Stock Liquidation Tragedy: Revealing the Truth Behind Margin Calls from a 20 Billion Loss

The March 2021 Wall Street震盪事件 demonstrated to the world what is called the “fastest losing money investment story.” Hedge fund manager Bill Hwang saw his assets evaporate by $20 billion within just 48 hours, and brokerages enforced forced liquidation of his holdings, a market phenomenon often referred to as “stock断头” (liquidation).

What exactly is 断头? Why did this tragedy happen? Let’s start by discussing the mechanisms of margin financing and爆仓 (liquidation).

How Margin Buying Leads to 断头

Margin financing is similar to taking out a mortgage on a house. When you are optimistic about a stock but lack sufficient funds, or want to expand your holdings to seek greater profits, you can apply for margin financing from a broker. Simply put, margin financing means you pay part of the funds with your own capital, and the broker lends you the remaining amount to buy stocks.

Under Taiwan stock market rules, investors typically bear 40% of the cost, and the broker provides 60%. Suppose a stock is currently priced at 100 NT dollars; the initial margin maintenance rate is set at 167% (100 ÷ 60). This maintenance rate is critical—when it drops below 130%, meaning the stock price falls to around 78 NT dollars, the broker will trigger a “margin追繳” (margin call), forcing the investor to top up the collateral.

If the investor cannot meet the margin call within the specified time, the broker will not hesitate. They will directly sell the investor’s holdings at market price. This action is called 强制平仓 (forced liquidation), which from the investor’s perspective is encountering a “margin 断头” (liquidation) or “爆仓” (爆仓).

How 断头 in Stocks Triggers Chain Reactions

The harm of 断头 is far beyond individual losses. When大量持股 (large holdings) face margin liquidation, the market will experience a series of chain reactions:

Overly fallen stock prices: Ordinary investors may think carefully when prices drop, but brokers only want to recover the borrowed principal. They will sell at market price directly, not waiting for better prices. Once a large-scale 断头潮 (liquidation wave) occurs in a stock, its price often falls well below fundamental levels, further triggering other margin investors to also face 断头, creating wave after wave of decline.

Breakdown of chip structure: Before 断头, stock chips are usually held by stable internal teams and institutional investors (retirement funds, insurance companies). But after forced liquidation, stocks flow into retail hands. Retail investors, pursuing short-term gains, tend to trade frequently, causing volatility and discouraging large capital inflows. This leads to a prolonged adjustment period until significant positive news can attract funds back.

Lessons from Bill Hwang’s Case

Bill Hwang’s story perfectly illustrates these risks. Over ten years, he expanded his assets from $220 million to $20 billion, mainly by using大量槓桿融資 (massive leverage financing) and concentrating holdings in promising companies. This strategy worked remarkably well in a bull market but also concealed huge hidden dangers.

During the intense market震盪 in 2021, his holdings suffered significant losses. To maintain sufficient margin, brokers began forced liquidation. The key issue was: he held an excessively large number of stocks, and the market lacked enough buy-side support. The massive sell-off caused stock prices to plunge, and other holdings were also forced to be liquidated due to margin calls, creating a vicious cycle. Stocks he invested in—ranging from Tech Stocks to Baidu—experienced sharp declines in a short period.

How to Use Margin Safely

Margin financing is not a monster; used correctly, it can improve capital efficiency:

• Gradual position building: If funds are limited, use margin to buy the same asset in stages, controlling risk
• Choose liquid assets: Only margin buy stocks with large market caps and active trading to avoid sharp volatility caused by illiquidity
• Assess returns and costs: Margin interest costs can offset gains; if the stock’s annual dividend is comparable to the interest, the investment may not be worthwhile, so select carefully
• Set clear exit points: When the stock price cannot break through resistance and begins consolidating, take profits promptly; if the price breaks support levels, cut losses decisively—don’t wait for rebounds

Discipline is the key to long-term profitability.

Summary

Leverage is a double-edged sword. Margin buying can accelerate wealth accumulation, but it also speeds up losses. The risks of stock 断头 and爆仓 are always present. Before investing, do thorough research, understand your risk tolerance and market mechanisms, to avoid exposing your funds to unnecessary danger.