Warning Sound on 'Samjeon-Nix Leverage' Shaking KOSPI; Authorities Pondering Countermeasures

The South Korean stock market is experiencing unprecedented volatility, with single-stock leveraged products tracking Samsung Electronics and SK Hynix at the center of the storm. These ETFs, which aim to double the daily returns of their underlying assets, have fueled a speculative frenzy. Since their launch in late May, these specific leveraged ETFs have accounted for a staggering 38.7% of the total ETF market's trading volume, with the single-stock products alone reaching 269.7 trillion won. This concentration is particularly concerning because leveraged ETFs typically have diversification requirements, limiting single stocks to 30% of holdings. However, these single-stock leveraged products bypassed these rules, allowing for extreme concentration and amplifying market swings.

“

Rebalancing transactions align with the direction of stock price fluctuations, so single-stock leverage inherently contains a mechanism that can further expand volatility.

The daily rebalancing required by leveraged ETFs inherently magnifies market volatility. When the underlying stock price rises, the ETF buys more, and when it falls, it sells more, creating a feedback loop that exacerbates price movements. This mechanism has contributed to a surge in the activation of the stock market's circuit breaker, which has been triggered 31 times this year, already surpassing the 26 times seen during the 2008 global financial crisis. A significant portion of these activations, 13 instances, occurred in the month following the launch of these single-stock leveraged products.

“

The expansion of inflows and outflows of these products can intensify one-directional trading concentration and increase losses for individual investors.

Financial authorities are now in a difficult position, seeking solutions that mitigate the risks without disrupting market principles. The Financial Supervisory Service (FSS) is collaborating with the Financial Services Commission (FSC) to devise countermeasures. FSS Governor Lee Bok-hyun has expressed personal regret, stating he should have opposed the products' introduction. Potential measures under consideration include strengthening investor education and raising the minimum deposit requirement for such products, currently set at 10 million won. Some experts suggest prohibiting new listings or capping the total issuance volume per asset manager.

“

We are contemplating measures with the Financial Services Commission to reduce the side effects of single-stock leveraged products without harming market principles.

Political bodies are also weighing in. The Democratic Party's K-Capital Market Special Committee plans to discuss the issue, with one committee member noting that single-stock leverage products are disrupting the market and widening stock market polarization. The committee is exploring ways to gradually reduce their scale. However, with many investors already holding substantial positions, a drastic overhaul is unlikely to be simple. The urgency is underscored by the fact that even the initial policy goal of luring foreign investors to the domestic market to curb the rising won-dollar exchange rate appears to have failed, as trading in these products on US markets has also increased since their domestic launch.

“

Shouldn't I have lain down then (opposed it)? I personally reflect on that.