Institutional Investors and Their Effects on Volatility
Institutional investors generally increase market volatility because their large trading volumes and strategic behaviors create significant price movements. They manage substantial capital, so their buy and sell orders are often large enough to shift prices entirely on their own. Because their positions are so large, these funds cannot enter or exit the market quickly without driving the price in an unfavorable direction. This slow execution period can prolong price movements over days, weeks, or sometimes months. These funds also benefit from superior research and informational edges that let them anticipate market shifts before retail investors. Furthermore, automatic inflows into passive index funds and forced selling from investor redemptions push prices around with total disregard for underlying company valuations.
