Middle East Tensions Escalate Triggering Huge Shakeup in Korean Stocks: Kospi Plummets Nearly 20% Over Two Days as Short Selling Surges

According to the latest data from the Korea Exchange (KRX), on Tuesday, March 3rd, the first trading day after the United States and Israel launched attacks on Iran (markets were closed on Monday), the short selling volume in the Korean stock market reached 2.46 trillion KRW (approximately $16.6 billion), an increase of 518 billion KRW (about $3.5 billion) from the previous trading day.

As the situation in the Middle East continues to worsen, market risk aversion has intensified. As of Wednesday, March 4th, the Korea Composite Stock Price Index (KOSPI) fell 11.04% to 5,152.48 points, triggering the circuit breaker mechanism at one point during the day. The previous day’s decline also exceeded 7%. This is the largest two-day decline since the global financial crisis in 2008.

Short selling is an investment strategy where securities are borrowed and sold first, then repurchased at a lower price to repay. Short sellers profit from falling stock prices. On Tuesday alone, the short selling volume showed a clear upward trend compared to the average daily volume of 1.9 trillion KRW in 2025.

Future volatility will increase

Over the past year, driven by the AI boom, the Korean stock market performed strongly. Since the beginning of this year, the KOSPI index once rose nearly 50% at its peak, making it one of the best-performing major stock markets globally, with significant gains driven by increased demand for storage chips, boosting Samsung Electronics and SK Hynix stock prices.

However, recent conflicts in the Middle East have pushed oil prices higher. As the eighth-largest oil consumer in the world, South Korea may face increased import costs due to rising energy prices, prompting investors to reassess risk assets.

Analysts say that market expectations are for increased volatility in the Korean stock market moving forward, and the Korean won is also expected to depreciate sharply (the won once fell to its lowest level since 2009). These factors are fueling demand for short selling.

Lee Kyoung-min, an analyst at DaShin Securities, stated, “Given the significant rise of the Korea Composite Stock Price Index in January and February, it is currently in a phase where temporary policy relaxation is needed to prevent overheating.”

An Hyungjin, CEO of Billionfold Asset Management in Seoul, said, “Market volatility is too extreme now, making it almost impossible to predict trends, and traditional analysis is also ineffective. Retail investors are hesitant, and buying activity has noticeably decreased.”

Notably, retail investors previously used margin financing to buy stocks heavily, with data showing that margin balances reached historic highs before the market correction. However, with the sharp decline in stock prices now, these leveraged positions face risks of margin calls or forced liquidation.

Kim Dojoon, CEO and Investment Director of Zian Investment Management in Seoul, pointed out that many investors are only financing stock purchases with 30% to 40% margin. If stock prices continue to fall, more forced liquidations could be triggered.

(Source: Cailian Press)