Short-Term Trading Erodes Confidence in Volatile KOSPI Market

South Korea's stock market, the KOSPI, is grappling with extreme volatility, leaving investors anxious despite a record-breaking 17.91% surge on July 31. This dramatic rise, which nearly erased three days of previous losses, has been overshadowed by a pattern of sharp fluctuations that have led to the frequent activation of trading halts like circuit breakers.

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Since the introduction of single-stock leveraged products in Hong Kong last October, the volatility of the domestic market has increased. Trading is frequent, transaction costs are high, uncertainty is rising, and there are many cases of sharp fluctuations based on one issue or a small event instead of fundamental trading.

The market has seen circuit breakers triggered 9 times this year alone, with 4 instances in July, highlighting a "chaotic" market environment. This instability has fostered a perception that the Korean stock market is unreliable. Seo Sang-young, an executive at Mirae Asset Securities, noted that the introduction of single-stock leveraged products in Hong Kong last year has amplified volatility in the domestic market. He observed an increase in frequent trading, higher transaction costs, and a rise in uncertainty, with stock prices fluctuating based on minor events rather than fundamental value.

Park Hyung-joong, an economist at Woori Bank, pointed to an overly optimistic view of the market held by both the government and investors since the latter half of last year, particularly concerning semiconductor stocks. This optimism, he argued, has led to negative consequences, concentrated in July. The government's policies have focused on channeling funds into the stock market, while large corporations like Samsung Electronics and SK Hynix have seen their market capitalization dominate the KOSPI, reaching over 50% of the index's total value.

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Since the second half of last year, stock prices have risen significantly, unprecedented in the history of the global stock market, especially centered on semiconductors. In this process, both the government and investors viewed the stock market too optimistically, and the negative effects have concentrated in July.

This volatile market undermines the government's goal of advancing the stock market and resolving the "Korea Discount" by shifting investment focus from long-term value to short-term gains. Joo Won, head of economic research at Hyundai Research Institute, warned that if the perception of the Korean stock market as a place for short-term trading solidifies, it contradicts government pledges and hinders the market's development into a mature financial hub. The instability also has broader economic implications, potentially reducing consumer purchasing power and exacerbating household debt issues, leading to a contraction in domestic demand.

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Both individuals and foreigners are focused on short-term trading, and institutions are following suit. If the perception that the Korean stock market is not a place to tie up money for a long time solidifies, it is the opposite of the current government's pledges, and developed markets will be out of reach.