With Main Street investors now able to trade as fast as some qualitative hedge funds, seismic changes could be ahead for the larger equity market.
Artificial intelligence trading tools that analyze reams of data and build portfolios are already shaking up Wall Street. But as they increasingly become available to retail investors, the entire stock market is in for a seismic transformation.
The retail crowd owns roughly 25% of the US stock market directly and over 60% indirectly through individual retirement accounts, 401(K)s and the like, according to calculations by Barclays Plc. They’re known for loyalty to a handful of high-flyers, like technology giants Tesla Inc. and Nvidia Corp., and a fascination with highly volatile so-called meme stocks like GameStop Corp. In many cases, their trading is disconnected from the underlying fundamentals of the shares they’re buying.
“Retail treats finance like entertainment and in most cases it’s all really the hype based on loud personalities who are running big tech companies,” said Kevin Xu, a former retail trader known as “Sir Jack A Lot” who’s now founder and chief executive officer of AfterHour, a social network for stock traders. “Generally, they don’t understand advanced concepts behind the equity market and just want to know what the next big stock is.”
The democratization of AI-driven platforms would change all of that, giving retail traders the ability to scan thousands of stocks and respond to real-time data as fast as sophisticated qualitative hedge funds. Indeed, their behavior is already starting to change, with portfolio weights in Magnificent Seven tech behemoths declining to 1.1% as of midday on June 9 from 10% last summer, according to data compiled by Emma Wu, JPMorgan Chase & Co.’s quantitative and derivative strategist.
The shift indicates investors are already seeking opportunities in less crowded parts of the market.
“AI’s ability to do material amounts of coding without any sophisticated coding background would allow retail to have an enhanced set of functionalities in their investment process,” said Alexander Altmann, global head of equities tactical strategies at Barclays, adding that the technology is going to affect every facet of the investment industry.
Simplifying Strategies
Buying by individual traders is particularly important now as they’ve been behind much of the S&P 500 Index’s 21% surge over the past two months. Retail investors’ sentiment — as proxied by Barclays’ equity euphoria indicator — is on the rise, which suggests more room for a near-term rally, according to the bank’s analysts.
Research and portfolio construction are the main areas where small investors use AI. In March, Robinhood Markets Inc. unveiled its AI tool called Cortex, which summarizes all variables that affect the stock price and can simplify the trading process, even for more complex strategies like options, helping clients find potential trades that align with their risk thresholds.
Cortex will be available for retail investors and brokerage customers later this year, according to Abhishek Fatehpuria, Robinhood’s vice president of brokerage product management.
Meanwhile, customers at Interactive Brokers Group Inc. have access to Reflexivity, a third-party platform that monitors a range of data and delivers insights tailored to the securities in a portfolio. With the technology, a trader can get an alert on developments like what a shift in the yield curve means for different groups of stocks. These kinds of tools dramatically increase traders’ exposure to a broader swath of equities.
“The orders of magnitude of what becomes possible are mind-boggling,” said Jan Szilagyi, founder and CEO of Reflexivity. “As people see the kind of the magic and the power of what has been happening in the AI space, they’ve come to understanding that this is not a 10% or a 20% improvement, it’s a hundred times difference.”
Weekly sales of Reflexivity’s platform have tripled since the fourth quarter of 2024, and the firm’s orders go beyond the US to Germany, Turkey and Brazil.
John Roszkowski, a retail options trader, said he’s already using AI “pretty heavily” for earnings transcripts. And he talks to Grok, a generative AI chatbot, about trading strategies.
Cutting Costs
“Having AI that could scan the entire market for trading setups or undervalued options would be awesome,” he said. “And then, having a trading agent that keeps my information and could coach me, that’s the next level.”
Ultimately, the spread of AI comes down to costs, which have been dramatically reduced thanks to the emergence of Chinese AI development company DeepSeek.
“DeepSeek has changed the game and essentially democratized the market,” said David Lin, founder and CEO at Linvest21 Inc. “The information asymmetry between institutional and retail investors is broken because the information at your fingertips is much cheaper.”
Lin, a former managing director at JPMorgan and global head of investment platform in the bank’s asset management division, launched his company with the goal of creating an AI investment platform that’s accessible to a wide range of investors. His flagship product — AlphaCopilot — is an AI-driven tool that generates investment strategies, builds portfolios of stocks and manages risks based on real-time data.
For now, Linvest21 serves institutional investors and certified public accountants. But the company is planning to eventually make the service available to retail traders.
Small funds or boutique family offices are seen as beneficiaries as well, as AI tools allow them to increase the scale of operations without additional hiring costs.
“You might have somebody who wants their own hedge fund without much staff,” said Jack Kokko, founder and CEO of AlphaSense, a market intelligence platform that uses AI for research and analysis for investors and corporations including Pfizer Inc., Microsoft Corp. and Alphabet Inc. “Suddenly, instead of hiring five analysts, you can have the technology that does all the work.”
Efficient Market
In the end, the expansion of AI tools will depend on the accessibility of the platforms. For retail traders, that means being able to analyze smaller companies and more obscure corners of the market that have been relatively opaque in the past.
“It absolutely makes the stock market more efficient,” Kokko said.
While it’s hard to predict what this kind of change will be for the stock market at large, the assumption is that it could reduce investors’ concentration in the largest tech stocks. And that could make the market more resilient to wild swings.
The Magnificent Seven — Alphabet, Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft, Nvidia and Tesla — account for roughly 30% of the S&P 500. That crowding has made the index vulnerable to outsized moves among just a few of its 500 companies. But with AI helping build portfolios, retail traders will have a view into a much wider universe of possible investments.
“It’s almost automatic,” said Sarah Hunt, chief market strategist and partner at Alpine Woods Capital Investors. “If the ownership is less concentrated and less crowded, the entire stock market can become less volatile.”
