The Sky is Falling: US Equity Market Structure Survey Results

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Executive Summary

When we realized the enormity of the problems facing Knight Capital Group, we were concerned. First, we were worried about the many folks at Knight with whom we have strong relationships. The level of uncertainty we felt is incomparable to what employees must have been facing but it was an anxious moment for the entire industry. No matter what your opinions are on the current state of market structure, having a firm that controls about 10% of share volume suddenly disappear from the market is not a confidence booster.

As the initial shock subsided and the chances for survival increased, our concern shifted to the impact the event would have on the market. As I wrote in my initial commentary, the idea that a firm as well respected as Knight could nearly bankrupt itself because of a software problem left me wondering about the hidden costs of our market structure. In other words, I still believe that transaction costs are low and efficiency is high. But what’s the cost? Is market structure comparable to national security, where freedom and safety are a constant tradeoff?

It was then we decided to reach out to the community and find out what impact, if any, this event had on attitudes toward market structure. We have done this type of survey twice before: after the Flash Crash and after the Facebook IPO. As a company that looks at and conducts numerous outreach projects, we are aware of the limitations and biases of various methodologies. We received 260 responses between August 6th and August 13th. The highlights of this survey include:

• Only 2% of respondents rate their confidence as very high, down from 12% in May 2010
(see page 3). 26% have very weak confidence, up from 3% in May 2010 (see page 3)

• When measuring the impact of the Knight trading issue, most participants believe it has had a medium impact on market structure confidence (see page 5).

• More than half of participants have not changed their investments in the wake of these events (see page 6).

• The most popular regulatory action among respondents to improve market structure is to reduce fragmentation (see page 9).