Why do institutional investors make short-term buy and sell decisions?

Question

The stock market as a whole rises and falls. Institutional investors represent 90% of stock market trading volume, generally possess hundreds of billions of Dollars in assets, and aren't motivated to "get rich quick" since they already have plenty of money. Their objective rather is to grow their assets long-term in a consistent way. This is in contrast to the individual investor who would be solely motivated to get rich quickly and thus would be making frequent high-risk trades.

From the S&P 500 chart, we can see over the last month it has gone up and down between 5221 points and 5375 points. For this up and down ripple to occur, clearly institutional investors have been selling and buying very frequently, much like a day trader would. My question is why? Why would they make these short-term adjustments when their assets are worth hundreds of billions of Dollars? What are they doing with the cash from selling in the meantime?

Answer 1

Institutional investors represent 90% of stock market trading volume, generally possess hundreds of billions of Dollars in assets, and aren't motivated to "get rich quick" since they already have plenty of money.

Institutional investors include everybody who has pension money, retirement fund money, and non-retirement money in mutual funds and ETFs. This is all in addition to those funds linked to insurance companies, University endowments, and other financial companies.

While tho money directed by the mutual fund is large, the investors can have small sums invested. Those investors range in age, income, and goals.

Even money designated for retirement can be day-traded. In the United states there was a not-insignificant number of government employees who were day-trading their TSP funds.

This is in contrast to the individual investor who would be solely motivated to get rich quickly and thus would be making frequent high-risk trades.

While an individual investor is skipping the big funds, they can still buy and hold.

From the S&P 500 chart, we can see over the last month it has gone up and down between 5221 points and 5375 points. For this up and down ripple to occur, clearly institutional investors have been selling and buying very frequently, much like a day trader would.

The value of the S&P 500 index will change everyday the markets are open. If even one person or mutual fund buys one share in a company it's price could change.

My question is why? Why would they make these short-term adjustments when their assets are worth hundreds of billions of Dollars? What are they doing with the cash from selling in the meantime?

Even big funds have to buy shares. When employee and company match funds hit the 401(k) there will be shares purchased to invest those funds in the market. When employees move money within their account shares will be bought and sold. When people cash in their retirement money shares will be sold. All these actions can impact the value of the index. The same thing happens when the makeup of the index changes.

What do they do with cash when shares are sold? They invest it in different companies.

Answer 2

So I have not conducted an actual study, but the market feels more volatile than it has been before. The market can be up, up, up; then down sharply or quite the reverse with no significant news or definitive reason for such. I feel like this trend started before COVID, during COVID was whatever, but has increased as the popularity of AI in recent months.

IMHO this is all due to people using AI bots to trade. What you are seeing is these institutions deploying their bots to see if the bots can be any better at timing the market. Given that these bots do not sleep or take lunch/coffee/smoke breaks they notice the start of a trend much quicker than a human and they all follow suit.

Also IMHO this provides us retail investors with an opportunity to micro-time the market. For example lets say one was interested in owning VZ for the long term. The Chart. Over the past 3 months you can see quite a fluctuation. If you buy when the bots are bearish, you can get a great price for what should be a very stable stock. Does VZ business really change that much in 3 months? It does pay a healthy dividend.