How Can a “Flash Crash” in One Market Trigger a Liquidation Cascade in a Seemingly Unrelated Derivative Product?

This can happen through cross-margining and shared collateral. For instance, a trader might be using a cryptocurrency that experiences a flash crash as collateral for a position in a stock index future.

The sudden drop in the collateral's value would trigger a margin call on the futures position. If the trader cannot add funds, the futures position is forcibly liquidated.

If this happens on a large enough scale, the wave of selling in the futures market can depress its price, potentially triggering further liquidations for other traders in that market, all initiated by a crash in a different asset class.