Retail Investors Led Thursday’s $3.7 Trillion U.S. Stock Rout

Retail selling and fund cuts drove a roughly $3.7 trillion decline in U.S. stock market value Thursday, as options hedging and rules-based rebalancing added pressure. The Nasdaq 100 recorded its sharpest one-day drop since March 2020.

Markets initially rose after the midterm elections as event risk eased and oil prices fell. They reversed within about 24 hours as investors reassessed risks tied to Democratic scrutiny of data center expansion. Retail investors began selling during the first half-hour of Thursday’s session, followed by hedge funds and long-only asset managers. Retail investors’ net sales of individual stocks on Thursday were surpassed on only two days during the March 2020 pandemic shock.

Mechanical strategies added to the decline. Options dealers’ hedging amid negative gamma exposure could add about $7 billion in selling for each 1% market drop. Volatility-control funds were estimated to face about $61 billion in stock cuts based on Thursday’s moves, while roughly $25 billion in sales begun Wednesday were still underway. Leveraged ETFs were expected to sell about $47 billion during closing rebalancing.

Trend-following strategies also reduced exposure after major indexes fell below key levels. Commodity trading advisers sold about $13 billion in S&P 500 and Nasdaq futures, bringing exposure close to its lowest recorded level. Fundamental long-short funds lost 1.3% Thursday, while technology-themed funds fell more than 4%, erasing their year-to-date gains.

Baskets of storage, optical networking, data center and AI semiconductor stocks fell 12% to 15%. The S&P 500 excluding AI-related stocks dropped 2.3%, and storage and optical networking baskets stood about half below their June highs. The VIX rose from 16.6 at Thursday’s open to nearly 28 at the close. Earlier coverage of the post-election rout examined concerns that forced selling could spread to other risk assets, including crypto.

Chip stocks helped lift the S&P 500 Friday, and the Nasdaq 100 rose as much as 2.6% intraday.