A small trigger can unravel large systems of overlapping arbitrage positions through forced selling

Evidence

The eventual result was what chapter 8 calls a “superportfolio”: a large, unstable structure of partially overlapping arbitrage positions. An event that was in itself less than cataclysmic the Russian government’s default on its ruble-denominated bonds on August 17, 1998 caused that superportfolio to begin to unravel. Arbitrageurs who suffered losses in Russia had to begin selling other assets in the superportfolio; in an increasingly illiquid market, those sales caused prices to move sharply against the holders of the superportfolio, forcing further sales; and so on. — Donald MacKenzie, An Engine, Not a Camera, 156

Categorization

• XREF: Bears directly on the leverage/liquidity spiral literature (Brunnermeier-Pedersen) and on the story of risk parity and corridor crowding; a vivid mini-version of the fire-sale mechanism that recurs in 2007-08. — connects to: High bank leverage turns small asset declines into instant illiquidity and insolvency. — Mark Blyth, Austerity: The History of a Dangerous…, 84; Market microstructure shapes whether arbitrage opportunities persist or vanish — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 94; Sudden margin hikes can trigger forced sales that amplify the very volatility causing them — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 941 (+8 more)
• SHARE: Sent to anyone who works in risk or quant trading: a compact textbook example of deleveraging-driven contagion within one superportfolio.

Broader Connections

• Sudden margin hikes can trigger forced sales that amplify the very volatility causing them #expands (0.88) — Donald MacKenzie, An Engine, Not a Camera, 941
• Compressed decision time makes financial markets prone to cascading collapse #expands (0.85) — David Harvey, The Condition of Postmodernity, 1938
• Fundamentally unrelated market phenomena can suddenly move in lock-step within a global microstructure #expands (0.72) — Donald MacKenzie, An Engine, Not a Camera, 1088