Securities and Commodities Markets - The Markets And The Wider World

The price of a given security or commodity is largely a function of its potential profit and risk; and, theoretically at least, the relationships among price, risk, and expected profit behave in fairly predictable ways. For example, bond prices will tend to rise when overall interest rates go down. But there are much less predictable forces at work as well. Changes in consumer or investor confidence, resulting from a major news event, can have a significant impact on the markets, even though such things might not seem to have much to do with stock prices.

Historical data from the Bureau of Labor Statistics indicates that changes in the market can result in higher unemployment, lower housing starts, or changes in price indices. A drop in household income may, in turn, be associated with certain social problems, such as crime. The U.S. Department of Justice, for example, has identified a correlation between income and intimate-partner violence.

Terrorism's Effect on Market Activity

Terrorism, or the threat of it, has historically affected the economies of both the countries involved and other

TABLE 4.6

Stock prices and yields, by index, 1990–2002
Item	Unit	1990	1994	1995	1996	1997	1998	1999	2000	2001	2002
SOURCE: "No. 1204. Stock Prices and Yields: 1990 to 2002," in Banking, Finance, and Insurance, U.S. Census Bureau, 2003, http://www.census.gov/prod/2004pubs/03statab/banking.pdf (accessed January 4, 2005)
Member firms	Number	5,827	5,426	5,451	5,553	5,597	5,592	5,482	5,579	5,499	5,392
Branch offices	Number	24,457	57,105	58,119	60,151	62,966	70,752	80,035	82,126	88,168	91,473
Companies listed	Number	4,132	4,902	5,112	5,556	5,487	5,068	4,829	4,734	4,109	3,663
Shares traded	Billion	33.4	74.4	101.2	138.1	163.9	202.0	272.6	442.8	471.2	441.7
Average daily volume	Million	132	295	401	544	648	802	1,082	1,757	1,907	1,753
Value of shares traded	Billion	452	1,449	2,398	3,302	4,482	5,759	11,013	20,395	10,935	7,254

world markets. Although economists debate the degree to which people, businesses, and global markets are impacted, economic activity does slow down and consumer confidence drops immediately following a terrorist threat or attack. At the very least, a terrorist attack can damage a city or country's infrastructure (transportation and communication systems) so that financial activity is forced to stop temporarily. After the attacks on the World Trade Center in Manhattan and the Pentagon in Washington, D.C., on September 11, 2001, the telephone system, public transportation, and other essential services in New York City were shut down, forcing the closure of the New York Stock Exchange, NASDAQ, and the American Stock Exchange for six days. When communication was restored and the markets reopened, stock prices suffered a sharp decline.

But the 9/11 attacks had even broader global economic consequences. Note the drop in the average daily volume on the NASDAQ from 1,907 million to 1,753 million from 2001 to 2002 in Table 4.6—even though the previous ten years had shown a steady and sometimes dramatic increase. The New York Journal News reported on September 10, 2002 that one year after the 9/11 tragedy the travel and tourism industry was still hurting economically from the reduced number of people traveling by air in general and specifically traveling to New York City. Yet there was no substantial impact seen on Wall Street one year after the attack.

Another major impact of terrorism is that more businesses put higher security measures into place, which has broad implications for an economy. The production of security-related items such as metal detectors increases, but some economists see this as an unproductive use of resources because the people hired to monitor security systems are not manufacturing any products. In addition, since the cost of the extra security measures is passed from the businesses to the consumer, increases in prices can negatively affect production and sales.

After the 9/11 attacks, the House Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises and the Committee on Financial Services held hearings to investigate ways to increase the security and stability of U.S. financial markets in the event of another terrorist attack. According to the SEC's "Testimony Concerning Recovery and Renewal: Protecting the Capital Markets against Terrorism Post-9/11" (Robert L.D. Colby, http://www.sec.gov/news/testimony/021203tsrc.htm, February 12, 2003), both the securities industry and the regulatory commissions instituted policies to safeguard the markets as a result of the 9/11 terrorist attacks. The industry's efforts included creating a better data backup system, improving crisis management procedures, and, especially, developing a more advanced telecommunications system. The SEC reported that it had worked with the Federal Reserve Board and the Office of the Comptroller of the Currency to identify practices that would minimize disruption of the market system during a large-scale disaster such as a terrorist attack. SEC also worked closely with the Financial and Banking Information Infrastructure Committee (FBIIC), the Federal Emergency Management Agency (FEMA), and New York City and State agencies to improve the overall safety of the securities markets.