What is market disruption?

What is market disruption?

Market disruption is a term that describes the state of affairs when the status quo of the stock market or a particular industry’s market is destabilized.

This could include the entry of what’s called a disruptive technology or new competitive company, or a natural disaster, or technical difficulties with the computer network that the exchanges use. It is also commonly used to refer to a panic or mania that makes the market disorderly and is stemmed through the use of circuit breakers.

A market or industry can be disrupted by the advent of a new technology or company. These will cause a shift in the way business is done, and some more nimble companies may come out ahead of the tried-and-true ones. The term market disruption also describes rapidly falling prices that cause investors to panic and sell-off, as well as the overly-rapid appreciation of a stock.

To counteract the pressure on investors to hyper-actively trade in such conditions, exchanges have installed circuit-breaker policies, which means that if there are swings in the market that are a little too rapid and too big, trading can be temporarily halted for a single stock or the entire market. This encourages investors to let cooler heads prevail.

This actually backfired in August 2015, however, due to the fact that ETFs, which are becoming a larger presence in the market all the time, were unable to keep up with their indexes when trading stopped. Methods to sidestep this problem are being researched.

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