Mechanical Selling refers to the automatic or forced liquidation of assets that occurs due to predefined rules or conditions, rather than discretionary investor decisions. This can be triggered by margin calls, loan liquidations in decentralized finance protocols, or the rebalancing of algorithmic trading strategies. It often contributes to downward price spirals as selling begets more selling, regardless of fundamental asset value. Such selling is systematic and less sensitive to market sentiment.
Context
News often reports on instances of mechanical selling, particularly during periods of high volatility or market downturns, explaining rapid price drops. Understanding these automated liquidation mechanisms is vital for comprehending market dynamics in both traditional and decentralized finance. The design of lending protocols and derivative exchanges continually evolves to mitigate the cascading effects of widespread mechanical selling.
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