Author: Jae, PANews
On July 8th, the South Korean stock market continued its decline, with the Korea Composite Stock Price Index (KOSPI) once falling below 7200 points, a drop of over 6% intraday, and a cumulative decline of over 20% since its June peak, entering a technical bear market.
The South Korean stock market, known for its high volatility and high retail investor participation, has fallen into an unprecedented crisis of confidence, triggered by leveraged ETFs targeting individual stocks.
Author: Jae, PANews
Ahn Cheol-soo, a member of the People Power Party and former presidential candidate, even publicly criticized KOSPI on social media, stating that it had completely "become a casino." He strongly demanded that strong corrective measures, including delisting, be taken against 2x leveraged ETFs linked to Samsung Electronics and SK Hynix. From the widespread attention when regulators made an exception and opened up leveraged ETFs for individual stocks at the end of May, to the current mess of parliamentary deliberations on delisting and regulators issuing public apologies, the South Korean stock market has followed a steep parabolic trajectory in just six weeks. This financial farce exposed the structural wounds of the South Korean stock market, characterized by high concentration and rampant leverage, and served as a wake-up call for the regulation of leveraged products amidst the global trend of retail investing. The deregulation of regulations forced by capital flight. Let's rewind two months. The introduction of individual stock leveraged products in South Korea was essentially a defensive measure. Radical financial reforms are often accompanied by institutional frustration and anxiety. For a long time, South Korean retail investors, dissatisfied with the prolonged stagnation of the domestic stock market, have withdrawn large amounts of funds and invested in overseas leveraged markets, especially leveraged and inverse ETFs listed in the US and Hong Kong. Among them, the SK Hynix double-leverage product issued in Hong Kong by CSOP was the most sought-after, attracting a massive amount of South Korean intraday trading funds in a short period of time. Its asset size once exceeded US$13 billion, making it the world's largest single-stock leveraged investment tool. On one hand, the domestic market continued to drain funds, and the Korean won faced high pressure to depreciate; on the other hand, retail investors had a strong demand for leveraged products. The policy balance of South Korean financial regulators began to shift. On April 28, the Financial Supervisory Service (FSS) officially revised the long-standing "single-stock leverage ban": It raised the maximum single-stock holding limit for index-based products from 30% to 100% and removed the mandatory threshold of 10 constituent stocks, clearing compliance obstacles for leveraged products linked to tech giants with 2x leverage and inverse products. At that time, the semiconductor industry was riding the wave of artificial intelligence (AI). Fueled by surging demand for AI computing power and breakthroughs in high-performance, high-bandwidth memory (HBM) technology, Samsung Electronics and SK Hynix achieved record-high performance, pushing bullish expectations to their peak. On May 27, South Korean financial authorities officially approved eight major asset management institutions to issue the first batch of 16 domestically produced 2x leveraged and inverse products linked to Samsung and SK Hynix. To curb excessive speculation, regulators have implemented several measures: 1. Prohibiting the use of the traditional term "ETF" in product names to differentiate them from diversified investment funds; 2. Requiring investors to deposit a margin of 10 million Korean won; 3. Mandatory completion of a two-hour investor education course. These thin protective barriers proved ineffective against the near-frenzied speculative fervor of retail investors. High concentration and high leverage have backfired on the South Korean stock market, making retail investors daily sacrifices for rebalancing. Ahn Cheol-soo pointed out that Samsung Electronics and SK Hynix together account for approximately 60% of the total market capitalization of KOSPI. Adding leverage to this top-heavy structure is equivalent to equipping the entire index with an amplifier. This means that any slight disturbance will be amplified exponentially throughout the entire market. As of early July, the amount of funds flowing into leveraged products for Samsung Electronics and SK Hynix had reached 212 trillion won, accounting for approximately 26.6% of the total trading volume of South Korean ETFs. However, all 14 leveraged products recorded negative returns one month after listing, with the largest loss reaching 35.9%. On July 7th, 13 of them even fell below their issue price of 20,000 won. That day, the combined trading volume of leveraged and inverse products of these 16 stocks reached 13.11 trillion won, exceeding one-third of the total trading volume of all ETFs in the market. Even more perplexing is that from its listing until July 3rd, even though Samsung Electronics stock rose by approximately 0.81%, the KODEX Samsung Electronics leveraged product actually fell by 10.75%. The underlying stocks are rising, but the leveraged product is losing money. This means that the "daily rebalancing" mechanism of leveraged products has become a curse that preys on retail investors. To maintain a 2x risk exposure, leveraged products must perform programmed rebalancing before the close of each trading day: passively adding positions when stock prices rise and mechanically selling when stock prices fall. In volatile market conditions, this mechanism generates a "negative compounding effect," with net asset value continuously declining due to rebalancing losses. As long as the underlying stocks are in a wide range of fluctuations rather than a one-sided upward trend, the net asset value of the leveraged product will continue to evaporate. As of July 6, the total net assets of 16 leveraged ETFs were approximately 14.91 trillion won, a 15.3% decrease from 17.6 trillion won on June 25, representing a loss of about 3 trillion won. The destructive power of leveraged products not only causes losses for retail investors but also negatively impacts the entire market. Trading monitoring data from UBS and Barclays shows that during market volatility in early March and mid-May, the volume of algorithmic portfolio adjustments in the last half hour before the close accounted for 60% and 17% of the total spot trading volume of SK Hynix, respectively. The portfolio adjustments of leveraged products have deviated significantly from the fundamentals of the underlying assets, directly evolving into irrational sell-offs or rallies driven by impulsive, "tail wagging a dog" tactics. The KOSPI volatility index surged to a historical extreme of 90.8 to 95 in mid-June, indicating a highly emotional and speculative market. This year, the South Korean stock market has triggered a market-wide circuit breaker five times, while this mechanism has only been triggered 11 times in total since its implementation; another mechanism, the "sidecar" suspension mechanism for algorithmic trading, has also been triggered more than 30 times this year. Brokerages rake in commissions, retail investors suffer heavy losses. Any financial spectacle can be broken down into a ledger of corresponding gains and losses: in the South Korean stock market, brokerages made a fortune, while retail investors suffered devastating losses. Policy reforms did indeed achieve the goal of retaining funds in the short term. After the launch of leveraged products, their scale rapidly expanded to 14 trillion won (approximately US$9.1 billion), validating the huge demand for leveraged tools among domestic retail investors. High turnover rates and secondary market premiums also provided ample arbitrage opportunities for quantitative funds and market makers, to some extent increasing pricing participation in the leveraged sector of the Korean stock market. Among them, the biggest winners were securities firms. According to FSS estimates, in the first month after launch, domestic securities firms earned as much as 5-10 trillion won (approximately US$3.3-6.6 billion) in commissions from related transactions, injecting a strong boost into the long-sluggish securities industry. "Those who operate the system are making money hand over fist, while the retail investors who actually participate are not making any money at all." Just as Lee Chan-jin later lamented, the cost was far heavier than the gains. Among the holders of leveraged products, 92% were retail investors. They used their meager savings, strangled by information asymmetry and systemic flaws, becoming the ones who footed the bill in this financial experiment. 1. International capital accelerates its withdrawal, damaging the credibility of the South Korean stock market: Data from the Wall Street Journal shows that the withdrawal of over $10 billion in foreign capital in the first half of 2026 is a signal that mainstream global funds are voting with their feet. Yesterday (July 7), foreign investors sold nearly $1.5 billion in the South Korean stock market, driving down overall stock prices. Ahn Cheol-soo pointed out that if the "rollercoaster-like KOSPI" continues, the South Korean market will be viewed by global institutional investors as an unpredictable "junk stock market." 2. Increased Market Concentration and One-Sided Risk: On July 2, the semiconductor sector suffered a blow, with the KOSPI falling over 5% within just 10 minutes of opening, triggering a circuit breaker. Programmed selling pressure from leveraged products played a key role in this. The Bank of Korea warned that the continued expansion of individual stock leveraged products could further exacerbate market concentration, increase market volatility, and amplify the risk of losses for retail investors. 3. Liquidity Mismatch and High Premium Trap Create Valuation Illusion: On June 8th, due to a large amount of capital chasing the price up and insufficient liquidity, ACE SK Hynix leveraged products once saw an 86% premium in the secondary market, with most retail investors buying at high prices. The next day, the premium quickly returned to normal, and even the rebound of the underlying asset could not cover the overdrawn premium. Retail investors not only failed to profit, but also suffered a 27% loss of principal.
Regulatory "crackdown" on leveraged products may trigger a new wave of capital flight from retail investors
As retail investors' assets shrink across the board, calls for accountability from all sectors of South Korean society for the financial regulatory authorities have reached a peak.
FSS Director Lee Chan-jin admitted at a media briefing in June that, in his eagerness to stabilize the exchange rate and intercept capital outflows, the regulatory authorities "responded hastily" during the product review process.
Regulatory "crackdown" on leveraged products may trigger a new wave of capital flight from retail investors
At a media briefing in June, FSS Director Lee Chan-jin admitted that, in order to stabilize the exchange rate and intercept capital outflows, the regulatory authorities "responded hastily" during the product review process.
Currently, the National Assembly has formally launched an in-depth review of individual stock leveraged products, with discussions focusing on rectification within a specified period and even mandatory delisting. Meanwhile, the Financial Supervisory Service has also urgently convened CEOs of major South Korean asset management institutions to discuss emergency safety net mechanisms. The regulatory authorities have proposed three main corrective measures: 1. Raising the investment threshold for retail investors: Significantly increasing margin requirements or setting a hard limit on the total amount of individual derivatives positions; 2. Slowing down the pace of expansion of derivatives instruments: The Korea Exchange has announced a postponement of the launch of weekly options on four super-weighted stocks, originally scheduled for the end of June, to prevent multiple derivatives from forming arbitrage chains and causing a secondary stampede in the spot market. 3. Guiding product diversification: In principle, no new individual stock leveraged products will be approved, and the quotas for existing products will be gradually locked. At the same time, restrictions on actively managed portfolio products with a correlation coefficient of less than 0.7 will be relaxed to guide retail investors back to multi-asset allocation. However, overseas asset management companies hold different views on the remedial actions of the Korean regulators. Li Jizhong, Executive Director of CSOP Asset Management in Hong Kong, bluntly stated: Even if South Korea implements a strong crackdown, it may be futile. External markets like Hong Kong offer more flexible tax advantages and longer trading hours. Forcing the delisting of domestic leveraged products could easily trigger another "mass exodus of retail funds," with capital flowing back to overseas leveraged markets. KOSPI spent six weeks transforming its "innovation testing ground" into a "casino." In this casino, the most expensive stake is the trust of investors. History has repeatedly proven that liquidity built on leverage will ultimately be repaid with more dramatic fluctuations; markets propped up by attracting gamblers will eventually be voted out by rational capital.
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