The February 2026 Selloff › The People Who Get Rich When You Get Poor

Not everyone loses money in a selloff. Some market participants depend on volatility for their returns, and early 2026 was good to them. Market makers did well. Citadel Securities posted \$3.4 billion in net trading revenue in the first quarter of 2025, up 45% year over year, with net income at \$1.7 billion and an EBITDA margin of 58%. The firm distributed approximately \$5 billion in profits to investors across 2025. Jane Street reported \$20.5 billion in trading revenue for 2024, with projections north of \$7 billion for a single quarter in 2025. Virtu Financial's market-making division saw net trading income rise 41% to \$1.2 billion in 2025, with fourth-quarter earnings beating analyst expectations by 43%. These firms profit from wider bid-ask spreads and higher trading volumes, both of which surge during selloffs. Citadel's algorithms execute millions of trades per second, capturing the spread between sellers and buyers. During the April 2025 tariff volatility, Citadel's daily Treasury volumes hit \$70 million in per-basis-point sensitivity, three times their COVID-era levels. Volatility is their product. Short sellers collected \$24 billion in paper gains from software stock shorts in the first five weeks of 2026. Software and AI-related stocks had fallen roughly 20% since January 1, and hedge funds were increasing their short positions rather than covering. Microsoft's short interest climbed approximately 20% in a single week. The most heavily shorted names included TeraWulf (over 35% of float), Asana (25%), and Dropbox (19%). Microsoft, historically a "reversal stock" where shorts cover on declines, was now trading like a momentum-driven, distressed name, with shorts increasing into weakness. Institutional investors saw the software selloff as structural, not a buying opportunity. CTA and managed futures strategies performed as designed. The Simplify Managed Futures Strategy ETF rose 1.43% on February 4 while the Nasdaq fell 1.5%. One prominent trend-following fund surged 45.62% in February 2024 during a different market dislocation. CTAs do well with sustained directional moves and cross-asset volatility, which is exactly what early February 2026 delivered. Put option holders collected too. When stocks fall and volatility rises at the same time, put options benefit from both delta gains (the stock moving in your favor) and vega gains (implied volatility expansion increasing the option's value). A software-sector put bought when the VIX was at 17 doubled or tripled in value as the VIX jumped above 22 and underlying stocks fell 7% to 20% in single sessions. PayPal's 20%-plus single-day collapse on February 4 turned modestly priced puts into big winners. On the other side of these trades sat the losers, and the common thread was leverage. At \$1.23 trillion in outstanding margin debt (3.91% of GDP, exceeding both the dot-com and pre-financial-crisis peaks by more than 50% in relative terms), the U.S. equity market was running on borrowed money to a degree never seen before. Any meaningful decline triggered the cascading margin call dynamic described above. Retail investors, who now account for 23% to 36% of U.S. equity market order flow depending on the day, had poured \$2 billion into leveraged Nvidia ETFs in a single session during the DeepSeek selloff in late January. Many of those positions were deeply underwater by February 5. Estimates suggested retail portfolios had declined roughly 10% from their peak, underperforming the S&P 500's 8.5% drawdown, meaning retail investors were concentrated in the riskiest names. The dip-buying behavior present in prior selloffs was absent from software stocks. Retail investors bought \$430 million in broad S&P ETFs during one session, but the sector-specific buying that had previously arrested software declines did not materialize. Something had shifted in the market's psychology. For the first time, the narrative around AI shifted from "this will make everything more valuable" to "this will destroy incumbent business models," and buyers were unwilling to step in front of that narrative shift.