Leverage and Short-Term Trading Raise Market
Increased use of leverage by retail and institutional investors is making the stock market more volatile, according to strategists speaking to MarketWatch.
A surge in self-directed retail investors and quantitative trading funds is shifting the U.S. equity market toward more borrowed money and short-term trading. Market strategists told MarketWatch this shift makes blowups like recent leverage-driven crises more likely, even though leverage in some areas has eased from peaks seen before July's AI stock swoon.
Philip Straehl, Morningstar Wealth's Chief Investment Officer, said overall leverage across retail and hedge-fund investors remains elevated. He warned this leaves the market susceptible to additional volatility if investors are forced to reduce risk. Straehl identified the influx of retail investors and the growing popularity of quant strategies as key drivers of the move toward shorter trading horizons.
A Shift in Trading Behavior
Over the past decade, a rush of new self-directed retail investors has entered the market. Concurrently, trendy quantitative trading strategies have attracted growing interest from major asset allocators and institutions. Straehl noted both investor classes are oriented more toward short-term trading than traditional, long-term fundamental funds.
The share of equity trading volume attributed to different investor types has changed significantly, as shown in the data Straehl highlighted.
Recent Market Stress Events
Bouts of volatility witnessed in spring and summer 2026 could become more frequent. Hot semiconductor stocks rallied sharply in the second quarter before turning sharply lower in July. This put pressure on investors who had borrowed money to chase the rally.
Shares of Micron Technology and Sandisk cratered. Straehl suggested a flood of assets into leveraged ETFs likely contributed to the speed of the unwind. The pain spread beyond the U.S., with South Korean stocks sinking into a tailspin. Shares of Samsung Electronics and SK Hynix, two memory-chip makers with huge gains in 2026, were hit hard.
Subsequently, a rash of liquidations led South Korean officials to implement new measures. These included restrictions on access to leveraged ETFs and increased cash margin requirements. Joe Saluzzi of Themis Trading said the South Korean market is a perfect example of how hyperactive day traders with access to derivative products like double-leveraged ETFs can cause a bubble to form.
Saluzzi explained that FOMO traders often get in near the top, frequently using margin, and get liquidated once the bubble pops. Assets managed by leveraged ETFs around the world surged earlier in 2026 as AI mania shifted into overdrive. However, these products still represent just a sliver of overall ETF assets.
