What Are ‘Cascading Liquidations’ and How Do They Relate to Flash Crashes?

Cascading liquidations occur when the forced closure of one large leveraged position generates significant market selling pressure, causing the price to drop further. This drop triggers the liquidation of other leveraged positions, which in turn adds more selling pressure, creating a self-reinforcing downward spiral.

Flash crashes are often exacerbated or even caused by this chain reaction, as the market rapidly loses liquidity and depth.