What Is a Market Disruption?

Mary McMahon
Mary McMahon

A market disruption is a significant event that interrupts regular trading and other financial activities. It may occur over the course of one or several days, destabilizing securities prices, limiting access to credit, and interfering with ordinary market business. Regulatory authorities use a variety of means to avoid market disruptions while facilitating free and open trade. In the event of a problem, they may choose to conduct an investigation to learn more about what happened, what led to it, and how to prevent problems of a similar nature in the future.

A market disruption is a significant event that interrupts regular trading and other financial activities.
A market disruption is a significant event that interrupts regular trading and other financial activities.

Crashes are a classic example of a market disruption. They may be precipitated by a variety of triggers that lead investors to start selling off securities as quickly as possible. Investors believe the value of their securities may decline and want to abandon vulnerable trading positions. In the process, they can accelerate a fall in stock prices by creating panic, which leads to a wave of selling activity that drags securities prices down very quickly.

Inflationary bubbles are also a form of market disruption. In this situation, prices for securities, commodities, or other assets rise well beyond fair market value in a short period of time. High trading activity tends to facilitate this, driving prices up as people jockey for position in a suddenly crowded market. One issue with bubbles is the possibility for correction, where prices will fall back down to a more reasonable level, taking traders with them.

Within the financial industry, a market disruption can be a significant cause for concern. Banks, for instance, rely on ready access to credit through interbank loans in order to finance their operations, extend credit to customers, and engage in other market activities. If they suddenly can’t access credit, or cannot locate credit at reasonable interest rates, they may experience business disruptions, and could be at risk of failing altogether is the market disruption doesn’t correct in time. Some banks may trigger what are known as market disruption event clauses in contracts with business partners if they feel they need to back out of a contract because of problems with the market.

Predicting the course of markets can be challenging, although traders, regulators, and analysts certainly try. Warning signs that a market disruption is on the horizon may include a market that appears to be softening, political situations that are changing, or traders behaving abnormally. Corrective measures to address a potential disruption can include limitations on trading if prices rise or fall too fast, or temporarily closing markets altogether to prevent catastrophe.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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