20 billion USD evaporated in 2 days: How margin calls triggered a chain reaction of collapse on Wall Street

The storm that shook Wall Street in 2021 began with one person’s failure.

Bill Hwang, a hedge fund manager, took 10 years to turn $220 million into $20 billion. His secret weapon was massive leverage—borrowing money to buy stocks of promising companies, thereby amplifying gains. Unfortunately, there are no free lunches with leverage; a market fluctuation caused him to lose $20 billion in just two days. Even more alarming, his forced liquidation didn’t stop at personal losses but triggered a chain reaction of margin calls across the entire market.

What exactly is a margin call? Why is it so dangerous?

Margin is leverage, and a margin call is leverage turning against you

First, let’s explain how margin works. If you’re bullish on a stock but lack sufficient funds, or if you’re confident and want to increase your holdings, you can borrow money from a broker to supplement your purchasing power. For example, in the Taiwan stock market, investors typically put up 40% of the funds themselves, and the broker lends the remaining 60%.

Here’s an example: Apple stock at $150, and you only have $50. The broker lends you $100 to buy one share. When the stock price rises to $160, selling the share after paying back the loan and interest yields a 19% profit—much higher than Apple’s 6.7% increase. But conversely, if the stock drops to $78, the broker can’t stay idle.

At this point, the margin maintenance ratio (original stock price divided by the borrowed amount) declines. When it falls below 130%, the broker will initiate a margin call—demanding the investor to add more collateral. If the investor can’t provide the funds, the broker will forcibly sell the stock. From the investor’s perspective, this is a margin liquidation or 爆倉.

Why do margin calls cause chain reactions?

The most terrifying aspect of margin liquidation isn’t individual losses but the domino effect it can trigger in the market.

When a stock plunges sharply, causing a wave of margin calls, brokers, aiming to recover their lent money quickly, usually don’t sell at high prices. Instead, they liquidate positions immediately, often at market prices. This massive sell-off floods the market, with insufficient buy orders to absorb the volume, causing the stock price to overshoot on the downside. The sharp decline then prompts other margin holders with the same stock to face margin calls, forcing them to sell as well, further driving down the price. This vicious cycle begins.

Bill Hwang’s case perfectly illustrates this. His holdings were so large that the market couldn’t absorb the sell-offs, and the resulting extreme volatility in stock prices led to multiple stocks in his portfolio facing margin calls. To maintain margin requirements, brokers even forcibly liquidated some of his well-performing holdings, further magnifying overall losses. The $20 billion evaporated during this cycle of repeated liquidations and chain margin calls.

After a margin call, stocks become chaotic

Once liquidated, stocks tend to flow into retail investors’ hands. Retail investors often trade with short-term gains in mind, buying and selling on small fluctuations, while large funds tend to stay on the sidelines. As a result, stocks that have undergone margin liquidation usually need a major positive catalyst to regain investor confidence, often experiencing a prolonged decline in the meantime. This is why short-term margin liquidation stocks are generally not recommended for trading.

How to use margin effectively to make profits

That said, if used wisely, margin can indeed improve capital efficiency:

Choose the right targets: Stocks with sufficient liquidity (large market cap). Small-cap stocks are more volatile and prone to sharp swings when margin positions are liquidated. Bill Hwang’s mistake was holding positions that were too large for the market to absorb.

Calculate costs carefully: Margin involves paying interest. If the dividend income and interest costs are roughly equal over a year, the investment isn’t worthwhile. Be especially cautious with timing and stock selection.

Set profit and stop-loss levels: When a stock consolidates near resistance, it’s not advisable to hold a margin position long-term, as interest will eat into profits. Sell if it breaks resistance; if it falls below support, it’s unlikely to rebound quickly, so cut losses promptly.

Operate with discipline and stagger entries: If funds are limited but you’re optimistic about a company, you can use margin to buy in stages. If the stock continues to decline, you can add to your position to lower your average cost.

Conclusion

Leverage is a double-edged sword. When used efficiently, it accelerates wealth accumulation; when abused, it speeds up losses. The risk of margin calls is real and objective—proper research and disciplined operation are essential to avoid exposing yourself to unknown risks. Discipline is the key to long-term success in the stock market.