Interconnectedness

From Riski

Global contagion

• Trade and Development Report 2009 September 7, 2009, United Nations Conference On Trade And Development (UNCTAD)

"Starting in the United States subprime mortgage market, the financial crisis spread quickly, infecting the entire United States financial system and, almost simultaneously, the financial markets of other developed countries. No market was spared, from the stock markets and real estate markets of a large number of developed and emerging-market economies, to currency markets and primary commodity markets. The credit crunch following the collapse or near collapse of major financial institutions affected activity in the real economy, which accelerated the fall in private demand, causing the greatest recession since the Great Depression. The crisis has affected most strongly companies, incomes and employment in the financial sector itself, but also in the construction, capital goods and durable consumer goods industries where demand depends largely on credit. In the first quarter of 2009 gross fixed capital formation and manufacturing output in most of the world’s major economies fell at double digit rates. Meanwhile problems with solvency in the non-financial sector in many countries fed back into the financial system.

In the course of the crisis, financial distress spread directly across stock and bond markets and primary commodity markets, and put pressure on the exchange rates of some emerging-market currencies. The uniform behaviour of so many different markets that are not linked by economic fundamentals can be attributed to one common factor: the strong speculative forces operating in all these markets."

As participants in financial markets often seek speculative gains by moving before others do, these markets are always “ready for take-off”, and eventually interpret any “news” from this perspective. Indeed, they often tend to misread a situation as being driven by economic fundamentals when these are just mirages, such as perceived signs of economic recovery in certain economies or fears of forthcoming inflation. As long as prices are strongly influenced by speculative flows – with correlated positions moving in and out of risk – markets cannot function efficiently.

Inter-dealer trading

• Tradeweb Takes on Icap in Inter-Dealer Agency Bond Trading Securities Industry News, November 19, 2009