What Is a Liquidation Cascade and How Does It Differ from a Standard Margin Call?
A standard margin call is a request for an individual trader to add more funds to their account. A liquidation cascade is a chain reaction that follows.
When a trader fails a margin call, their broker forcibly sells their assets. This large sell order pushes the market price down, which in turn causes other leveraged traders' positions to fall below margin requirements.
This triggers a new wave of forced liquidations, creating a domino effect where each liquidation triggers the next, rapidly accelerating the death spiral.
