INVESTMENT FOCUS-Fragmented markets shrug off global seizures

* No sign of domino effect after turbulent week

* Fragmentation helped local shocks stay local

* System more tolerant of technical faults-analyst

* Central banks remain biggest shock absorber

* Fear of bond-market crunch as rate outlook turns

By Lionel Laurent

LONDON, July 10 (Reuters) - A trading shutdown across Chinese markets, a multi-hour outage at the NYSE and the financial quarantine of Greece sound like the plot of a summer disaster movie. Yet their collision this week left only a flesh wound.

For a post-crisis market structure that is frequently lambasted by investors as fragmented and vulnerable to a global liquidity shock, this is no mean feat. Global equities are down just 1 percent this week, with little sign of worldwide systemic spillover from U.S. technical glitches or wild swings in China.

And more broadly, despite a pick-up in volatility on bond, currency and equity markets, major benchmark indexes have kept within a fairly narrow trading range.

Is our imperfect system stronger than previously thought? After all, while these shocks were clearly painful on a local level - Greek household savings are stuck in limbo, Chinese stocks have lost 25 percent of their value in three weeks and the NYSE faces more scrutiny - no "domino effect" took place.

One answer is that a fragmented system can actually help local shocks stay local. Foreign ownership of Chinese equities is feeble, Greece is a tiny slice of European corporate exposure and U.S. stocks trade on a plethora of electronic venues that can absorb the outage of even the world's most famous exchange.

"I hesitate to say fragmented markets are a universal good...But in these particular circumstances, the lack of linkages has certainly been an important contributor to relative stability," said Bill McQuaker, co-head of multi-asset at Henderson Global Investors.

Another answer lies in shifting investor expectations of market shocks, five years after the U.S. "flash crash" that briefly wiped out nearly $1 trillion in market value and seven years after the subprime crisis pushed investment bank Lehman Brothers into bankruptcy and redrew the financial landscape.

Markets may simply have become more tolerant of technical glitches and rapid-fire bouts of selling, some say, pointing to a system that is not necessarily more robust or more immune to shocks but that is able to trade around cracks when they appear.

"It's not an environment of resiliency. It's an environment of fault tolerance," said David Weiss, senior analyst at research firm Aite Group.

CENTRAL BANKS

The big elephant in the room when it comes to contagion risk, however, remains the influence of central banks.

After all, one obvious reason why panic selling failed to hit this week is because central banks and regulators took action. China's securities regulator banned shareholders with large stakes from selling, while the European Central Bank (ECB) reiterated its ability to fight any contagion risk from Greece.

While there was less need for the U.S. Federal Reserve to intervene in the case of the NYSE outage, years of easy money may have locked investors into complacency. Nomura's Bob Janjuah warned on Monday that markets were "way too optimistic" about global growth and were underestimating contagion risks.

"All global central banks are guilty of market manipulation, either explicitly or implicitly," Deutsche Bank Managing Director Nick Lawson told clients on Friday. "China just provides a little more clarity about the consequences of certain actions."

The real test for post-crisis global markets has yet to come, in other words, and may only come when central banks reverse course and start to raise interest rates. The Bank for International Settlements said as much last month, comparing low rates to an elastic band being stretched to breaking point.

This in turn may topple the dominos in a bond market that has seen liquidity dry up as banks retrench from the heavily over-the-counter market - even as the global stock of U.S. dollar-denominated non-bank debt has swollen to $9.5 trillion at end-2014 from $6 trillion at the end of 2010.

So even if the return of volatility to financial markets for now remains limited to so-called "mini-tremors", there is still a fair amount of anxiety to go round over the system's ability to withstand bigger shocks in future.

"It's an uncomfortable time," said Lon Erickson, portfolio manager at Thornburg Investment Management. "We have not yet had the true test of the market." (Additional reporting by Jamie McGeever and Sujata Rao-Coverley)