What Is the Role of Margin Calls in Accelerating a Death Spiral in Derivatives Trading?

Margin calls act as a mechanical accelerant to a psychologically-driven death spiral. When asset prices fall, leveraged traders are forced to sell their holdings to meet margin requirements.

This forced selling is not based on market sentiment but on contractual obligation, adding immense, inelastic selling pressure. This drives prices down further, triggering a cascade of more margin calls for other traders.

The panic intensifies as investors realize the selling is automated and relentless, speeding up the price collapse.