How Does the Presence of Institutional Vs. Retail Traders Affect the Herding Effect?

Retail traders are generally more susceptible to the herding effect due to less access to sophisticated research and higher emotional volatility. Their collective action can create sharp, short-term price swings.

Institutional traders, with deeper capital and proprietary models, can act as contrarians, absorbing the retail selling. However, if institutional players also herd (e.g. due to risk management mandates or index tracking), their massive capital can accelerate the crash into a systemic event.