Author: Marty Rabkin

A few days after the initial shock of the enormous problems facing Knight Capital (NYSE Euronext: KCG) began to subside, only months after the Facebook IPO and its subsequent fall-out, TABB Group decided to measure the institutional community’s confidence in US equity market structure.

“Nonetheless, there’s concern that cracks in the system exposed during the 2010 Flash Crash and the recent rash of technology-specific issues are exposing the industry to unacceptable risks”

Surveying market participants between August 6 and 13, TABB learned that only 2% of the respondents drawn from broker/dealers, asset managers, hedge funds, execution venues and vendors rate their confidence level as very high, down markedly from 12% in a May 2010 TABB survey following the Flash Crash.

According to Adam Sussman, a TABB partner, director of research and author of the 11-page, 10-exhibit report, “The Sky is Falling: US Equity Market Structure Confidence Survey Results,” 26% say they have a very weak level of confidence, up from 3% in 2010.

There’s little confusion among those who participated between the lack of internal controls at an execution venue or broker/dealer and the broader issues facing market structure, Sussman explains.

“Nonetheless, there’s concern that cracks in the system exposed during the 2010 Flash Crash and the recent rash of technology-specific issues are exposing the industry to unacceptable risks,” says Sussman. “At TABB, we believe that this erosion in market structure confidence during the past two years is due to tough market conditions, declining market volumes, the Pipeline Trading scandal and, more recently, botched IPOs.”

Other key findings from the TABB survey include:

• When measuring the impact of the Knight trading issue, most participants believe it had a medium impact on market structure confidence
• More than 50% have not changed their investments in the wake of these recent events
• Reducing fragmentation is the most popular regulatory action among respondents to improve market structure

 

Survey issues included:

• What is the greatest long-term impact on retail investor confidence?
• What is the impact of Knight Trading issues on market structure confidence?
• What do you believe it would take to revive retail investor enthusiasm for US equities?
• How does a lack of confidence impact your investments?
• How quickly should regulators address how the equity market can be protected against flawed technology?
• With regard to Knight’s trading issues, rank your major concerns, e.g., internal controls, quarantining algos, QA process, trade monitoring gap, etc.
• What new market structure regulations would help minimize the types of events seen in 2012 to assist the industry in regaining investor trust?

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