What it is:
A market disruption is a sharp, rapid weakening of market performance in response to external forces.
How it works (Example):
A market disruption often occurs as a result of an event or group of events that are widely perceived as economically detrimental. The anxiety becomes contagious, causing both investor confidence and consumer confidence to fall. The stock market can decline sharply in just a short space of time because trading becomes unstable and highly erratic.
The credit and subprime mortgage crisis of the late 2000s, for example, resulted in a market disruption that brought a halt to consumer spending, increases in unemployment, and wide day-to-day fluctuations in stock prices.
Why it Matters:
The widespread effects of a market disruption are frequently rooted in consumer and investor perceptions rather than a fundamental collapse. As a way to "short circuit" market disruptions, the New York Stock Exchange (NYSE) and other large exchanges have established contingencies that automatically stop all trading upon indications of sudden substantial losses beyond a reasonable level.