Market volatility triggered by leveraged exchange-traded funds (ETFs) tracking Samsung Electronics and SK hynix is exceeding dangerous levels. On the 15th, the KOSPI closed at 7,284, up 6.24% from the previous day. After the index plunged intraday the day before, triggering a sell-side sidecar, a buy-side sidecar was activated just one day later, replaying the "roller-coaster KOSPI." Over two days, the gap between the intraday low (6,448) and high (7,424) approached a staggering 1,000 points. Since Korea's first single-stock leveraged product launched on May 27, sidecars have been triggered 35 times and circuit breakers five times. This demonstrates that extreme volatility has spilled over into structural risk.
The side effects of the "Samjeonnix leverage," which tracks twice the return of the underlying stocks, are truly serious. At one point, the trading value of 16 leveraged and inverse ETF issues accounted for 83% of the entire domestic stock market's turnover. Excessive day trading has amplified the volatility of the two stocks, which in turn has led to sharp swings across the KOSPI. The KOSDAQ, drained of liquidity, has fallen into a slump. It is telling that on the previous day, when the market plunged intraday, rumors spread that tens of thousands of margin-call accounts had been liquidated this month alone, with individual losses reaching trillions of won. Global investment banks, as well as financial markets in Japan, Taiwan, and the United States, are sounding the alarm over Korea's leverage.
Yet the response from the Presidential Office, the Financial Services Commission (FSC), and the Financial Supervisory Service (FSS)—the very bodies that set the stage for the roller-coaster KOSPI—has been lukewarm. At most, the Korea Financial Investment Association gathered the heads of 10 major securities firms the previous day and pledged to pursue self-regulation, including strengthened customized risk warnings, expanded investor education, and higher deposit requirements. President Lee Jae-myung, during the FSC's second-half work report on the 15th, instructed officials to "swiftly prepare measures (for leveraged ETFs)," so it remains to be seen whether the financial authorities will come up with a quick response.
We must not overlook that if the side effects of leverage persist, not only will trust in Korea's stock market be damaged, but the government's productive finance drive could also lose momentum. It is clear that the money move from real estate to the stock market would also be shaken. Financial authorities must move quickly to prepare countermeasures. To reduce the side effects of single-stock leverage, measures are needed such as limiting investment caps, sharply strengthening margin requirements, and banning the inflow of credit loans. Introducing 30-minute single-price auctions or limiting the number of daily trades is also worth considering. Financial authorities must bear in mind that if they fail to contain the side effects of leverage, the capital market revitalization championed by the current administration could crumble into a sandcastle.
