Can Everyday Investors Beat the Pros in an AI Selloff?

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0:18Hi, Telis. Hi, Miriam. I like our pretty fancy new studio. What do you think?

0:22Telis Demos: Some nice new digs in here. Yeah. We also have some special guests joining us today. We have Hannah Aaron-Lang, who is our colleague on the Markets Desk. Welcome, Hannah. Thanks for having me. And then we also have Scott Rubner, who is head of equity and equity derivative strategy at Citadel Securities. Welcome, Scott. Thanks for having me. So tell us, what is Citadel Securities and how is it different from Citadel? So Citadel Securities is a global leading market maker. We trade both for institutional clients and retail clients. And for the retail clients, we represent about 35 % of all retail shares executed.

1:03And within the U.S. market, we execute around 24 % of all U.S. shares.

1:09Telis Demos: So this conversation kind of started from something Hannah and I were just kind of chitchatting about in the newsroom. Hannah wrote a great story a couple weeks ago about kind of where retail investors' heads were at. And by retail investors, we're talking individuals, people who are not professionals. They're investing their own money, right? Is that a safe definition of retail investor? Perhaps some of you out there listening to this podcast. The interesting part of the conversation is that households are actually the largest owner of the equity market today. So we've done some interesting work to define who the investor is today.

1:46and they're coming to the market under the age of 40. They're in the lower income of wealth. So the new investor today has really been a new generation that's participating in the market.

2:03Telis Demos: That's fascinating because I think we're sort of used to at the Wall Street Journal thinking of our audience as generally people who have a lot of money already, maybe they're retired, And they have time and energy and interest to trade actively. But it sounds like you're saying that that is changing a lot, that it's not the same as it might have been, what, 10 years ago? Like over what time frame would you say? Absolutely. So I would say since 2020, when I look at who owns the most equities in the entire marketplace, so the top 1 % own about 50%. The top 10 % own about 80%. And then the rest is this new generation of investor that's more engaged in the market today.

2:50And it's really changed the way that markets behave. So our discussion is almost how does the retail investor interact today versus 10, 20 years ago? And the signals that they provide in the market. And we use our data just to see on an intraday basis, and this most recent sell-off in the equity market, specifically AI stocks, has been an interesting data point where instead retail has moved into the same names that institutional accounts are also very active in. So back in what we were saying 2020, the behavior changed. And now I would say with the use of technology, these names look a lot more like the professional investing community as with retail trading.

3:42So this may be a totally outdated impression, but I have always thought of the retail investor as the dumb money and institutional investors as the smart money. And my impression was always that the institution always wins and retail gets crushed. Has that changed? I think that changed pretty dramatically. And we're seeing some evidence in our data that retail becomes very aggressively better buyers when the market is on red days. So the market's down. They like buying on weakness. Buying the dip. And institutional investors become sellers of the weakness. So if I look at the last 20 trading sessions in the market, October has been a very volatile month.

4:27The last 20 days, retail through our platform has been buying for 20 straight days, and the market has been quite volatile, especially red. Is it unusual, that long of a buying streak? It's unusual the length and the size. At the same time, institutional investors have become sellers over those same 20 days. So there's these interesting inflection points in the marketplace where retail is buying and institutional is selling. And what happens is that through our platform, even we're providing a better liquidity to the marketplace because we can meet at the middle of the market and prices have been better.

5:09Telis Demos: And is that a signal for what's coming ahead? Like, can that dynamic continue? Like if institutions continue to have worries about AI, but retail continues to be bullish about it. At some point, will retail run out of gas and that institutional selling will sort of overwhelm the market? So I think it's also a reflection of the U.S. economy. So as long as the job markets remains quite robust and healthy, the retail investor, in my view, is a sign of the economic resilience in the marketplace. So as long as they're invested in the job market, it's easy to allocate to equities in a model-based portfolio.

5:51So just think retirement accounts. If you're employed and have a monthly paycheck that goes into your retirement account, you can very specifically allocate to the strategy that you would like to. We call that the target date fund. So if you want to retire in 2050, you can allocate to stocks and bonds and other asset classes according to those parameters. And I would say I've seen only an increase in interest of this activity, not one that has been fading. So I'm not so worried about the sell-off in the market for activity to wane. I'm more focused on the job market and the U.S. resilience. Hannah, I want to ask you a question because you've been covering this so well.

6:34What happened that caused this shift in the identity of the retail investor? Yeah, I mean, this is something that Scott and I think have talked about several times, which is part of why you and I were discussing it, TELUS. But I mean, this really the catalyst for this massive shift that we've seen in the number and types of retail investors participating in the market was really back in 2020. So you have seen a really big shift over just the past several years. But, you know, there are a few things that laid the groundwork for that. So you had brokerages sort of get rid of commissions on trades.

7:07So basically, you used to have to pay every time you placed a trade. That was a huge hindrance for people.

7:11Telis Demos: Like Robinhood made that famous, the zero commission trading. Exactly. And then Robinhood also was sort of one of the first big mobile stock trading apps. So that kind of happens over the course of the 2010s. And then in 2020, of course, you have COVID. And you have a lot of people that are stuck at home. They're spending a lot of time online. A lot of them have extra cash because of those stimulus payments, right? And they're not really going out and spending money, I guess. Exactly, exactly. So they truly just have all this extra money on hand. A lot of folks start to engage in the markets, and that sort of sets the stage for the GameStop meme stock frenzy, which you guys may remember, essentially, this moment in which Wall Street really wakes up to the power of retail investors.

7:53And I think one misconception is that from that moment in 2021, those folks kind of fade away or maybe step back from the market. And in fact, what Scott and I have discussed several times is how that cohort has only really grown in strength and size and sophistication over that period where now folks are no longer confining themselves to stocks even. They're trading options. They're exploring new asset classes like prediction markets. They're interested in IPOs. They become this massive structural force in how the market operates. And Scott has been following that very carefully, which is one reason that we talk so frequently and one reason why I brought it up to you.

8:30Tell us.

8:30Telis Demos: Yeah, that's really interesting. And actually, something Scott said jumped out at me, which is kind of talking about the connection between the job market and what retail investors are doing, which suggests that in the same way that people spend money on, you know, we talk about the job market being important to consumer credit, to retail sales. Hannah do you see that developing where people have kind of oh I've got some extra money I'm doing well part of what I'm going to spend my money on is the market kind of different from like okay I've got my 401k I'm investing more for my retirement more just like this is something I want to play with I want to invest it.

9:09I think that is happening. I think there's a bit of a wealth effect thing happening, too, where like if you've done so well over the past several years as the AI investing boom has progressed, which has certainly been the case for many retail investors. I think there's a tendency to they're sitting on more sort of capital or net worth overall. So there's a tendency to keep investing. And then I also think that like a lot of people have won really big over the past several years. I mean, the economy has been really resilient. And then a lot of the most successful stocks of this market, you know, whether it's your Mag7 or, you know, Palantir's stocks like that are really popular among retail investors.

9:46So a lot of people are sending out a lot of gains there as well. And I think that encourages them to continue making bets like that. The conversation has shifted so much to now the retail investor wants a properly allocated portfolio to now they're really buying bonds because they can lock in a three and a half percent 30 year tips inflation adjusted rate. So once upon a time, we were talking about more low quality stocks. Today in the marketplace, the sophistication of portfolio allocation and model allocation, i.e. buying bonds, you would not think that this was the case. But the more and more I'm intrigued by the retail investor, the more and more it feels like a professional money manager with the use of technology that can meet their needs.

10:40So we've come a long way from the meme stock investors of 2020. I mean, it seems like we're talking about, you know, a much more sophisticated crowd now. I think dramatically the tide has turned. And when I think about how the market operates on a daily basis, you have very rigid rules on the institutional community, what happens, whether it's a price trend or a spike in volatility. Retail has been a buffer in that marketplace. I think it's just a major feature of the market today. And it looks a lot more like institutional trading. And this reminds me actually of something that I heard at a retail investing conference where I was recently.

11:21I spoke with an individual trader who said something to the effect of like, I'm not a Wall Street money manager. I don't work at a big firm. Like, I don't have quarterly or end of year goals to meet in terms of my performance. Right. So I can just buy anytime the market goes down and not maybe have to worry about it that much to the extent that a professional might have to. Right. So I think that's an advantage that retail has in that regard. I think that's right. There's very few instances in our data, and we started looking at it in 2017, where you have these big macro events, March of this year or April of last year, where there's a spike in volatility and retail may step back.

12:02So there is a point of levels of, you know, I would say panic in the market. Very few. According to our data, we look at levels of volatility that retail buys until and then when they become a seller. And it's not really until the VIX goes above 30 where there's a change in behavior. So I think when we muddle along through on exchanges on a daily basis, today we're seeing a significant rotation in the market. So there is just a lot of interest in a daily basis. And given breadth has been so good when the top 10 stocks aren't working, the other 490 are. So it's been this netting effect that retail has really been increasing their participation.

12:47Telis Demos: I think we talk about this, though, this phenomenon of like retail is buying when stocks are down. People put it as kind of a bad thing that like buy the dip is not said as like a complimentary description of retail. It's still like people think that they're the dumb money. Right. It's like, oh, they would buy the dip kind of thing. Exactly. Like, oh, they don't get how this trade is falling apart. So these dummies are just buying every time it goes down. And we also talk a lot about the historical research that like the more people trade, the worse their returns are. But is what you guys are talking about evidence that like people have changed their behavior in a way and they're not just like buying thoughtlessly or it's the sign of a bubble, but that like they're just participating in the market and not necessarily, you know, distorting it in some way.

13:39Telis Demos: Is this not actually a bad thing? in other ways? I think there is a misconception that retail and everyday investors sort of buy super indiscriminately, almost in a way that is entirely amateur. And I think, you know, Scott has some good analysis showing the reasons why that's not necessarily the case. But then I also think, you know, even if your response, your default response as an investor right now is to buy when the market goes down, there's plenty of evidence from the past, you know, five or six years to show that you know that's a relatively good playbook think of all the sharp declines that we've had where the market has rebounded right back up right and if you bought at the bottom you were heavily rewarded um you know whether that's sort of the covet crash in 2020 whether that's the tariff turmoil and you know april of last year you know another investor i talked to recently told me that he basically took every penny he had and put it into stocks you know at the depth of that crash in 2020 like in march of that year when we all like had no idea what was going to happen with like the world, not to mention the market.

14:40And he took this massive bet on stocks at that moment and ended up like tripling his net worth over the next few years.

14:46Telis Demos: So when we talk about things like that, like look at this lunatic who mortgaged his house to put a bet on stocks. And the fact that it's turned out right is like, oh, we've rewarded people for doing bad. But it sounds like what you guys are saying is that like stocks going down isn't always the right answer. And so the fact that there is like a ballast or the people are behaving in this way is maybe evidence that that they're not unsophisticated, but that they're sophisticated. And they know that a downturn doesn't mean, oh, that's it. America's finished. You know, right. Like maybe that is the time to buy.

15:21And also hitting on a key point that you mentioned, this is not just a U.S. phenomenon. It's a global environment. So when we think about retail activity in the U.S., it looks very similar in Asia and Europe and countries all over the world where in the equity market, we're seeing a lot of global participation. And as markets start to trade 23.5, it will likely increase and liquidity will improve in the marketplace. That's a great place to pause. We're going to come back in a minute with more on the changing role of the retail investor.

16:13returns value, and innovation yields opportunity. Combining insights both local and global, we look beyond obvious trends to uncover the opportunities shaping tomorrow. Explore our funds at globalxetfs.com. Global X, beyond ordinary ETFs.

16:41Telis Demos: It's been mentioned a couple times here, but I want to focus back on this idea that the tools retail has in front of them have evolved to. We know that, you know, it's not just you can buy a stock, right? You can trade other asset classes very easily. Now you can even use AI in some ways, right? Like I think you wrote that Robinhood is offering kind of an AI tool. People can use model portfolios. They might use a robo advisor that kind of does things. How has that changed the impact that retail has on the market, the fact that they might be trading across asset classes or executing a strategy rather than just buying one thing and selling one thing at a time?

17:26Yeah. I mean, Scott, I would be interested to hear your thoughts on this. But I know just from the reporting that I've done over the past few weeks, a lot of people now are talking about agendic trading, which is basically like an AI, an AI agent that will play the market for you so the same way they're in your parameters right yeah like they can really do that today you can say yeah

17:46Telis Demos: like yeah I mean I think like an overall series period of time execute something yeah I mean I took like one example from somebody I spoke with relatively recently he was having his agent you know and of course this took a lot of time and effort to put together but he was having his agent scan thousands of like options flow data points and then ranking all of them out of ten and then if that trade ranked above a certain number on the scale of 1 to 10, the agent placed that trade and tried to follow the momentum because it looked like a high-conviction institutional trade. So people can use this for fairly sophisticated things, and they already are.

18:22And some of the brokerage executives that I talk to say this could be on par with mobile trading or even the Internet in terms of what it kind of opens up to individual investors is because this like algorithmic trading style has previously only been available to like quant funds, you know, you and I might think of folks on Wall Street who are super pro at this. So I think we're in the midst of another big shift. You know, it's it's to be determined whether or not this, you know, something like algorithmic trading becoming more available is going to allow everyday people to just like outperform the market on a mass scale.

18:57I think there's like some understandable doubt about that. But I think it's a sign of just how much retail investors are getting access to these days that would have been pretty unimaginable even 10 years ago. But I don't know. I'd be interested how you think technology and sort of the tools that are at these folks disposal has has changed some of the things that we've talked about. Yeah, I would just say it is very easy to allocate to your own individual parameters. So you think risk, return, time horizon, taxes, legal, liquidity, unique. You can go in and very easily type in what you would like to achieve, your goals.

19:38So I would say what's actually increased is the ability to meet your own goals, trading your own and compounding your own wealth as a way using technology to improve going forward. And if I just give you a couple statistics and I think about the role of ETFs, it's really interesting. So the ETF landscape in the U.S. has seen$1.6 trillion worth of inflows year to date. That's 60 percent higher, which was a record last year. And it'll annualize about$2 trillion. And I would say when I think about where the money is going, there are a lot of new active ETFs which capture a very specific theme or sector or factor.

20:28So I would just say technology continues to increase and it actually suits you better on a daily basis.

20:36Telis Demos: So it's not just, oh, retail buys Tesla or retail buys Apple. Right. Right. It's it's people are thinking about what they do from a portfolio point of view. If retail has the same tools, ultimately, that institutions do, we've been talking about how retail has kind of been moving in the other direction. They've been buying when the hedge funds and asset managers have been selling. Do you think that they start to look more like each other the more you might have a tool that's telling you, you know, kind of the same rules of thumb that that that a professional investor is using? Yeah, because another thing about agentic trading, right, is that it would ultimately probably lead to more trades if more folks like adopted those tools, right?

21:14So I think that is, I think retail activity continuing to increase is something that we're very, very likely to see in years going forward.

21:21Telis Demos: I mean, it's something that sounds a little risky to me in that, you know, if everybody's asking Claude or whatever to say, oh, Claude, how should I trade this market? And, you know, Claude will probably give, well, I don't know, I guess, but maybe it'll give a fairly consistent answer. And then does that magnify moves? Because people are, instead of doing what maybe they used to, which is just instinctively, oh, stocks are down, I'll buy more, or I'll buy these names because I like them. Yeah. And then do the hedge funds and asset managers start to not be interested in distinguishing between what the retail behavior is and what their behavior is if they're the same?

21:59I mean, maybe would they like it if everyone behaves in a consistent institutional way? I don't know. When I think about the construction of the U.S. markets, the top seven stocks represent 35 % of the market. The top 10 stocks represent 40 % of the market. 49 % of the market is AI. So you have such a wide winners and losers thesis. I think that the entire landscape is actually benefiting from the low correlation among names. So it's really a stock pickers market across the board, even given the use of AI. I think there's very specific trades and themes where a lot of people are engaged and that will continue going forward.

22:48But I would say, you know, wide remit of trading opportunities available. All right.

22:54Telis Demos: We're going to take a quick break. When we come back more with Hannah Aaron Lang and Scott Rubner of Citadel.

23:09Telis Demos: what do your clients get out of the the portions of your research because you you write about a lot of kind of you know thematic and technical and other stuff going on in the stock market retail is just one part of it why do your clients like to get that retail update what do you think people do with that information or use that for? Yeah, I think it's a overall, it's a barometer to get a real-time sentiment indicator in the market. And over two decades, there's been tools and themes created to determine them. And today, I don't think that they're so relevant thinking about real-time sentiment and positioning, and you might be missing a major part of the market.

23:55So my job, and I've been doing this for the past 22 years, is really to provide a market mosaic of what's going on real-time. I think that one point Scott and I have talked about a lot is just this idea that you can't necessarily get a full picture of the market today without thinking about what retail is doing. Retail is a very crucial part of that picture. And I don't know, it's really interesting to me because one thing that I also hear a lot is, you know, the stock market is not the economy, that whatever happens on Wall Street can be kind of confined to the world of capital markets. And I think, you know, one consequence of this retail revolution that we've seen take place is that, you know, increasingly what happens in the stock market can impact the livelihoods and net worths of everyday people on a much larger scale than ever before.

24:43So that's something I spend a lot of time thinking about as well is you know given the concentration in ai given these sort of violent gyrations that we've seen in the market over just the last few months like those moves have maybe a farther reaching ripple effect on the united states economy than than before so it's one kind of consequence of this as well too people have benefited a lot and people could get really hurt if we do see you know that sort of like massive market meltdown well i mean it kind of raises the question that we talk all the time about is ai in a bubble have has the is the bubble about to pop was last week at the beginning of that i mean we've had so many discussions about this but if retail keeps buying the dip then is the bubble ever going to pop i mean if if what would cause retail to fall out of love with ai yeah that's a really good question does it take

25:33Telis Demos: an economic event maybe like does it like if there's a you know sudden jump in the unemployment rate or, you know, there's just some some other economic challenge. Or maybe the Fed raising interest rates. Maybe that hits people or, you know, if inflation continues to rise. I don't know. Everyone who looks at the market is also making analogies to the growth of the U.S. consumer and how strong it has been. If the macro environment does change for whatever economic reason, it would impact the activity on a daily basis. But based on our outlook on the US, on global growth, on the US resiliency, I think a lot of the things we're seeing in the market is a very healthy economy and one that has been super robust.

26:22So we are monitoring it closely. But when I think about retail buying the dip, I don't think it's wholeheartedly, They're picking stocks based on a view that they have with the use of technology that makes them look like professional investors. So to me, that's a real healthy market environment and one that I'm not really worried about.

26:48Telis Demos: So maybe just to wrap up, tell us then, based on the evidence that you look at across what's happening in retail, the institutional signals you look at, what's the story of the market right now, would you say? The story in the market is absolutely the resiliency of earnings growth. And when I think about Q3 earnings growth, right now we're on pace for 30 % year-on-year EPS growth versus 27 % coming in. So the bar was high coming in. I'm really focused is AI spreading into the productivity of the average company. So when we're talking about specifically that the top capitalization weighted, I'm not so focused on that.

27:35I'm focused on profitability and earnings growth into 2027 of the average company. Think, how do you even define an AI company? You know, is a single stock that you would traditionally not think of AI? I now think of it as AI. So I would just say when I think about nine out of the 11 gig sectors, all reporting double digit EPS growth, I'm thinking the health of the U.S. consumer plus the profitability of corporate America has really been resilient. So I would say the point in time is just the continuation of the trend that we've seen. And earnings have been the fundamental driver of this rally in 2026.

28:19And in 2027, I don't think that we've seen peak earnings yet.

28:24Telis Demos: Well, this has been a great conversation. Hannah and Scott, thanks for joining us. Thanks for having me.

28:32And that's everything you need to know to take on your week. The show is produced by Alexis Moore and Michael LaValle. Michael LaValle is our sound designer. He also wrote our theme music. Aisha Al-Muslim is our development producer. Chris Sinsley is our deputy editor. Leetal Malad is our Senior Director of Shows. Samantha Hennig is the Wall Street Journal's Head of Multimedia. For even more, head to WSJ.com. I'm Miriam Gottfried.

28:57Telis Demos: And I'm Telestivos. Until next time.

29:04What connects Global X ETFs with the advisors and investors who choose us? Conviction. The belief that vision returns value and innovation yields opportunity. Combining insights both local and global, we look beyond obvious trends to uncover the opportunities shaping tomorrow. Explore our funds at GlobalXETFs.com. GlobalX. Beyond Ordinary ETFs.