Matthew Krumholz
Founder & CEO, VICA Partners
A company can change very little while its market value changes enormously. We explain the price move immediately. But do we actually measure the capital mechanism that produced it?
American securities law established a powerful principle: investors should receive meaningful information about the securities in which they place their capital. The Securities Act of 1933 made disclosure of significant financial information central to that architecture so investors could make informed judgments for themselves. That principle remains fundamental.
But the market built around it changed. Capital now moves through index funds, ETFs, retirement systems, benchmark mandates, quantitative strategies, derivatives, dealer hedging, algorithmic execution, systematic rebalancing, and institutional intermediaries. Existing research increasingly demonstrates that institutions, fund structures, market liquidity, algorithmic trading, and capital flows can materially affect asset prices and market behavior.
We can see the security, the filing, the price, and the story. What remains far less visible is the system moving the capital.
I describe the attempt to measure that system as Market Mechanics. Its central proposition is simple: price is an outcome of interacting capital relationships; those relationships can increasingly be measured; and capital, at sufficient scale, can change the market structure through which subsequent capital must move.
If that proposition survives serious empirical testing, financial disclosure may eventually require a second evolution—from visibility into the security toward visibility into the system surrounding it.
The first disclosure revolution asked:
What am I buying?
The next may need to ask:
What is moving it?
A company can lose billions of dollars of market value in hours while relatively little has changed in its products, customers, technology, assets, or long-term economics.
The explanations arrive almost immediately: rates, valuation, sentiment, politics, profit-taking, fear, an analyst comment, a headline.
By the end of the day, price has acquired a story.
What began to bother me was not that these explanations were always wrong. Some are right. It was that the explanation often began with the visible outcome while the mechanism producing it remained far less visible.
An index may have been sold. An ETF may have experienced redemptions. A systematic strategy may have changed exposure. A derivative position may have required hedging. Liquidity may have weakened. Benchmark-linked capital may have transmitted pressure across securities whose underlying businesses had not simultaneously changed. Research on market macrostructure, inelastic markets, and ETF-induced trading provides substantial reason to take these mechanisms seriously.
The company may not have changed. The system around it did.
Consider something as ordinary as a retirement contribution. A worker earns income. Part of it enters a plan. The plan allocates through investment vehicles, and those vehicles may distribute capital according to portfolio or benchmark rules. ERISA appropriately requires fiduciaries to act prudently, in the interest of participants and beneficiaries, and to diversify plan investments to minimize the risk of large losses.
But there is another level of analysis: what market structure emerges when millions of individually prudent allocations become persistent, aggregated capital?
The saver sees an account.
The market experiences capital.
Both are true.
The security still matters. Fundamentals matter. Earnings, cash flow, management, valuation, innovation, and business risk matter. But they do not describe the entire mechanism through which modern prices are formed.
That leads to the first principle of Market Mechanics:
Price tells us that something happened. It does not necessarily tell us what happened underneath it.
I did not begin with a theory of how markets should operate.
I began by trying to measure how they actually behave.
The measurement led to the theory.
I needed a language for what I was observing—not physics imported into finance for effect, but concepts capable of being defined, measured, challenged, rejected, or improved.
Capital Force is directional capital deployment of sufficient scale and persistence to exert measurable pressure on a security or market.
Capital Inertia is the persistence of existing positioning: institutional allocations, mandates, benchmark exposures, retirement structures, and systematic strategies can remain embedded until meaningful countervailing conditions alter them.
Transmission describes the pathways through which capital propagates across securities, funds, indexes, derivatives, sectors, benchmarks, and related markets.
Structural Resistance describes a market’s capacity to absorb capital movement through liquidity, depth, broad participation, opposing demand, and independent sources of capital without disproportionate price displacement.
Market Geometry describes the configuration of concentration, liquidity, participation, positioning, and interconnectedness that governs how capital can propagate through the system.
At a conceptual level:
This is not a claimed universal law.
It is a statement of relationships that must earn their validity through measurement.
The deeper proposition is more consequential:
Capital does not merely move through market structure. At sufficient scale, capital changes the structure through which subsequent capital must move.
A large position can consume liquidity. Changing liquidity alters price sensitivity. Price affects volatility. Volatility can alter systematic positioning and hedging. Those responses can affect liquidity again. Price changes can alter benchmark weights, which can influence subsequent allocation, which can again influence price.
The environment is not fixed.
Capital changes markets, and changed markets alter the behavior of capital.
The system is recursive.
It is also nonlinear.
The same amount of buying or selling need not create the same amount of price displacement. A large flow entering a deep market with broad participation and redundant liquidity may have limited impact. A smaller flow entering a concentrated market with deteriorating liquidity can produce a disproportionate move. BIS research has documented both flow-related ETF price effects and a broader pattern in which average liquidity can improve while episodes of severe illiquidity become more frequent.
The question is therefore not simply:
How large was the force?
It is also:
What kind of system received it?
That distinction changes the way I think about risk.
A market can appear calm while becoming less resilient. Volatility can compress. Prices can rise. Trading can appear orderly. Yet participation can narrow, capital can concentrate, and liquidity can become increasingly dependent upon common mechanisms.
The visible market may appear stable while its internal geometry changes.
Risk is not simply more volatility. Risk can be a change in the architecture through which volatility propagates.
Market Mechanics therefore does not attempt to replace one market story with another.
It attempts to measure the structure beneath the stories.
Any framework claiming to reveal hidden structure must impose limits on itself.
There are three categories that should never be confused:
Observed. Inferred. Hypothesized.
Price, volume, holdings, fund flows, spreads, benchmark weights, and options activity can be observed, though never with perfect completeness.
Institutional accumulation, liquidity dependence, synchronization, Capital Inertia, and Transmission may be inferred from defined relationships among those observations.
Causation is harder.
It remains a hypothesis until it survives contradiction, comparison, and repeated testing.
I do not believe Market Mechanics provides access to a perfect hidden reality behind every market move. That would replace one form of overconfidence with another.
Its purpose is narrower:
to create a hierarchy of evidence that is harder for narrative to distort.
That requires a governing principle:
If Capital Inertia contains no incremental information beyond conventional momentum, the hypothesis should fail. If institutional positioning adds nothing beyond established price and factor measures, it should fail. If divergence between price and capital state cannot meaningfully distinguish systematic transmission from company-specific deterioration, the measure should be redesigned or abandoned.
And if supposedly independent signals are merely correlated expressions of the same underlying information, they should not be counted repeatedly.
A model should never be rescued by the story surrounding it.
The sequence should be disciplined:
Define the proposition. Measure it. Identify what contradicts it. State what would falsify it. Test it across time and regimes. Preserve the result.
A serious measurement system must be capable of saying:
We were wrong.
My belief in Market Mechanics is irrelevant to whether Market Mechanics is correct.
The evidence decides.
That standard applies to VMSI™, IC-VMSI™, and every framework that grows from this work.
It must also apply to the regulatory argument.
The Securities Act of 1933 addressed a fundamental visibility problem by requiring investors to receive significant information about securities offered for public sale. The SEC describes disclosure as a primary means by which investors—not government—can make informed judgments about whether to purchase securities.
The underlying principle is larger than any filing requirement:
Trust requires visibility.
Modern markets may now present another visibility problem.
We can see the company. We can read its filings. We can see earnings, forecasts, prices, analyst opinions, and news.
What remains far less visible is the capital architecture surrounding the security.
How concentrated is capital? How dependent is price formation upon common benchmarks and intermediaries? How much movement is discretionary and how much is mechanically transmitted? How redundant is liquidity? Is participation broadening beneath price or deteriorating? Is the security moving because its economics changed, or because the capital system around it changed?
These questions do not replace conventional disclosure.
They extend the field of vision.
I call that principle Capital Mechanics Disclosure: greater structural visibility into capital concentration, institutional accumulation and distribution, benchmark dependency, liquidity redundancy, systematic transmission, derivative amplification, participation integrity, and the relationship between visible price and underlying capital behavior.
The objective is not to publish every institutional trade, expose proprietary algorithms, or eliminate legitimate investment privacy.
The objective is visibility.
From that follows what I call the Right to Structural Visibility: the proposition that investors should increasingly be able to understand not only what they own, but the capital environment in which that ownership exists.
Retirement capital illustrates the issue. One contribution is personal savings. Millions of recurring contributions become persistent capital moving through plans, funds, target-date strategies, indexes, and securities.
The saver sees an account.
The market experiences allocation.
Diversification creates a similar paradox. An individual can own hundreds or thousands of securities while many investors collectively depend upon overlapping benchmarks, dominant holdings, allocation structures, and liquidity pathways. Research on passive investing has examined how the growth and mechanics of passive vehicles can affect market structure and underlying securities.
Individual diversification can coexist with systemic synchronization.
Passive capital may be passive in discretionary security selection.
It is not necessarily passive in market effect.
Liquidity deserves the same distinction. High trading volume does not guarantee structural resilience. BIS research revised in 2026 finds that average liquidity has improved across several major asset classes while the distribution of liquidity has become more fragile in important markets, including more frequent episodes of substantial illiquidity.
The important question is therefore not merely how much liquidity appears available in normal conditions.
It is:
How many independent sources remain when many participants need liquidity at once?
This points toward a larger regulatory problem.
Twentieth-century financial regulation became increasingly sophisticated at governing nodes: companies, funds, exchanges, broker-dealers, advisers, banks, retirement plans, and fiduciaries.
Modern market behavior increasingly propagates through connections: benchmarks, common ownership, derivatives, liquidity dependencies, collateral relationships, systematic rebalancing, and automated allocation.
We regulate the nodes. Increasingly, risk travels through the connections.
That does not mean the answer is immediate regulation.
The answer begins earlier:
I am not arguing that securities law should change because it is old.
Age proves nothing.
I am not arguing that retirement law should change because financial markets have become complicated.
Complexity proves nothing.
My proposition is conditional:
If Capital Mechanics proves measurable, persistent, economically significant, and inadequately represented by existing disclosure structures, then financial transparency should eventually evolve to reflect that reality.
Evidence first.
Reform follows.
Capital sounds abstract until we remember where it comes from.
Time becomes labor. Labor becomes income. Income becomes savings. Savings become capital.
Behind a retirement account is a portion of someone’s life.
Once that capital enters financial markets, it enters an architecture most people cannot fully see.
I do not believe investors should be protected from every loss. Markets require risk. I do not believe government should determine what people own. And I do not believe any mathematical framework can reduce an adaptive financial system to perfect prediction.
What I believe is simpler.
People should be able to understand the system into which they place the accumulated product of their lives.
I did not set out to challenge the architecture of American finance. I began because price was not telling me enough.
I wanted to know whether participation beneath price was strengthening or weakening; whether liquidity was resilient or dependent; whether institutional capital was accumulating or distributing; whether volatility was disappearing or merely compressing; whether capital was becoming concentrated; and whether movement in a security reflected a change in the company or a change in the system surrounding it.
Those questions led to VMSI™.
They led to IC-VMSI™.
They led to Market Mechanics.
I set out to measure the market more accurately. The measurement led me here.
That is why these ideas should be tested rather than admired.
If they fail, reject them.
If they survive, improve them.
But if the evidence continues to survive, eventually the question becomes larger than a market model:
The first disclosure revolution asked:
What am I buying?
The second must increasingly ask:
What is moving it?
And eventually:
What system is that movement creating?
This is not a rejection of the architecture built before us.
It is the next question created by its success.
Capital does not simply move through markets. At sufficient scale, it changes the markets through which subsequent capital must move.
If that structure can be measured, we should measure it.
If the measurement fails, we should say so.
If it survives, our understanding should change.
And where the evidence ultimately requires it, our institutions should be willing to change as well.
The securities laws of the twentieth century made financial information visible. The task of the twenty-first century is to make financial mechanics visible.
Capital doesn’t have an opinion. It has a position.
The ideas presented here do not emerge in isolation. Important academic, institutional, and practitioner research already examines components of the structural transformation described in this paper. That work deserves attention.
Valentin Haddad and Tyler Muir — Market Macrostructure: Institutions and Asset Prices. Their work examines how the organization of financial markets into institutions and key participants affects the level and dynamics of asset prices, including the rise of passive investing and the role of financial intermediaries.
Xavier Gabaix and Ralph S. J. Koijen — In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis. Their framework directly examines the relationship between institutional capital flows and market prices, arguing that constrained institutional demand can make aggregate equity prices unusually sensitive to flows.
Michael Green, Hari Krishnan, and Stephan Sturm — A Model for Passive That Breaks the Market. This 2026 preprint develops a formal model of how increasing passive participation could alter market volatility and stability.
The Bank for International Settlements has published relevant work on passive investing and securities markets, ETF-related price effects, and the changing fragility of market liquidity. These studies examine how investment structures, trading mechanisms, fragmentation, and algorithmic activity can affect prices and liquidity conditions.
The U.S. Securities and Exchange Commission has likewise examined modern market structure. Its Staff Report on Algorithmic Trading in U.S. Capital Markets describes algorithmic trading as pervasive in contemporary markets and evaluates its relationship with liquidity and market functioning in normal and stressed conditions.
I consider these contributions important because the underlying question is larger than any one framework:
How does the organization of modern capital itself affect market behavior?
Market Mechanics does not seek to replace this research. It seeks to contribute a particular synthesis: whether Capital Force, Capital Inertia, Transmission, Structural Resistance, and Market Geometry can be measured together as a system—and whether doing so ultimately has implications for disclosure and investor visibility.
Where others have identified important components of the changing market system, this paper asks whether those components can be measured together as a system.
That question should be tested.
Because if the system can be seen more clearly, we should learn to see it.