Retail’s Short Fuse

Key Capital Private, Investment Note - Issue #33

Retail’s Short Fuse

Before the pandemic, large institutions such as hedge funds and asset managers set the tone for equity flows and market structure. The 2020 meme stock episode broke that pattern, and it never fully reversed.

Commission-free trading became industry-wide in 2019, cutting costs to zero and accelerating small-ticket trading on mobile. Trading account creation surged, with more than 10 million new U.S. brokerage accounts in 2020, and roughly another 10 million by mid-2021 (source: Houlihan Lokey), pulling a younger, more transactional cohort into day-to-day activity.

Most estimates place individuals at one-fifth of total U.S. equity volume today, down from the Q1 2021 peak of 24%, but well above the pre-COVID norms of 10% (source: Citadel Securities). With this footprint staying persistent, does this group now stand alongside institutions as the marginal price maker? And more importantly, is this changing how markets typically behave during major events?

Is the Retail Trend Your Friend?

The old stereotype of a "retail investor" was a conservative, buy-and-hold saver who slowly built a portfolio of blue-chips and broad indices. While that investor still exists, today’s app-native trader is younger, trades more often, and uses high-leverage tools with greater frequency.

Since 2020, the behaviour that’s stood out most is aggressive dip-buying in broad indices. This is often based on the belief that market drawdowns will "mean-revert" without needing a specific fundamental catalyst. Consider the speed of recent recoveries:

• The S&P 500's 34% drop in early 2020 was fully recovered in just five months from its lows. For comparison, the previous three market declines of 30%+ took nearly three years or longer before the market retraced those losses (source: Schroders).

• More recently around "Liberation Day" (April 2025), fund managers were deeply pessimistic and swung to multi-year equity market underweights following a 19% S&P 500 decline (source: Bank of America Fund Manager Survey). Meanwhile, retail investors were buying the dip at a record pace (source: VandaTrack).

While proving direct cause-and-effect is tricky, the consensus is that retail's buying momentum was a material contributor to these recoveries. Without them, selloffs may have been deeper and rebounds much slower. As Goldman Sachs strategist Scott Rubner puts it, there’s a “competition for dip alpha”, i.e., who can step in fastest after a market pullback. That retail reflex may explain why recent drawdowns have snapped back in “V-shapes” rather than long “U-shapes”.

The 0DTE Tsunami

But perhaps the biggest change in behaviour has been the growth of 0DTE (zero-day-to-expiration) options. Before 2020, options were mainly a professional tool for hedging or fine-tuning risk. Now, retail investors use these contracts - which expire the same day they're bought - as a cheap and fast way to make leveraged bets on the market's immediate direction.

By May 2025, contracts expiring the same day they are written accounted for over 61% of S&P 500 option volume, with retail driving more than half of that flow (source: Cboe). This ultra-short-term focus fundamentally changes where risk shows up.

This helps explain the apparent detachment between market sentiment and the VIX, the traditional “fear gauge” for markets. The VIX is calculated using options that are 30 days from expiration. Since so much action is now packed into a single 24-hour window, a lot of real-time market turbulence falls outside the VIX's measurement. This is why the VIX often looks calm, even when intraday markets are more volatile.

The 12-Figure Stock Swing

The same dynamic also appears in single stocks. Retail investors increasingly use zero-day options to get highly leveraged, same-day exposure to big news events in a handful of names, while overall index moves often remain relatively subdued. In 2025, the S&P 500 has frequently been calm even as individual tech giants have added or shed more than $100 billion in market value in a single session. For example, Nvidia jumped almost 19% in the trading day following Donald Trump’s pause to ‘reciprocal’ tariffs, while Meta Platforms’ shares fell 10% after its Q3 2025 results, as investors digested guidance over AI-driven capital expenditures.

So far this year, there has already been 119 instances where a single company’s market cap moved by more than $100bn in one trading day, the highest annual total on record (source: Bank of America). During the bear market of 2022, there were just 33 such moves. A record 0DTE share of the options market and high retail participation strongly suggest these dramatic single-name moves are being exacerbated by retail activity on the back of specific catalysts.

A Rising Tide Lifts All Shorts  

Another impact is the difficulty now faced by investors who allocate capital on a stock's decline. For the last half-decade, getting on the wrong side of an activist short seller like Hindenburg Research was a nightmare for a CEO. Yet, this year, Hindenburg closed its doors, joining other prominent short sellers who have retreated. Famed Enron short-seller Jim Chanos closed his fund in 2023, and just this week Michael Burry - famous for betting against the U.S. housing market in 2008 - informed investors he was liquidating his hedge fund, saying his “estimation of value in securities is not now, and has not been for some time, in sync with the markets.”

Meanwhile, a basket of the 250 most-shorted U.S. stocks is up 57% year-to-date, the best run since a return of 85% in 2020 (source: S3 Partners). Prominent short seller Carson Block of Muddy Waters notes that bull market cycles have become too long and corrections too brief. He believes any market correction is now viewed by retail traders as a "Buy the Dip" opportunity, making it nearly impossible for bearish bets to pay off consistently.

Conclusion

"You could drop a nuclear bomb and the broken VIX would not go higher" is an exaggerated quote taken from a user on X, but it captures the growing sense that markets are no longer reacting as expected and that the rising influence of retail investors may be reshaping market dynamics.

Ultimately, the most profound danger for investors may be the failure to recognise that in this short-fused market, the highest exposure could be the moment the retail bid stops arriving on time.