Margin Call Feedback Loop

A margin call feedback loop occurs when initial margin calls lead to asset sales that further lower prices, triggering more margin calls. This is a classic symptom of a deleveraging event in highly leveraged markets.

As traders are forced to sell to meet margin requirements, the resulting price pressure affects other traders who are also using the same assets as collateral. This interconnectedness means that even traders who were not initially over-leveraged can be forced into a liquidation cycle.

The feedback loop continues until the total leverage in the system is significantly reduced or external liquidity enters the market. It is a primary concern for risk managers who monitor total system leverage and the potential for rapid deleveraging events that can cripple market functionality.