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

In late June, the South Korean stock market—an indicator of the global AI hardware cycle—was hit by a violent leverage storm. After the KOSPI index climbed to a record high of 9,000 points last Monday, it reversed sharply; on Tuesday it plunged by 10%, triggering a circuit breaker. On Thursday it recovered more than half of the losses, and on Friday it sank again by 8%, triggering a second circuit breaker. Since 2000, the Korea Exchange has triggered the circuit breaker mechanism only 11 times; however, last week alone accounted for two, bringing the year-to-date total to 5.

During this round of extreme volatility, the two chip giants that dominate the market—Samsung Electronics and SK Hynix—were hit first. Both recorded single-day declines of more than 12%, and the two companies contributed 71% of the total index drop. South Korea’s stock market volatility surged to 92.7, even surpassing the peak during the 2008 global financial crisis, and reaching five times that of the U.S. VIX index.

In particular, Samsung Electronics and SK Hynix together account for nearly 60% of the KOSPI index’s weight, which has effectively turned the South Korean stock market into a leveraged semiconductor call option: when global capital’s risk appetite rises, it becomes the best-performing market globally; when global tech stocks pull back, it quickly becomes the market first trampled by the rush.

With extremely high leverage and a highly crowded trading structure, the traditional price-discovery function of the South Korean stock market has been significantly weakened. Any pullback is no longer a reassessment of fundamentals; instead, it is amplified by the mechanical selling of leveraged ETFs. This means that any trading activity targeting Samsung or SK Hynix—whether buying or selling—will hit the index with nearly double the leverage effect. Under this negative gamma effect, intraday swings of over 5% in the KOSPI index have become commonplace. The frequent circuit breaker events occurring in the recent period are a true reflection of this structural fragility.

How far has leverage expanded under regulatory clearance and extreme enthusiasm for capital?

Korea’s financial market mechanisms are relatively relaxed, offering investors abundant ways to add leverage both on-exchange and off-exchange. The former includes margin financing via brokerages, leveraged ETFs, and on-exchange futures and options; the latter includes CFDs (contracts for difference), securities-backed loans, and off-exchange options/TRS, among other methods. For example, in Korea, the margin ratio for brokerage financing is not less than 40%, with a theoretical maximum leverage of 2.5x—lower than China (100%) and the U.S. (50%). As for leveraged ETFs, domestic Korea-based ETFs offer up to 2x leverage, while overseas ETFs offer 3x leveraged ETFs.

To attract domestic retail capital back to the local market, since late January this year, when Korean regulators approved single-stock leveraged ETFs based on blue-chip stocks, a large number of derivatives designed to provide daily double-digit-style (two-times) returns have entered the market quickly.