Welcome to the third module of Global Capital Markets. We've seen that capital markets deliver a lot of positives to corporations, assisting price discovery, providing source of funding, allowing them to manage their risks. Now let's take a look at the things that might go wrong on markets, the constraints on markets, the restrictions to corporate financing. So we've established pretty much that markets are engines of economic growth. They assist corporations in the investing in positive net present value projects that would otherwise not be implemented. But there is good economic growth and then there is bad economic growth, uncontrolled economic growth, better said. We'll take a closer look at that in the next module. For now, we'll focus on the all-important liquidity. To achieve good price discovery, to have an efficient market, we need liquid markets. This module will mostly focus on liquidity. So it's all about liquidity, but we'll also focus a little bit on trust and integrity of the markets. Trust and integrity, so necessary as they underpin the efficient market function. We'll also take a closer look at the long arm of governance and the long arm of agency. The agency issue that arises because management is not equal to the owner. We'll look at the all-important role of rating agencies, and put it in some context of what has happened over the last decade or so. And finalize the discussion with regulators, their role and what they can do to assist in providing those all-important, efficient markets with their roles in price discovery, funding and risk management. So it's worth to take a little bit of a historical perspective on this. So a bit of history reveals repeat, maybe too often, episodes of market failures. The better known of those are listed here. Tulipmania back in the 17th century. The commodity market corners that happened throughout the 18th century and 19th century. The banking panics as they occurred in the late 19th century. And of course, the well-known Great Crash of 1929, resulting in the Great Depression. And lastly on this list, but certainly this is not an exclusive list, the Black Monday event on October 1987. When we discuss in the next module the impact of markets or the role that markets played in contributing to financial crisis, we'll take stock here and put that into some perspective as you see it here of historical market failures. These are just the better knowns. The list is pretty long, unfortunately. It also seems that just as there are business cycles for the economies, there are things which we could label as market cycles. Market cycles are going from a very positive role to economic development to periods where the impact on economic development might actually be negative. They're just as unpredictable as business cycles, and more importantly, they are just as hard to time. Wouldn't it be great if we actually had an indicator telling us that market failure is imminent? And we might be able to respond to avoid market failure. So back to liquidity. Liquidity will be the core element of this module. What is it and why is it so important? In particular, we'll focus on the question, what happens when liquidity disappears? And how does that disappearance, the evaporation of liquidity, affect corporations in particular? So let's focus on what happens in a crash. In a crash, prices drop rapidly. That's because in a crash, everyone will want to sell the assets that they hold. They want to get out of the market. Unfortunately, there's no counter-party there to be found, so no one is willing to buy when the price keeps dropping. What happens next is that there will be all these sell orders in the market but no buy orders coming in. That means that the market will become what we call one-sided. If the market becomes very quickly one-sided, prices will drop steeply. When prices drop, liquidity simultaneously disappears. No one will really be keen to sell their assets when prices are dropping too quickly. So both buyers that were already absent from the market and sellers will disappear from the market. Liquidity, the presence of lots of buy and sell transactions, will rapidly disappear from the market. At that stage, when only a few traders might be left on the market, price signals are becoming truly unreliable. They no longer will reflect what we labeled as fair value or intrinsic value of the asset, but merely reflect a very distorted liquidity situation on the market. At that stage it will also become very, very difficult for corporations to issue new stock in the market or to issue bonds. They will simply be unable to find investors. In a market crash, prices drop. Investors become reluctant to buy any risky asset. In summary, markets will simply close down altogether. And that, for obvious reasons, has an immediate deleterious impact on the economy. But even in the absence of such crashes, there are issues that we need to consider in terms of imposing constraints on well-functioning markets. So markets can fail in providing their core functions of price discovery, funding, risk management, for reasons as insider trading or market manipulation. Both scenarios, prices could potentially be distorted and prices no longer reflect intrinsic value. Or the flash crashes that we see now from time to time, simple technical market failure, might cause markets to become unreliable and fail in their core functions. And then there's the market participants' trust in the integrity of the markets. Obviously related to insider trading and market manipulation undermining their trust, but there are other causes where market participants' trusts become eroded. What trust relies on is instantaneous and continuous public access to all relevant information. The important role of pooling all relevant information for a particular asset leading to price discovery of that intrinsic failure. Issuers of the securities are supposed to be held accountable. They're expected to be able to pay the coupons, to pay dividends over time, but more importantly, to release all public information, all material information to the public at large. Further conditions supporting trust in the markets, or the absence thereof would undermine the trust and integrity in the participants' eyes. Effective competition. So can we rely on a market where there are sufficient buyers and sellers to lead to a perfectly competitive outcome? The absence of manipulation or insider trading and effective and efficient regulation to pull that all together, to ensure that the markets can indeed deliver that efficient function.