As a thought experiment, if 100% of the stock market was owned by total market index funds (or there was a law saying this was the only investment allowed), there would be no volatility between shares. E.g. if Apple went up 1%, GM would also go up exactly 1%. If TSLA fell 0.5%, the whole market would be down 0.5%. All shares would have a beta of one. This is because inflows and outflows could only occur within the entire block of the total market index. Also, the relative weighting of any given company within the index could never change. Microsoft would always be X% of the size of Exxon no matter what happened in their futures. Without a market for individual stocks, there would be no way for their prices to deviate from each other as people preferred to own one or the other. They would forever be equal weighted, aside from splits and new issues.
Drop that percentage to 99% and see what happens. A tiny marketplace emerges, perhaps as big as the stock market decades ago.
People start trading Microsoft and Exxon against each other after earnings or news are announced, easily taking piles of cash from index investors until an equilibrium is reached whereby the individual traders account for enough trading volume to move the price. At that equilibrium, the benefits of stock picking equals the cost of asystematic risk, and stock picking has the same yield as index investing. When trades by active investors exceed the threshold, the index investors start taking piles of cash from active traders, on net. This second scenario is what has been happening for the last few decades, and I suspect the threshold exists at a very very low volume of active trading. So 99% should have been an option.