The vector for financial contagion is hedge funds
This article sums up exactly my experiences at DE Shaw during the ruble default/LTCM melt down in 1998:
My Brazilian rate started trading. It blinked 17.40%, 1.50% wider than the prior day. I was out 3 million dollars, and I had no chance to trade. No chance to get out at 15.50% or 16.00%. The market had gapped.
The days following Lehman were notable not only because of the large moves, but because I, and many others, could never have traded at any price. Fists punched screens all across the globe.
It was a self-reinforcing problem. A feedback loop developed. I couldn’t sell my Brazilian rates so instead I sold another investment, Argentinian bonds. Others were doing the same, selling whatever they could, whatever was trading, moving the money into cash. The process devolved down the ladder of securities, from the least liquid to the most liquid. By the end, some of the largest stocks in the world, blue-chip stocks in the S&P 500 were also gapping.
The months following Lehman’s collapse saw the entire financial system start to fail, in a cascade of interconnected plummeting securities, and with them, the world economy.Emphasis mine. The contagion has everything to do with the homogeneity of the financial investors, and nothing to do with actual market correlations between the assets.