Leveraged ETF trading volume plunges 75% on first day of higher deposit rule

South Korea's financial markets experienced a significant shift on July 31st as new regulations took effect, drastically reducing trading activity in leveraged exchange-traded funds (ETFs). The minimum deposit for these products, specifically those tracking single stocks like Samsung Electronics and SK Hynix, was raised from 10 million won to 30 million won.

The impact was immediate and stark. Trading volume for 16 single-stock leveraged ETFs (including inverse products) plummeted to approximately 3 trillion won, a mere quarter of the previous day's 12.4 trillion won and one-fifth of the 15 trillion won from July 29th. Even compared to less active days, the volume was halved. For instance, the KODEX SK Hynix single-stock leveraged ETF saw its trading value drop to 1.21 trillion won from 3.6 trillion won the day before. Similarly, the SOL SK Hynix Futures single-stock inverse 2X ETF's trading volume shrank from 5 trillion won to 565 billion won.

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The trading volume has decreased significantly, so it seems appropriate to view it as effective.

Despite the sharp decline in trading volume, the prices of these leveraged ETFs surged, with some rising by 48% to 60%. This surge was driven by significant gains in the underlying stocks, Samsung Electronics and SK Hynix, which rose 26.81% and hit the upper limit, respectively. This price movement led to a reversal for many retail investors who had previously accumulated these products. They shifted from net buying to substantial net selling, with KODEX SK Hynix single-stock leveraged ETF alone recording 5.87 trillion won in net sales.

Financial experts offered mixed views on the effectiveness of the new regulation. Lee Sang-hyun, a researcher at Meritz Securities, believes the substantial reduction in trading volume indicates the policy is working. However, Park Woo-yeol of Shinhan Investment & Securities cautioned that it's too early to definitively assess the policy's impact. He noted that the high prices of leveraged ETFs early in the trading day might have also contributed to the reduced volume, suggesting further observation is needed.

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While leveraged product trading decreased today, there's also the aspect that trading was reduced because the prices of SK Hynix and Samsung Electronics leveraged products formed highs from the beginning of the trading day. The policy's effectiveness still needs more time to be observed.