How Does Cascading Liquidation in Futures Markets Contribute to Market Instability?

Cascading liquidation is a chain reaction where the liquidation of one large position causes a price drop, which in turn triggers the liquidation of more positions, and so on. This continuous, forced selling creates a feedback loop that rapidly depletes market liquidity and pushes prices down sharply.

It leads to extreme market instability, often resulting in "wick" formations on charts.