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Extreme volatility in South Korea’s world-beating stock market is alarming policymakers, who fear trading is being driven more by leverage than fundamentals after a rushed launch of single-stock derivative products tied to chipmakers Samsung Electronics and SK Hynix.
The unusually sharp swings in the world’s two largest memory chipmakers, which together account for half of the Kospi, prompted President Lee Jae Myung this week to order swift measures to curb what he called the products’ destabilising effects.
“Our domestic stock market is quite unstable,” Lee said at a policy meeting with top government officials in Seoul on Wednesday. “In fact, since it experienced a historically unprecedented massive surge in such a short period, it would require time and fluctuation to stabilise.”
The Kospi is on track to be the world’s best-performing major equity market for a second year, fuelled by demand for Samsung and SK Hynix’s AI chips. But doubts over the durability of AI spending have triggered a sharp correction, with the index falling 25 per cent from its June peak.
Leveraged exchange traded funds tied to Samsung and SK Hynix — which offer two times the stocks’ average daily return — have magnified the selling, with hedging and margin calls inflicting heavy losses on retail investors.
The Kospi whipsawed this week, plunging 16 per cent on Monday before rebounding more than 6 per cent on Wednesday and then falling another 6 per cent on Thursday.
Volatility has been so high that the stock exchange has paused trading 37 times this year, compared with just three during all of last year. More than half of the halts came after the debut of single-stock leveraged products in May.
“This is abnormal,” said Namuh Rhee, chair of the Korea Corporate Governance Forum. “Memory chips are a highly cyclical business with unpredictable demand. Allowing two-times leverage for retail investors in this sector is a serious policy blunder.”
While similar products exist in the US and other major markets, South Korea is unusual in the scale of its retail participation and the speed at which regulators approved the single-stock derivatives.
Brokerages rolled out 16 leveraged and inverse ETFs in late May after regulators gave them the green light. By then, shares of Samsung and SK Hynix had more than quadrupled in value in one year.
“It’s hard to see why regulators approved these products after the market had already risen so much,” said Kim Hyung-kyoon, executive director at asset manager Tcha Partners. “They’ve effectively created a casino for retail investors.”
Rhee said South Korea’s ETF market had become “distorted”, with brokerages and asset managers favouring higher-margin sector ETFs over broad-based products more common in the US. Single-stock products now have about $8bn in assets, making up nearly half of all leveraged ETFs in South Korea.
Financial Supervisory Service governor Lee Chan-jin last month expressed regret over the rushed launch of single-stock products. “Looking back, I regret not doing everything I could to stop it,” he said.
In response to growing calls to curb volatility in its $4.1tn equity market, the government on Thursday said it would suspend new listings of single-stock leveraged ETFs and triple the minimum deposit for such products to Won30mn ($20,300) from August 5.
It will also require retail investors to attend additional courses on risk management after rolling out training videos last year.
Regulators blame the single-stock ETFs’ “short gamma” dynamics for the volatility. To maintain their target returns, fund managers and liquidity providers must aggressively buy shares as prices rise and sell quickly as they fall, exacerbating rallies and declines.
Goldman Sachs estimated SK Hynix’s double-digit fall on Monday forced leveraged funds to sell roughly $5bn of the stock to rebalance their portfolios, equivalent to about 18 per cent of combined trading in SK Hynix shares and futures that day.
The company’s $26.5bn US listing last week has raised concerns that South Korea’s leverage-driven swings could spill over into global markets. Several leveraged ETFs tracking the chipmaker’s American depositary receipts launched days after the US listing.
ETF-driven swings had also fuelled a wave of margin calls, said Jongmin Shim, equity strategist at CLSA. Outstanding margin loans stood at Won34.4tn on Thursday after reaching a record Won38tn last month.
“Retail investors must be bleeding heavily,” said Shim. “The market was already highly concentrated in two semiconductor stocks, and adding single-stock leveraged ETFs has made those swings much worse.”
Kim Jin-young, a 37-year-old retail trader, is feeling the pain despite avoiding leveraged products. He invested about Won100mn in Samsung Electronics and SK Hynix in February and has seen his paper gains shrink from Won60mn last month to Won20mn.
“I regret not selling earlier,” he said. “It hurts because it feels like I’ve lost money I’d already made. But I’ll hold on until the end of the year because I expect the shares to recover. Even then, they’ll still generate a better return than leaving my money in the bank.”
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