Bloomberg reviews the U.S. stock sell-off: retail investors sold first, followed by hedge funds and institutions, with mechanical reduction of positions intensifying the sell-off

According to Bloomberg, Wall Street's reaction to the U.S. midterm elections shifted from positive to negative in about 24 hours. The sell-off on Thursday spread from retail investors to hedge funds, long-only asset management firms, and quantitative strategies, causing a loss of approximately $3.7 trillion in market value for U.S. stocks in a single day, with the Nasdaq 100 index recording its largest drop since March 2020. Initially, the stock market rose after the elections due to the reduction of event risk and a decline in oil prices, but investors later reassessed the risks of Democratic scrutiny on data center expansion.

In the first half hour after the market opened on Thursday, retail investors were the first to sell for profit, followed by hedge funds and long-only firms. Data from Vanda Research shows that the net selling scale of retail investors on that day was second only to two days during the pandemic shock in March 2020. Its strategist Viraj Patel pointed out that while retail and systematic investors were actively selling, institutional buyers chose to step back. The decline subsequently triggered mechanical selling, with Nomura strategist Charlie McElligott estimating that based on the negative gamma exposure during Thursday's trading, for every 1% drop in the market, options market makers would generate an additional selling pressure of about $7 billion.

Volatility control funds estimated that they needed to reduce their holdings by about $61 billion in stocks based on market changes at the time, with about $25 billion in sales still being executed on Wednesday. The rebalancing of leveraged ETFs is expected to bring about an additional $47 billion in stock sales. Vanda estimated that commodity trading advisors sold about $13 billion in S&P 500 and Nasdaq futures. Goldman Sachs' prime brokerage trading desk estimated that fundamental long-short funds lost about 1.3% on Thursday, while technology-themed funds fell over 4%. The basket of stocks in storage, optical networks, data centers, and AI semiconductors dropped by 12% to 15% that day, and the VIX index rose from 16.6 points at the opening to nearly 28 points at the close.