Next week, the I/O Fund will be releasing our official 2024 returns, along with our updated cumulative and annualized returns. However, before we release our returns, we think it’s prudent to discuss the importance of verified returns for retail investors.
Retail Investors Take the Brunt of Market Losses
The unfortunate reality is that retail investors disproportionately suffer losses compared to institutional investors. According to a study by Dalbar Inc., the average retail investor underperformed the S&P 500 by 6.1% annually over a 20-year period with a 5.5% gap in 2023, which was higher than the gap in 2022 – showing that bull markets often do not reward retail investors in the way that it’s perceived. According to the report, this is because “investors tend to sell out of investments during downturns and miss out on rebounds." Additionally, Bloomberg found that 80% of day traders quit after the first two years.
A University of Oxford professor explains this disparity: "Retail investors will always lose money because they lack the ‘education,’ whereas financial professionals are well-informed – that’s what they do."
This is especially concerning given that retail investors now make up 25% of the market, a sharp increase from 10-15% before the pandemic, according to Bloomberg Intelligence (Bloomberg, 2023). With more individual investors participating, the need for risk management and verified returns has never been greater.
The I/O Fund will officially release our 2024 returns and cumulative returns next week, with results that prove our firm has handily beat not only the indexes but also Wall Street’s best firms. Stay tuned to your inbox!
The Role of Quant Machines in Extreme Volatility
One of the primary culprits behind today’s extreme market swings is high-frequency trading (HFT) and algorithmic investing. While many newer investors picture a stock trading floor with market makers assisting trades, the reality is far different. Instead, the market is largely controlled by colocation data centers filled with high-speed servers executing trades in milliseconds.
Algorithms thrive on volatility, often triggering rapid selloffs that disproportionately hurt retail investors
Research shows that HFT firms account for 50-60% of U.S. equity trading volume, making them dominant players in the market. These algorithms thrive on volatility, often triggering rapid selloffs that disproportionately hurt retail investors, who don’t have the same tools to react instantly. A study by the CFA Institute found that flash crashes, largely caused by algorithmic trading, wipe out billions in market value within minutes, often before retail investors can even process what’s happening.
For example, during the May 6, 2010, flash crash, the Dow Jones Industrial Average plunged nearly 1,000 points in just 10 minutes, temporarily erasing nearly $1 trillion in market value—a drop largely attributed to high-frequency trading algorithms. Similarly, in December 2018, a wave of algorithm-driven selling caused the S&P 500 to drop nearly 20% in a matter of weeks, triggering widespread panic among retail investors.
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A report from the Bank for International Settlements (BIS) further found that high-frequency trading increases market fragility, as it can amplify both buying and selling pressure, creating price swings that disproportionately impact smaller traders. Per Ox Journal: “Although, all these benefits do come at a cost, derived also from the increase in liquidity that these algorithms provide; the cost is the increase in volatility. To be exact, Zhang finds that high-frequency trading increases short-term intraday volatility by 30%.”
Without access to sophisticated trading tools, retail investors are left vulnerable to these rapid market fluctuations.
