What Is a “Flash Crash” and How Can It Trigger Cascading Margin Calls across a Leveraged Derivatives Market?

A flash crash is a rapid, deep, and sudden drop in asset price, typically lasting only a few minutes before a quick recovery. In a highly leveraged derivatives market, this sudden drop instantly pushes many leveraged positions below their maintenance margin.

The automated liquidation of these positions forces the sale of the underlying collateral, which further drives the price down, triggering more liquidations in a cascading effect, thus amplifying the crash.