades in the opposite direction to profit from the previously accumulated positions. They actively sell the accumulated positions, driving price down, so they can profit from their shorts. This takes out stop losses of small investors, thus causing a loss for small investors. Institutional traders know the price of those stop losses and view them as mini barriers in the quest to drive price in a direction of their own profitability. When encountering those barriers, they use more capital to take out the barriers, but only enough capital that their other trades will remain profitable.
This is done with many financial securities and often multiple times and in different directions. It is not a done once with one security. It occurs to drive prices up and down in multiple rounds profiting in both directions simply by manipulating prices and knowing the direction (long or short) of the little guy's trades and where the little guy has his stop losses. It has nothing to do with the fundamentals of a security. It has nothing to do with market driven volatility. It is a false volatility, intentionally manipulated by institutional traders under the guise that volatility provides a range of prices for all traders to buy and sell. That would seem to be a good thing, but not when institutional traders actually know ahead of time the direction price will go. They can do this with superior market information to that what small traders can afford or even obtain.
Understanding this is fundamental in correcting the problem. Institutional traders gain superior information in two ways. 1.) The investment banking side of the business and brokerage side of the business collude on market information. The brokerage side of the business knows the disposition of trades it is handling. The larger the brokerage, the great the sampling of the overall market and the high quality the information. 2.) Institutional investors can buy additional information that is too expensive for small investors to afford.
This is not good for capitalism and competition. It has long been held as a tenant of market capitalism that "perfect information" is required for pure competition. "Perfect information" being price, quality, supply, demand and other factors required to make a decision to buy and sell.
The solution to the problem is simple. Make all market data ubiquitous. Perfect information has never been perfect in any type of market mainly because of a lack of information or the speed required to acquire and disseminate that information. Technology has changed that, but establishment oligarchs control access to the technology and the data it provides. It is presently very inexpensive to provide uniform access to the same data for all parties participating in a market. It is good for the market. It is good for investors of all means.
Government has seen fit to regulate markets under the pretense of protecting small investors and reducing the little guys risk. One of the biggest contributors to this is Dodd-Frank. However, it has done quite the opposite because Dodd-Frank was created by financial mental midget politicians and establishment lobbyists from big banks. I could go on for hours about the damage Dodd-Frank has done to little guys and how it benefits the establishment.
Things like shorting, leverage, hedging and derivatives often derided by mainstream media as risky and bad for markets, and particularly risky for small investors/traders. I can tell you that I only trade derivatives. I trade in both directions; long and short. I hedge. I almost always use leverage, because almost all the derivatives I trade are leveraged. The exceptions to that are metals which Dodd-Frank made it illegal to trade with leverage. I can also tell you that my trading is probably less risky than what most people incur by blindly placing their money into 401k's and pensions.
The knowledge to trade in this manner is easy to obtain and does not require extraordinary intelligence. It does require some time and effort. That after all is required to be proficient in most professions. My major barrier to greater profitability is price manipulation based on market data that I do not have access and is used against me. This only occurs due the collusion of people in establishment government with the financial industry.
Make no doubt about it. What small investors are doing to hedge funds over Gamestop and now other securities is a populous rebellion against establishment. The small guy has been abused and is fighting back. In some cases, without regard to their own profitability and solely for the purpose to dealing a blow to the establishment. I am 100% onboard with it.
That's only for forex accounts. Why would you not trade them in your futures account?