Leveraged Products Trigger Dramatic Stock Market Shifts: How Did the Korean Stock Market Become a 'Casino'?

Author: Jae, PANews

On July 8, South Korea’s stock market continued its downward trend. The Korea Composite Stock Price Index (KOSPI) briefly fell below 7,200 points, dropping more than 6% intraday. Since the June peak, it has accumulated losses of over 20%, entering a technical bear market.

Known for high volatility and high retail participation, South Korea’s stock market has fallen into an unprecedented trust crisis, triggered by leveraged ETFs tied to individual stocks.

Ahn Cheol-soo, a lawmaker from the People Power Party and a former presidential candidate, even openly attacked the situation on social media: KOSPI has “completely turned into a casino.” He strongly called for strong corrective measures, including delisting, for 2x leveraged products tied to individual stocks such as Samsung Electronics and SK Hynix.

From the widely watched regulatory exception that opened up single-stock leveraged ETFs in late May, to the current chaos of parliamentary deliberations on delisting and public regulatory apologies, the South Korean stock market has drawn a steep parabola in just six weeks.

This financial farce has laid bare the structural damage of a highly concentrated and out-of-control leveraged market in South Korea, and it also serves as a warning bell for the regulation of leveraged products amid the global wave of retail investors.

Deregulation Forced by Capital Flight

Rolling the lens back to two months ago, the rollout of single-stock leveraged products in South Korea was, in essence, a defensive measure.

Radical financial change is often accompanied by institutional helplessness and anxiety. For a long time, South Korean retail investors, dissatisfied with the long period of sideways movement in the local stock market, have withdrawn large amounts of capital and invested in overseas leveraged markets—especially leveraged and inverse ETFs listed in the United States and Hong Kong. Among them, the 2x leveraged product on SK Hynix issued in Hong Kong by CSOP (Southern Fund International) has been the most popular. In a short time, it siphoned off a massive amount of intraday trading capital from South Korea; its assets under management once exceeded $13 billion, jumping to become the world’s largest single-stock leveraged investment tool.

On one side, the local market keeps bleeding with mounting pressure on the value of the Korean won. On the other side, retail investors have an intense demand for leveraged products. The policy balance of South Korea’s financial regulators began to tilt. On April 28, the Financial Supervisory Service (FSS) formally revised the long-standing “single-stock leverage ban”: raising the individual-stock position limit for index-type products from 30% to 100%, and removing the hard threshold for 10 constituent stocks—clearing regulatory compliance hurdles for 2x leveraged and inverse products tied to technology giants.

At that time, the semiconductor industry was riding the boom created by artificial intelligence (AI). With soaring demand for AI computing power and breakthroughs in high-bandwidth memory (HBM) technology, Samsung Electronics and SK Hynix both set record-high earnings, pushing bullish expectations to their peak.

On May 27, South Korea’s financial authorities officially approved eight mainstream asset management institutions to issue the first batch of a total of 16 domestic 2x leveraged and inverse products tied to Samsung Electronics and SK Hynix.

To curb excessive speculation, regulators set “firewalls” in form:

1. Prohibiting the direct inclusion of the traditional “ETF” term in product names, to distinguish from diversified investment funds;

2. Requiring investors to deposit a 10 million Korean won margin;

3. Mandating that investors complete a 2-hour investor education course.

But these thin guardrails, in the face of retail investors’ near-crazy speculative enthusiasm, proved all but meaningless.

High Concentration + High Leverage Backfire on the South Korean Market: Retail Investors as Daily Rebalancing Sacrifices

Ahn Cheol-soo pointed out that Samsung Electronics and SK Hynix together account for about 60% of KOSPI’s total market capitalization. In such a “top-heavy” structure, layering leverage on top is like installing an amplifier for the entire index. This means that any small fluctuation will be multiplied and spread across the entire market.

As of early July, the capital flowing into leveraged products for Samsung Electronics and SK Hynix had reached 212 trillion Korean won—about 26.6% of the total trading value of ETFs in South Korea. However, 14 leveraged products all recorded negative returns one month after listing, with the largest loss reaching 35.9%. On July 7, 13 of them even fell below their issue price of 20,000 Korean won. On that day, the combined trading value of 16 single-stock leveraged and inverse products was 13.11 trillion Korean won, exceeding one-third of the total ETF trading value across the entire market.

Even more perplexing is that from the time of listing until July 3, although Samsung Electronics shares rose by about 0.81%, the KODEX Samsung Electronics leveraged product actually fell by 10.75%.

Underlying stocks were rising, but the leveraged products were losing money. This means the leveraged products’ “Daily Rebalancing” mechanism has become a curse that harvests retail investors.

To maintain 2x risk exposure, leveraged products must undergo programmed rebalancing before the close of each trading day: when the stock price rises, they passively add exposure; when the stock price falls, they mechanically sell. In a choppy market, this mechanism creates a “negative compounding effect,” with net asset value continuously eroding due to rebalancing losses. As long as the underlying assets are range-bound with wide fluctuations rather than moving steadily upward, the net value of leveraged products will keep evaporating.

As of July 6, the total net assets of the 16 single-stock leveraged ETFs were about 14.91 trillion Korean won, down 15.3% from 17.6 trillion Korean won on June 25—roughly shrinking by about 3 trillion Korean won.

The destructive power of leveraged products does not only make retail investors lose money; it also rebounds on the entire market. Trading monitoring data from UBS and Barclays shows that during the market turmoil in early March and mid-May, the programmed rebalancing flow in the half hour before the close accounted for 60% of SK Hynix’s total spot trading volume and 17%, respectively.

The rebalancing behavior of leveraged products deviated sharply from the fundamentals of the underlying assets, directly evolving into irrational sell-offs or buy-ins—“wagging the tail of the dog.” The KOSPI fear index once surged to historical extremes of 90.8 to 95 in mid-June, pushing the market into a highly emotional game-like state. Since the beginning of this year, the South Korean stock market has triggered market-wide circuit breakers 5 times. And since the mechanism was implemented, it has triggered only 11 times in total. Another “sidecar” suspension mechanism targeting programmatic trading has also been triggered more than 30 times within the year.

Brokers Take the Commissions; Retail Investors Lose Everything

Any financial spectacle can be broken down into a ledger of benefits and costs. In the South Korean stock market, brokers profit handsomely, while retail investors suffer severe losses.

The policy reform has indeed achieved its goal of intercepting capital in the short term. After leveraged products launched, their scale quickly ballooned to 14 trillion Korean won (about $9.1 billion), validating the massive demand for leveraged instruments among local retail investors. High turnover rates and secondary-market premiums also provided abundant arbitrage space for quantitative funds and market makers, to a certain extent increasing the market’s participation in pricing in the leveraged segment.

Among them, the biggest winner is brokers. According to FSS estimates, in the first month after launch, the commissions earned by domestic brokers from related trading were as high as 5–10 trillion Korean won (about $3.3–6.6 billion), injecting a strong shot of adrenaline into the long-depressed brokerage industry.

“Those who operate the systems are lying back counting money, while the retail investors who truly participate can’t make any money.” As Lee Chan-chan later bitterly criticized, the cost is far heavier than the gains. Among holders of leveraged products, 92% are retail investors. Under the double squeeze of information asymmetry and mechanism flaws, they become the ones paying for this financial experiment with their meager savings.

1. International capital accelerates withdrawal, damaging the reputation of the Korean stock market: According to The Wall Street Journal, the wave of withdrawals of more than $10 billion by foreign capital in the first half of 2026 is a signal that global mainstream funds are voting with their feet. Yesterday (July 7), foreign capital sold nearly $1.5 billion worth of South Korean stocks again, pushing the overall share prices down. Ahn Cheol-soo pointed out that if this “roller-coaster KOSPI” continues, the South Korean market will be viewed by global institutional investors as an unpredictable “junk stock market.”

2. Rising market concentration and increasing one-sided risk: On July 2, the semiconductor sector was hit by negative news. Just 10 minutes after the market opened, KOSPI fell by more than 5%, directly triggering a circuit breaker. The programmed sell pressure from leveraged products played a key supporting role. The Bank of Korea warned that the continued expansion of single-stock leveraged products could further increase market concentration, intensify market volatility, and amplify the risk of losses for retail investors.

3. Liquidity mismatch and high-premium traps create phantom valuations: On June 8, due to a rush of funds chasing gains and insufficient liquidity, the ACE SK Hynix leveraged product once showed an 86% premium in the secondary market, and most retail investors ended up buying at high prices. The very next day, the premium quickly reverted. Even if the underlying rebounded, it could not offset the premium erosion. Retail investors not only failed to profit, but also endured 27% principal evaporation.

Regulatory “Crackdown” on Leveraged Products May Trigger Another Round of Retail Capital Flight

As retail investors’ assets shrink across the board, public calls for accountability toward financial regulators in South Korea have reached their peak.

At a media briefing in June, FSS Governor Lee Chan-chan admitted that, driven by urgency to stabilize the exchange rate and intercept capital outflow, regulators “handled the situation hastily” during the product review process.

Currently, the National Assembly has officially begun an in-depth review of single-stock leveraged products. The discussion focuses on measures including deadline-based rectification, and even compulsory delisting. At the same time, the Financial Supervisory Service has urgently convened CEOs of major asset management institutions in South Korea to consult on an emergency safety cushion mechanism.

There are mainly three directions for correction proposed by regulators:

1. Raise the investment threshold for retail investors: significantly increase margin requirements, or set a hard proportional cap on the total positions of individual derivatives;

2. Slow the pace of expanding derivative instruments: the Korea Exchange has already announced a delay in launching four weekly options on “super-heavyweight” stocks originally scheduled for late June, to prevent multiple derivatives from forming arbitrage chains and causing secondary stampedes into the spot market;

3. Guide products toward diversification: in principle, no new single-stock leveraged products will be approved, and the quota for existing products will be gradually locked down. At the same time, restrictions on actively managed portfolio products with correlation coefficients within 0.7 will be loosened to guide retail investors back toward multi-asset allocation.

However, overseas asset management firms have different views on South Korea’s regulatory remediation actions. Li Jizhong, Executive Director of CSOP Asset Management in Hong Kong, said bluntly that even if South Korea implements a crackdown with an iron fist, it may be futile. External markets such as Hong Kong offer more flexible tax advantages and longer trading hours. Forced delisting of domestic leveraged products is likely to trigger another “mass exodus of retail capital,” causing funds to flow back to overseas leveraged markets.

In six weeks, KOSPI used an “innovation test field” to become a “casino.” In this casino, the most expensive chip is investors’ trust.

History repeatedly proves this: liquidity built on leverage will ultimately be repaid with even more violent volatility; and a market propped up by attracting gamblers will ultimately be abandoned by rational capital voting with their feet.