Why Is a Sudden Market Flash Crash a Risk for Reaching the Bankruptcy Price?

A flash crash is a rapid, deep, and short-lived decline in price, often caused by a large sell order or cascading liquidations. During such extreme volatility, the exchange's liquidation engine may not be able to execute the forced closing order quickly enough or at the intended liquidation price.

If the market price drops below the bankruptcy price before the order is filled, the position's loss exceeds the initial margin, creating a negative balance that the insurance fund must cover.