Retail traders' behavior in moments of stress may hold the key to building a forward-looking volatility index that regulators and institutions could use to monitor systemic risk, according to Anton Palovaara, founder of Leverage.Trading.
Leverage.Trading is an educational and analytics website centered around crypto leverage, margin trading, and crypto futures
Speaking with Benzinga after the release of his firm's Global Leverage & Risk Report, which analyzed data from 27,416 traders across 94 countries, Palovaara said the dataset surfaces patterns of defensive behavior before volatility strikes.
"Our data shows traders brace for impact long before liquidations dominate the headlines," Palovaara said. "This behavioral lens finally gives analysts a chance to see risk sentiment before the event happens, not after the crash."
Unlike liquidation tallies, which are reported post-event, Leverage.Trading's tools record liquidation checks, margin stress tests, and position recalculations hours or even days before market shocks.
That pattern, Palovaara argues, reveals inefficiencies hidden beneath the surface.
"On the surface, the market looked normal," he recalled of July 10, when activity spiked ahead of a $1.29 billion Bitcoin (CRYPTO: BTC) short wipeout the following day.
"But by July 11, our risk calculators were being hit five times more than usual. Traders were running liquidation checks and recalculating margins hours before Bitcoin's short wipeout. That is not random noise. It is a clear signal that psychology was taking over, and it followed the same patterns we've seen before,” he added.
Palovaara calls this layer of behavior a "shadow order book."
"Beyond the visible trades and open interest, there is another layer showing where traders intend to defend or capitulate. You can see clusters of fear forming," he said.
That behavioral layer has implications well beyond crypto.
Palovaara believes the data could be aggregated into what he describes as a "retail VIX."
"Regulators mostly look at lagging signals like realized volatility, exchange flows, or liquidation reports after the fact. What's missing is a way to see stress building before it breaks," he said.
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"Now imagine building an index from those signals, combining liquidation checks, leverage ratios, and position sizing. The result is essentially a retail VIX. The current VIX tells you how volatile the market already is. A retail VIX would tell you where fragility is forming,” Palovaara said.
The August dataset illustrated that fragility clearly.
On August 16, liquidation checks spiked 28.5% in a single day, the sharpest on record.
The next day, Bitcoin dropped from $124,000 to $115,000, and $576 million in positions were liquidated.
"If that signal had been publicly available, it could have been a powerful indicator for anyone watching closely," Palovaara said.
But visibility could itself shift market dynamics.
"If enough traders recognize that fear is spiking, they may front-run it. That creates feedback loops, where stress signals cause earlier and sharper moves. In that sense, fear itself becomes the trade," he explained.
The data also challenges the view that whales drive all major crypto moves.
"Whales still dominate in terms of raw capital. There's no denying that. But our data shows that retail provides the outline of the story before the whales write the headline," Palovaara said. "Retail doesn't control the flood, but they reveal where the dam is about to break."
Another striking trend was the overwhelming role of mobile devices during stress periods. Between July 14 and August 17, 85% of liquidation checks happened on mobile.
"This tells two stories at once," Palovaara said. "The first is about professionalization. Retail traders are no longer tied to desks. They are recalibrating margins and running stress tests while commuting, eating dinner, or reacting to headlines in real time."
"The second story is about fragility," he cautioned. "Mobile trading has limitations that desktop setups do not. In a real cascade, latency matters, and mobile interfaces are slower. Many apps are also gamified, designed to feel intuitive but nudging users toward emotional responses. Retail feels more in control, but the design of the tools often makes them more reactive."
For Palovaara, the conclusion is clear: the emotional and behavioral dimension of retail trading is no longer peripheral — it may be measurable, and it could be institutionalized into risk monitoring.
"This is not theoretical," he said. "The scaffolding is already here. With the right aggregation, this kind of index could become a standard risk-monitoring tool across multiple asset classes."
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Photo courtesy: Shutterstock/CKA
