29 September 2022
Over the years, we have seen considerable developments in trading technology, encouraging global investment and ultrafast trade execution. The ability to undertake global investment strategies is obviously beneficial but has new technology helped or hindered recovery from Black Swan events?
In simple terms, a Black Swan event concerning financial markets is an event which comes as a total surprise and has a substantial global knock-on effect. Some relatively inexperienced traders may find it difficult to comprehend events which "sneak up" on markets and take everybody by surprise. However, there are many examples over the years, some of which are more recent than you might expect!
The Great Depression of 1929 is a perfect example of how a surprise stock market crash in the US obliterated investor confidence and consumer spending. What was effectively a "flash crash" decimated markets between 1929 and 1933, but the economic effect continued for many years.
Even today, there is some debate and confusion as to what actually prompted the stock market crash. However, as a trader, while markets were depressed, there would still have been moments of hope, but as ever, the timing of trade execution would have been crucial.
For many years prior to the 1997 Asian financial crisis, the so-called "Asian tigers" were attracting the lion's share of global investment into developing economies. But, looking back, the crisis began when the Thai baht collapsed after the government decided to lift the currency peg to the US dollar. This led to a massive outflow of funds and contagion dragged in other Asian economies leading to a worldwide financial crisis.
The introduction of the Internet has been a game changer for businesses and individuals. The run-up to the 2000 Dot-Com crash saw investors ploughing billions of dollars into online projects, which were forecast to be loss-making for many years. Akin to the Tulip market crash of the 1600s, the timing of trade execution went out of the window for many investors. They simply needed exposure to this new growing technology sector – at any price!
On 14 April 2000, the NASDAQ composite index was in freefall; a daily fall of 9% equated to a 25% fall on the week. A trend which many naïve investors thought would "last forever" came to a screeching halt, prompted by plans to increase US base rates and a recession in Japan. Unfortunately, many households and investors did not recover from this Black Swan event, the repercussions of which are still felt today.
Looking back, there were indeed signs of problems within the US subprime mortgage market at the tail end of 2007 and the beginning of 2008. Mortgage funding was made available to individuals who had no chance of repaying the capital. Akin to a game of Russian roulette, the idea was simple, buy a property, wait a few months, sell it for a profit and then start again. Those left with properties when the market collapsed were cast into the financial abyss, many never recovering.
The knock-on effect on global mortgage markets, house prices, central banks and currencies was perhaps the worst case of contagion ever seen. What began in the US as a ripple in the subprime mortgage market very quickly spread worldwide. While there have been other challenges since then, this is predominately the reason why global base rates are still toward the relatively low end of their traditional range.
As with any form of business, there are changes over the years as new technologies and opportunities arise. It is safe to say that trade execution speeds have improved dramatically, and technology has allowed individuals to consider global investment strategies from the comfort of their armchairs.However, this has exacerbated financial challenges, creating more instances of flash crashes and sudden stock market movements.
In a split second, we can see billions of dollars of investment move in and out of markets, significantly impacting market sentiment. The ability to "go short" on stocks can also extend downward spirals, with selling prompting more selling and further concern. The concept of market crashes and recoveries remains the same, but the traditional timeframe has been squeezed significantly. Is new technology a help or hindrance, or both?Back to News