Define a “Liquidity Crisis” and Its Link to Margin Call Amplification

A liquidity crisis is a severe market condition where an asset cannot be bought or sold quickly enough without causing a significant change in its price. It is characterized by a lack of buyers and a collapse in order book depth.

Margin calls amplify this crisis because they introduce a massive, non-discretionary wave of forced selling, overwhelming the limited buying interest and causing prices to gap down sharply.