Morgan Stanley reviews the US stock market plunge: leveraged ETF sell supply reached $57 billion, retail investors' sell volume in the first 90 minutes after market open was the second largest since 2016.

Morgan Stanley’s derivatives team released a note stating that on November 5, U.S. long-short hedge funds’ net leverage dropped 5% in a single day, marking the fifth-largest one-day decline since 2010. The current level falls within the bottom 10% of the historical distribution for the same period. Since June, the total exposure reduction driven by long-short funds’ active trading equals 10.7% of their total position value at the end of June, the largest magnitude in at least a decade. Hedge funds are currently underweight AI stocks relative to their market cap weight, yet AI stocks still account for 32% of their absolute exposure. The AI stocks in question are defined as constituents of the MSXXAI index, covering AI-technology beneficiary firms, AI power-related enterprises, and major hyperscale cloud providers. That day, the required sell volume from leveraged ETFs hit the highest level since data became available in 2007, generating $57 billion in U.S. equity sell supply. According to Morgan Stanley’s QDS estimates based on public data, retail U.S. stock sell volume within 90 minutes after market open was the second-largest since 2016. The team also noted that stock trading correlations are starting to rise, a trend that typically signals risk reduction activities are spreading more broadly.