Great article. How do you think the QIS (short vol with (tail) hedgers, QIS supplying vega into the market, compressing implieds, until stress hits — when they rebalance or pull risk down, contributing to vol spikes.) and retail VIX space (VXX, SVIX, UVXY,VVIX) factor into the mix? Investment banks are very active in the former (as market markers) and CBOE in the latter and both increased a lot in size.
P.S. The ChatGPT answer is:
VIX space acts as a transfer market between:
Institutional hedgers seeking convexity,
Retail and ETF investors trading volatility tactically,
Systematic strategies harvesting the vol risk premium.
In 2025, the picture looks roughly like this:
QIS platforms dominate the systematic risk premia space (hundreds of billions notional).
The VIX ecosystem is deep and liquid, but also crowded in short-vol exposures.
New products (like 1-day VIX, or dispersion indices) further tighten the link between QIS flow, index option liquidity, and VIX curve dynamics.
Investment banks’ QIS desks therefore function as market makers of volatility exposure, while the VIX complex is the marketplace through which those exposures are priced and transferred.
Thank you! In Part II, I will cover systematic investors, which include QIS (vol premia, intraday momentum, etc.). I will also cover CTAs, vol control funds, leveraged ETFs, and ETFs with an option overlay (like JHEQX).
The retail VIX space is an interesting one too. It is much less leveraged since 2018 (Volmageddon), and now there is not only a demand for short VIX exposure but also a very large demand for long VIX exposure. This has direct trading consequences on the VIX futures curve. I will add this to the next post.
I have to say this post is in my Top 5 blog posts for the year - closed quite a few holes in my understanding of market structure. For example i think i underestimated the impact of retail relative to the other market actors and how relentless the dip buying actually is. Your post also raised some new questions though that i hope you can help me with:
(1) Is there an overlap between the 53% of US AUM share of passive and the retail trading proxied by 50% off-exchange volume? I'm guessing yes because retail also buys index funds via robinhood etc. Or to ask that differently: What is your rough estimate of how much of the 50% off exchange volume is just buying index funds and how much is stock picking?
(2) From your post i gathered ~50% retail trading (off-exchange) and ~25-30% Hedge Fund Trading relative to traded stock volume. Also you mentioned beta compounders commanding ~40-50% of global insti AUM (but that includes more than just us equities). So would it be a fair assumption to say that retail accounts for ~ 1/2 of us equity volume and HFs and beta compounders each about ~1/4 ? Or is this misleading because HFs can increase/decrease net exposure in hours. I am just trying to guesstimate each groups relative impact on markets and i know that probably nobody has exact data on this.
(3) Regarding beta compounders - are they mostly bound by a benchmark like a global 60/40 and judged on their tracking error? Or could they theoretically do something wild like going to 70% cash / excluding US equities / switching bonds for gold?
(1) The distinction between passive and active is linked to the instrument itself, not the venue. So, in theory, half of the off-exchange volume is flowing toward passive instruments (passive ETFs like SPY) and the other half toward active instruments (stocks, or active ETFs like ARKK). I'm also reasonably confident this ratio is not completely static; the frothier the market, the more retail investors will trade stocks instead of ETFs. Some options flow charts from the CBOE are confirming this hunch of mine. I bet that right now retail active flow is 2/3 of the retail passive flow.
(2) That's a good guesstimate; yes, there is no exact data. There is also the volume coming from market makers; behind each option traded or stock imbalance, there is an action from the market makers. They also need to re-hedge their options when the market moves. Let's save that for another part of the guide. :)
(3) I picture a PM Beta Compounder as a risk-averse person with a comfortable situation; this is an average, of course, but we can only work with aggregates. They have low tolerance for career risk, and each deviation from the benchmark will need to go through committees and other administrative processes. So yes, they are somehow bound by a benchmark, but they can overweight or underweight an allocation. Given the size of their AUM, a small change in allocation can have a big impact on market trends.
Great article. How do you think the QIS (short vol with (tail) hedgers, QIS supplying vega into the market, compressing implieds, until stress hits — when they rebalance or pull risk down, contributing to vol spikes.) and retail VIX space (VXX, SVIX, UVXY,VVIX) factor into the mix? Investment banks are very active in the former (as market markers) and CBOE in the latter and both increased a lot in size.
P.S. The ChatGPT answer is:
VIX space acts as a transfer market between:
Institutional hedgers seeking convexity,
Retail and ETF investors trading volatility tactically,
Systematic strategies harvesting the vol risk premium.
In 2025, the picture looks roughly like this:
QIS platforms dominate the systematic risk premia space (hundreds of billions notional).
The VIX ecosystem is deep and liquid, but also crowded in short-vol exposures.
New products (like 1-day VIX, or dispersion indices) further tighten the link between QIS flow, index option liquidity, and VIX curve dynamics.
Investment banks’ QIS desks therefore function as market makers of volatility exposure, while the VIX complex is the marketplace through which those exposures are priced and transferred.
Thank you! In Part II, I will cover systematic investors, which include QIS (vol premia, intraday momentum, etc.). I will also cover CTAs, vol control funds, leveraged ETFs, and ETFs with an option overlay (like JHEQX).
The retail VIX space is an interesting one too. It is much less leveraged since 2018 (Volmageddon), and now there is not only a demand for short VIX exposure but also a very large demand for long VIX exposure. This has direct trading consequences on the VIX futures curve. I will add this to the next post.
I have to say this post is in my Top 5 blog posts for the year - closed quite a few holes in my understanding of market structure. For example i think i underestimated the impact of retail relative to the other market actors and how relentless the dip buying actually is. Your post also raised some new questions though that i hope you can help me with:
(1) Is there an overlap between the 53% of US AUM share of passive and the retail trading proxied by 50% off-exchange volume? I'm guessing yes because retail also buys index funds via robinhood etc. Or to ask that differently: What is your rough estimate of how much of the 50% off exchange volume is just buying index funds and how much is stock picking?
(2) From your post i gathered ~50% retail trading (off-exchange) and ~25-30% Hedge Fund Trading relative to traded stock volume. Also you mentioned beta compounders commanding ~40-50% of global insti AUM (but that includes more than just us equities). So would it be a fair assumption to say that retail accounts for ~ 1/2 of us equity volume and HFs and beta compounders each about ~1/4 ? Or is this misleading because HFs can increase/decrease net exposure in hours. I am just trying to guesstimate each groups relative impact on markets and i know that probably nobody has exact data on this.
(3) Regarding beta compounders - are they mostly bound by a benchmark like a global 60/40 and judged on their tracking error? Or could they theoretically do something wild like going to 70% cash / excluding US equities / switching bonds for gold?
Thanks!
Thank you for the kind comment!
(1) The distinction between passive and active is linked to the instrument itself, not the venue. So, in theory, half of the off-exchange volume is flowing toward passive instruments (passive ETFs like SPY) and the other half toward active instruments (stocks, or active ETFs like ARKK). I'm also reasonably confident this ratio is not completely static; the frothier the market, the more retail investors will trade stocks instead of ETFs. Some options flow charts from the CBOE are confirming this hunch of mine. I bet that right now retail active flow is 2/3 of the retail passive flow.
(2) That's a good guesstimate; yes, there is no exact data. There is also the volume coming from market makers; behind each option traded or stock imbalance, there is an action from the market makers. They also need to re-hedge their options when the market moves. Let's save that for another part of the guide. :)
(3) I picture a PM Beta Compounder as a risk-averse person with a comfortable situation; this is an average, of course, but we can only work with aggregates. They have low tolerance for career risk, and each deviation from the benchmark will need to go through committees and other administrative processes. So yes, they are somehow bound by a benchmark, but they can overweight or underweight an allocation. Given the size of their AUM, a small change in allocation can have a big impact on market trends.
I hope that makes sense! Cheers.
Awesome post! Would love to see how I can track those indicators in closest time possible
Thanks! Part II will be about systematic investors, and Part III will be about where to get the data and how to use it in practice.
Excellent work on this, thanks for sharing.