What is a liquidation explosion and forced liquidation, based on the event of Bill Hwang losing 20 billion USD

In March 2021, a hedge fund manager named Bill Hwang lost 20 billion USD in just 48 hours, shocking Wall Street. The root cause of this financial storm was “liquidation” and “forced liquidation” — two of the most terrifying terms for leveraged investors.

What does liquidation and forced liquidation mean? Why does it happen?

Liquidation actually means forced liquidation, and both terms refer to the same concept in stock and futures markets. When investors use margin (borrowing money from brokers) to amplify their positions, a market decline that doesn’t meet expectations can trigger this deadly chain reaction.

Let’s understand how margin works with a simple example:

Suppose you are bullish on Apple stock, currently priced at 150 USD, but you only have 50 USD. The broker can lend you 100 USD, allowing you to buy one share. If the stock rises to 160 USD, you sell and pay back the broker 100 USD plus 0.5 USD interest, netting 59.5 USD profit, a 19% return.

But what if the stock drops to 78 USD? Your losses will be magnified. More importantly, the broker will start worrying about recovering the lent money and will require you to add margin.

In Taiwan stocks, margin trading usually involves investors contributing 40%, and brokers covering 60%. With an initial stock price of 100 TWD, the margin maintenance rate is 167%. When the maintenance rate drops below 130% (i.e., stock price falls to 78 TWD), the broker issues a margin call. If the investor cannot meet the margin requirement within the specified time, the broker will execute a “forced liquidation” — directly selling your stocks. From the investor’s perspective, this is called “margin liquidation” or “forced liquidation.”

Bill Hwang case: How leverage destroyed 20 billion in assets in 48 hours

Bill Hwang’s story vividly illustrates the double-edged nature of leverage. Over 10 years, he grew his assets from 22 million USD to 20 billion USD, mainly through precise stock picking combined with heavy margin use. However, the biggest risk of high leverage is a black swan event.

In 2021, the stock market experienced extreme volatility, and his holdings faced massive swings. To avoid losses, brokers began forced liquidations. But Hwang held enormous positions, and when his assets were sold off, there weren’t enough buyers to absorb the sell orders.

What happened? The stock prices plummeted further, triggering liquidation of other investors holding the same stocks. To maintain margin, even stable holdings were forcibly sold by brokers. This created a terrifying chain reaction — almost all his investments declined sharply in a short period.

Two major impacts of margin liquidation on the market

Impact 1: Stock prices fall into free fall

Normal investors tend to hesitate to sell when prices drop, fearing realizing losses. But brokers’ logic is entirely different — they want to recover their lent funds quickly, so they will sell investors’ stocks at market price regardless of the best price.

This can cause a stock to plunge excessively, leading to more forced liquidations and a vicious cycle of further declines.

Advice: Long investors should avoid stocks with liquidation risk, while short sellers can take advantage of this opportunity to profit.

Impact 2: Stock ownership becomes chaotic

Under normal circumstances, internal management teams and long-term holders (retirement funds, insurance companies) form stable ownership. But after liquidation, stocks sold by brokers flood into retail investors.

Retail investors tend to be short-sighted, buying and selling on minor fluctuations, which discourages large capital inflows. As a result, the stock continues to drift downward until the company releases major positive news to attract funds again.

Therefore, stocks that have undergone liquidation are generally not recommended for short-term trading, as the risk of further decline is high.

How to use margin safely?

Although margin trading carries high risks, proper use can improve capital efficiency:

1. Choose stocks with sufficient liquidity

Bill Hwang’s tragedy teaches us that it’s essential to select stocks with large market capitalization and ample liquidity. Concentrating holdings in small-cap stocks can cause severe volatility if liquidation occurs.

2. Evaluate margin costs and expected returns

Margin involves interest costs, so investment returns must exceed the interest paid. Some stocks have minimal volatility, and dividend income may just cover margin interest, making the strategy pointless.

3. Use margin to stagger purchases

If funds are limited but you are bullish on a stock, using margin can help implement a phased buying strategy. When the stock rises, you enjoy profits; if it falls further, you have funds to buy more at lower prices, reducing your average cost.

4. Set entry and exit points at resistance and support levels

When a stock fails to break through resistance, it consolidates, during which you still pay margin interest. It’s advisable to sell immediately if the stock cannot break resistance. Conversely, if the stock breaks support and is unlikely to rebound shortly, stop-loss promptly.

Conclusion

Leverage is like a double-edged sword; used wisely, it can accelerate wealth accumulation, but misused, it can magnify losses. Margin liquidation simply means forced liquidation caused by leverage failure, and the risks are extremely high.

Investors should think carefully before trading, establish clear stop-loss and take-profit rules, and avoid becoming the next victim of a liquidation storm.