The initial reaction of many people is to consider this the latest in a long line of market scandals eroding investor confidence. I think that would be mistake. For one thing, Knight's software error is not a "scandal". It's a blunder. A big one to be sure, which is why they are paying a heavy price.
Here's a thought worth considering (and perhaps a phrase worth coining): Screwing up is not the same thing as screwing over.
A software error doesn't belong in the same mental or moral category as LIBOR rate fixing or MFGlobal's account-mixing. Those remain true scandals in which unethical behavior took advantage of/preyed on other people's money. It's no wonder that people muttering "the game is rigged" is at an all time high. (You can check the stats yourself at MarketPsych Data by choosing "Trust" from the Psychvars tab.)
Knight screwed up, but didn't screw (nor seek to screw) anyone else over. The distinction is crucial. Will Knight survive? I hope so. They handled it well, taking full responsibility and protecting the needs of their clients by absorbing the damage themselves.
And as far as confidence goes, if the major averages can advance nearly 2% on the day the biggest domestic market-maker shuts down... then perhaps the system is healthier than we suspected.
In the meantime, happy investing.
And hey... let's be careful out there.
Frank Murtha, Ph.D.