Who really moves the markets
The vast majority of trading volume comes from institutions and algorithms. Retail investors are a small slice of the market, and when you trade, the other side is usually a professional.
When you place an order, you might picture another person on the other end. In reality, the other side is usually a computer program or a large fund.
The main players active in markets: pension funds and insurers, investing enormous sums for the long term. Mutual funds and ETFs. Hedge funds. And trading firms whose computers act in fractions of a second.
That's not a reason to panic, but it is a reason for humility. For long-term investing, it doesn't matter who's on the other side. For short-term trading, it matters enormously.
That's why the common idea that a bit of chart-reading is enough to compete with these opponents is the most expensive misconception a beginner can have. It's like playing weekend soccer and expecting to win the Champions League.
By volume, institutional players dominate trading by a wide margin. A significant share of volume on large stock markets comes from algorithmic systems, including market makers, who continuously quote buy and sell prices and earn from the spread and rebates from trading venues, not from directional bets.
The composition of the other side matters a great deal for assessing your own chances. In a trade against a market maker, the expected disadvantage is roughly half the spread. In a trade against an informed participant, it can be considerably larger. The term adverse selection describes exactly this problem: you tend to get filled precisely when doing so benefits the other side.
At the same time: for long-term investments, the identity of the other side is largely irrelevant. The risk premium doesn't come from outsmarting someone, it comes from supplying capital and enduring volatility. The competitive disadvantage against institutions applies exclusively to short-term forecasting, not to long-term participation.
Summary
- Most trading volume comes from institutions and algorithms.
- In short-term trading, the other side is typically better equipped than you.
- In long-term investing, the other side doesn't matter.
Did you get it?
What do market makers earn from?
The spread and fees from trading venues, not from betting on direction.
What does adverse selection mean in trading?
That the other side tends to trade precisely when it's advantageous for them, meaning generally to your disadvantage.
Why doesn't the other side matter for long-term investing?
Because the return comes from the risk premium and the value companies create, not from outsmarting anyone.