The margin call spiral: forced selling inside a stock market crash

What is the margin call spiral in a stock market crash?

The margin call spiral is a feedback loop between prices and borrowed money. A fall in prices reduces the equity of leveraged accounts. Lenders then issue margin calls, and accounts that cannot meet them sell. Those sales add supply and lower prices, which reduces equity again. The loop uses the same rules in every round, and only the size of the numbers changes. The guide on what a margin call is gives the definition and a worked example.

This page focuses on the loop, since a single call matters little to a market while a chain of calls matters a great deal. A crash needs a mechanism that turns one move into many, and the spiral is that mechanism for leveraged markets. It explains why falls inside leveraged markets can look sharper than the news alone would suggest.

Which stages does the margin call spiral follow?

Stage 1 is the initial fall, which can come from any news. Stage 2 is the first wave of calls, from accounts with the highest leverage. Stage 3 is forced selling, where brokers or owners sell whatever is easiest to sell, often the most liquid shares rather than the weakest ones. Stage 4 is the new lower price, visible on every screen. Stage 5 is the second wave of calls, from accounts that held up until then.

Each wave reaches a different group. The first wave hits investors with thin cushions, the second hits those with moderate leverage, and later waves reach funds that hold the same shares in size. Because the most liquid shares often sell first, prices of good companies fall alongside weak ones. The result is a broad decline that looks unrelated to any single company’s news. The speed of each wave depends on how fast lenders reprice collateral.

What decides whether a margin call spiral fades or runs away?

The deciding quantity is a feedback ratio: the extra selling that one round of falling prices produces, divided by the selling that caused it. A ratio below 1 means each round is smaller than the last, and the loop fades. A ratio of 1 or more means each round matches or exceeds the last, and the loop feeds itself until leverage is exhausted. The ratio depends on how much leverage exists and how deep the market is.

An illustration with assumed values shows the effect. Suppose a 5.0% initial fall triggers forced sales that cause a further 4.0% fall, which is a ratio of 0.8. The next rounds add 3.2% and 2.6%, and the series approaches 25%, which is 5 times the shock. Real ratios change from round to round, so the table shows a logic, not a forecast.

Which conditions speed up a margin call spiral?

5 conditions raise the feedback ratio. Thin liquidity means a given sale moves the price more. Similar leverage across accounts means calls arrive together. Tighter terms in volatile weeks mean lenders raise requirements, which FINRA lists among the causes of a call. Crowded holdings mean many accounts sell the same shares. Automated selling rules mean orders arrive without a pause for judgement.

Each condition has a measure. Trading volume and bid-ask spreads show liquidity, margin debt and fund leverage show the stock of borrowing, and ownership data show crowding. Reading them together gives a view of how likely a fall is to feed itself. A market with all 5 present at once has the highest ratio, and one with a single condition holds a lower one. Track the measures monthly and note the changes.

What did the 1987 margin call spiral look like?

On Monday 19 October 1987 the Dow Jones Industrial Average fell 508 points, or 22.6%, the largest one-day percentage drop in its history. Margin calls rose to roughly 10 times their average size and about 3 times their previous highs, according to Wikipedia. That scale created severe liquidity strain for brokerage firms, because the calls arrived faster than clients could fund them.

Computer-driven hedging that sells as prices fall may have accelerated the decline, though studies have not agreed on its weight. The episode matters here for one reason: it shows a loop that ran through several channels at once, each with its own speed. Readers who study the structure spot the same pattern later, in other markets and under other names.

How does a margin call spiral reach banks and lenders?

The loop moves from investors to lenders because lenders hold the loans behind the sales. When many borrowers sell at falling prices, the value of collateral drops across the whole book, and lenders face losses of their own. Banks with high leverage have the smallest buffer. According to the EQOS Asia 2008 back-test (2026), banks ran at 30:1, so a fall of 3.3% was enough to bankrupt one.

The same study records that the actual decline from 2007 to 2008 was about 20%, which is roughly 6 times that threshold, and that Bear Stearns was bought at $2 a share, against $172 a year earlier. When lenders weaken, they ask for more collateral and lend less, which feeds the loop from the other side. That is how a stock market spiral becomes a financial one.

How can you watch for a margin call spiral today?

Start with the stock of borrowing, because it sets the size of the possible loop. FINRA publishes margin debt each month, and the series reaches back to January 1997. Add the liquidity measures from the previous section, and record all of them with a date. As of October 2026 this page leaves current values to those sources, which update more often than any article. A rising trend in borrowing together with thinner trading is the pattern to note.

The EQOS Asia Λ simulator scores a system in 10 minutes, and a 30-minute pre-diagnostic applies the scoring to your own exposure. This page is general information, not investment advice. It describes a mechanism, and the trigger that starts a spiral arrives on its own schedule. The sister page on margin calls in 1929 shows the same loop with a thinner cushion.

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About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile