Leverage Concerns in a Soaring Bull Market: Will Korean Stock Risks Spread?

In late June, South Korea's stock market, a bellwether for the global AI hardware cycle, experienced a violent leveraged storm. The KOSPI index surged to a record high of 9,000 points last Monday before sharply reversing, plunging 10% on Tuesday and triggering a circuit breaker. It recovered most of the losses on Thursday, only to crash another 8% on Friday, causing a second circuit breaker. The Korea Exchange has triggered circuit breakers only 11 times since 2000, but last week alone accounted for two, bringing the year-to-date total to five.

During this extreme volatility, the two dominant chip giants—Samsung Electronics and SK Hynix—bore the brunt, both recording single-day drops of over 12%, contributing 71% of the index's total decline. The volatility of the South Korean stock market surged to 92.7, surpassing even the peak during the 2008 global financial crisis and reaching five times the U.S. VIX index.

In particular, Samsung Electronics and SK Hynix together account for nearly 60% of the KOSPI index's weight, effectively turning the South Korean stock market into a leveraged call option on semiconductors: when global risk appetite rises, it is the best-performing market globally; but when global tech stocks pull back, it quickly becomes the first market to suffer a stampede.

Under extremely high leverage and extremely crowded trading structures, the traditional price discovery function of the Korean stock market has been significantly impaired. Any pullback is no longer a repricing of fundamentals but is amplified by mechanical selling from leveraged ETFs. This means that any trading activity targeting Samsung or SK Hynix—whether buying or selling—will impact the index with nearly double the leverage effect. Under this negative gamma effect, intraday swings of more than 5% in the KOSPI index have become common. The recent frequent circuit breaker events are a true reflection of this structural fragility.

With regulatory approval and extreme capital enthusiasm, to what extent has leverage expanded?

The South Korean financial market has relatively lenient mechanisms, providing investors with various ways to leverage both on and off the exchange. The former includes margin trading through securities firms, leveraged ETFs, on-exchange futures and options, while the latter includes CFDs (Contracts for Difference), securities-backed loans, off-exchange options/TRS, etc. For example, the minimum margin requirement for Korean securities firms' margin trading is 40%, with a theoretical maximum leverage of 2.5 times, lower than China (100%) and the U.S. (50%); as for leveraged ETFs, domestic Korean ETFs offer up to 2x leverage, while overseas ETFs offer up to 3x leverage.

To attract domestic retail capital back to the local market, since the end of January this year, when Korean regulators approved single-stock leveraged ETFs based on blue-chip stocks, a large number of derivative instruments designed to provide double the daily return have quickly entered the market.