South Korean stocks become 'casino' as retail investors chase leverage

South Korea's stock market is witnessing a frenzy of speculative trading, with investors increasingly flocking to high-risk leveraged products. This trend is driven by sharp volatility in the KOSPI index, prompting some, like a 30-year-old job seeker, to sell gold and double down on investments, fearing that inaction will lead to destitution. The market is described as having transformed into a "legal casino" where long-term investment is abandoned in favor of pure speculation.

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Every day staring at the stock market has turned my life upside down. But I'm more afraid that if I do nothing now, I'll end up like a beggar.

Reports indicate that the KOSPI index has experienced significant fluctuations, even triggering circuit breakers twice in the past week. In response to an uncertain economic future, investors are embracing leveraged products. A 29-year-old office worker admitted that while he knows long-term investment is correct, the high opportunity cost of waiting in such a volatile market is too great.

This collective anxiety, a fear of being left behind, is evident in staggering trading volumes. On June 26, the turnover rate for the "KODEX SK Hynix single stock leverage" product reached 108%, while the inverse 2x futures product betting on a price drop saw an astonishing 1261% turnover. Analysts note that leveraged Exchange Traded Funds (ETFs) have become tools for retail investors to gamble on daily market movements.

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I know long-term investment is the right way, but the market is so volatile now, the opportunity cost of just waiting is too high.

The fervor is creating a dangerous feedback loop. Retail investors are concentrating their funds on leveraged products tied to Samsung Electronics and SK Hynix, seeking quick riches. Imbalances in the supply and demand of these leveraged products are causing extreme price swings in these key stocks, consequently exacerbating the volatility of the entire KOSPI index. On June 29, the KOSPI closed at 8394.65 points, with foreign investors offloading a record 7.756 trillion won. Despite retail and institutional investors attempting to prop up the market, the VKOSPI volatility index, known as the "Korea Fear Index," surged 4.56% to 96.94 points, a historic high, signaling extreme market tension.

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In a volatile market, if intraday trading decisions are wrong, a large portion of the investment principal can be lost within a day; even if the market moves sideways, the possibility of loss is high due to the negative compounding effect.

Adding to the risk, ultra-high-risk products with leverage up to 150 times the investment are emerging outside the traditional regulatory system. Binance, a major cryptocurrency exchange, launched a KOSPI futures product with 150x leverage on June 26, where a mere 0.66% drop in the KOSPI could wipe out an investor's entire capital. Over 1 trillion won flowed into this product shortly after its launch, with a significant portion estimated to come from South Korean domestic investors. Binance also introduced products allowing 50x leverage on Samsung Electronics and SK Hynix. Lee Hyo-seop, a senior researcher at the Korea Capital Market Institute, urged caution, warning that misjudgments in intraday trading can lead to substantial losses within a single day, and even sideways markets pose a risk due to negative compounding. He emphasized the need for better investor education regarding high-risk investments and mechanisms to prevent investors from misidentifying themselves as high-risk takers when their actual investment tendencies do not align.

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We need to strengthen education for leveraged investors; currently, this education is just superficial, and we need to establish corresponding mechanisms to prevent investors from defining themselves as high-risk investors when their actual investment tendencies are not high-risk.