The truth about liquidation in financing: starting from the Bill Hwang $20 billion loss incident

In March 2021, a Wall Street investment manager lost $20 billion in just 48 hours, becoming the fastest person in history to lose money. Behind this shocking event in the financial world reflects a seemingly simple yet extremely dangerous trading concept—financing liquidation and forced liquidation.

Understanding from large investors’ liquidations: Why did Bill Hwang lose so much?

Bill Hwang’s investment strategy is straightforward: select promising stocks and use significant leverage to amplify returns. With this approach, he turned $220 million into $20 billion over 10 years.

But high leverage is like a double-edged sword. When the stock market experienced huge volatility in 2021, his holdings began to come under pressure. To protect their capital, brokers enforced forced liquidations.

The problem was—his holdings were too large. When the broker sold such a large amount of stock into the market at once, there wasn’t enough buying volume to absorb it. After the stock price was hammered down, this triggered the futures liquidation risk of his other holdings, leading to more forced liquidations. This created a vicious cycle: liquidation → stock price drops → more liquidation → stock price continues to fall.

Even his Baidu shares plummeted significantly during this storm. Even stocks that initially had little volatility were forcibly liquidated to maintain sufficient margin.

What is financing? What is liquidation?

The logic of financing is simple: You put in a portion of the money, and the broker loans you the rest to buy stocks.

Suppose you like a stock currently priced at 100 yuan, but you only have 40 yuan. The broker loans you 60 yuan, allowing you to buy one share.

If the stock rises to 110 yuan, after selling and paying back the broker’s 60 yuan plus interest, the remaining profit is yours. This way, with a 40 yuan principal, you can achieve a return far exceeding 10%.

But conversely, if the stock drops to 70 yuan, the broker starts to worry—because you only invested 40 yuan, and now the stock is worth only 70 yuan. The 60 yuan loan may not be recoverable. So, the broker will notify you to top up the margin, meaning you need to add more funds.

In the case of Taiwan stocks, financing usually involves investors putting in 40%, and brokers covering 60%. The initial maintenance margin rate is set at 167% (100 yuan ÷ 60 yuan). When the maintenance margin falls below 130% (around a stock price of 78 yuan), the broker will issue a margin call.

If you do not top up the margin within the specified time, the broker will directly sell your stocks, which is called “forced liquidation,” from the investor’s perspective, also known as “financing liquidation” or “爆倉” (blowout).

What impact does large-scale liquidation have on the stock market?

Impact 1: Stock prices will be oversold

Generally, retail investors seeing stock prices fall may hesitate to sell at a loss. But brokers are different—they only want to quickly recover the lent funds, regardless of whether they can sell at a good price.

Therefore, when a stock triggers financing liquidation due to a sharp decline, the broker’s massive sell-off will push the stock price even lower, triggering more liquidation waves. This creates a vicious cycle of “drop → liquidation → sell-off → further decline.”

For long investors, it’s advisable to avoid stocks with liquidation risk; for short sellers, it can be a good profit opportunity.

Impact 2: The chips after liquidation become chaotic

We usually think that internal company teams and long-term institutional investors (retirement funds, insurance companies) hold more stable chips. But when large-scale liquidation occurs, stocks sold off by brokers at any cost will flow into retail investors.

Retail investors tend to be short-sighted and profit-driven, trading frequently with minor price fluctuations. This leads to large capital being unwilling to enter, and stocks may continue to decline until major positive news can attract funds again.

Therefore, stocks after liquidation are generally not recommended for investors, as they are very likely to fall further in the short term.

How to safely use financing to increase returns?

Although financing carries high risks, if used wisely, it can make capital more efficient:

First: Choose stocks with sufficient liquidity

From Bill Hwang’s lesson, it’s clear that when using financing to buy stocks, you must select companies with large market capitalization and high trading volume. Otherwise, if a big investor liquidates, the stock price could be hammered down severely, potentially affecting your holdings as well.

Second: Consider the balance between financing costs and returns

Financing involves paying interest to the broker. Some stocks hardly fluctuate, and the main income comes from dividends. If the annual dividend income is roughly equal to the financing interest cost, the investment becomes meaningless.

Third: Enter gradually and set stop-loss and take-profit levels

Using financing to buy in stages allows you to enjoy gains when prices rise; when prices fall, you still have funds to buy more at lower costs. But be aware—if the stock hits a resistance zone and cannot break through, during this period you still need to pay interest. It’s generally recommended to take profits when unable to break resistance, and cut losses decisively when breaking support.

Discipline is the key to long-term success.

Summary

Financing is a double-edged sword. When used correctly, leverage can amplify your returns and accelerate wealth accumulation; when used improperly, the same leverage can rapidly magnify your losses.

Futures liquidation and financing blowouts may seem distant for ordinary investors, but as soon as you use financing or leverage, you are always at risk of facing these dangers.

Always do thorough research before investing, understand how much risk you are taking on, and avoid exposing your assets to unpredictable dangers.