Market Disruption What it is How it Works

Market Disruption: What it is, How it Works

Cierra Murry is an expert in banking, credit cards, investing, loans, mortgages, and real estate. She is a banking consultant, loan signing agent, and arbitrator with more than 15 years of experience in financial analysis, underwriting, loan documentation, loan review, banking compliance, and credit risk management.

What Is a Market Disruption?

A market disruption is a situation where markets cease to function in a regular manner, typically characterized by rapid and large declines. Market disruptions can result from physical threats to the stock exchange or unusual trading, such as a crash. In either case, the disruption creates panic and disorderly market conditions.

Market disruptions are examples of inefficiencies and market failures.

Market Disruptions Explained

Following the 1987 crash, systems were put in place to minimize risks associated with market disruptions, including circuit breakers and price limits. These systems halt trading in rapidly declining markets to avoid panic.

Market disruption can occur if there is a severe decline driven by investor fears of factors that would hinder business flow. For example, war threats to crucial oil rigs can trigger worries about resource access. Natural disasters in vital industry locations can also cause significant disruptions, halting production indefinitely.

Politics and Market Disruption

Political action and policy changes can incite crashes leading to market disruption. If federal authorities adopt a detrimental stance towards industries, widespread and immediate effects can trigger rapid share selloffs. Trade and tariff changes on imports and policy shifts that disrupt international trade may create panic.

Unnoticed weaknesses in an economy’s fundamentals can also drive crashes and market disruptions. The Subprime Meltdown occurred when many mortgages defaulted, causing the liquidity and health of the economy to be questioned. This expanded into the Credit Crisis, with uncertainty surrounding securitized loans and lending practices, leading to the failure of major financial institutions like Lehman Brothers.

As the underlying issues became publicly known, the Great Recession followed, erasing $16 trillion of net worth from U.S. households.