How Does a High Margin Call Frequency Affect Market Volatility?
A high frequency of margin calls can exacerbate market volatility. When many traders receive margin calls simultaneously, they are forced to sell assets to post additional collateral or face liquidation.
This concentrated, forced selling pressure drives prices down rapidly, which in turn triggers more margin calls and liquidations in a cascading effect. This feedback loop creates a 'liquidation spiral,' significantly increasing market volatility and leading to sudden, sharp price drops.
Glossar
Margin Call Frequency
Frequency ⎊ Margin call frequency is the rate at which a broker or protocol issues demands for additional collateral from a trader whose leveraged position has deteriorated due to adverse price action.
Forced Selling Pressure
Liquidation ⎊ The emergence of forced selling pressure within cryptocurrency markets, options trading, or financial derivatives typically stems from margin calls, contract expirations, or regulatory actions compelling the rapid disposal of assets.
Margin Calls
Trigger ⎊ Margin calls represent a demand from a brokerage or exchange for an investor to deposit additional funds or collateral to bring the account back to the required maintenance margin level, particularly relevant in leveraged cryptocurrency trading and derivatives markets.
Market Volatility
Dispersion ⎊ Market volatility within cryptocurrency, options, and derivatives contexts represents the magnitude of price fluctuations over a defined period, quantified typically by standard deviation or variance of logarithmic returns.