The South Korean stock market continues to experience a "rollercoaster" ride. This month, the KOSPI index has recorded an average daily fluctuation of 3.9%, marking unprecedented volatility. Analysts attribute this instability to a concentration of trading in Samsung Electronics and SK Hynix, as well as the impact of single-stock leverage ETFs based on these companies.
According to the Korea Exchange, from June 1 to 26, the KOSPI's average daily fluctuation rate was 3.88% over 19 trading days. Days with fluctuations exceeding 4% occurred on nearly half of those days, with three instances of movements over 8%.
On June 8, the index plummeted by 8.29%, only to rebound by 8.18% the following day. On June 23, it fell by 9.99%, marking the largest single-day drop in history with a decline of 910.71 points. The index then surged by 5.42% on June 25, before dropping again by 5.81% on June 26, showcasing a pattern of rapid reversals.
Market safety mechanisms have been triggered frequently. This year, the sidecar mechanism has been activated 29 times in the securities market, surpassing the annual record of 26 set during the global financial crisis in 2008. Last week, both buy and sell sidecars were triggered within a day of each other, and circuit breakers were also activated.
Notably, this month saw three instances of circuit breakers being triggered, marking the first time in a month that trading was halted three times. Circuit breakers are designed to temporarily suspend trading to prevent panic selling when stock indices drop sharply. While they have been activated during major crises such as the Asian financial crisis, the global financial crisis, and the COVID-19 pandemic, they were only triggered six times from 2000 to last year. This year alone has seen five activations, including two in March and three in June.
The primary cause of this volatility is the concentration of trading in large-cap semiconductor stocks. As of June 26, Samsung Electronics and SK Hynix accounted for 56.48% of the KOSPI's market capitalization. The significant daily price movements of these stocks have caused substantial fluctuations in the overall index. In this context, the Korean version of the volatility index, VKOSPI, surged to 97.78, the highest level since the global financial crisis.
Additionally, the recent launch of single-stock leverage ETFs for Samsung Electronics and SK Hynix on May 27 has further amplified volatility. On June 26, trading volume for 16 single-stock leverage ETFs reached 16.4 trillion won, accounting for 35.2% of total ETF trading volume. The previous day, this figure peaked at 40.9%. The net assets of these ETFs grew from 5 trillion won on their first day to 17.6 trillion won within a month.
Market observers report that a "short gamma" structure is exacerbating volatility. Leverage ETFs adjust their underlying asset ratios just before market close to maintain a daily return of twice the benchmark. This means that when stock prices rise, they buy more, and when prices fall, they sell more, which can amplify gains in bull markets and losses in bear markets.
Financial authorities are also responding. Lee Chan-jin, head of the Financial Supervisory Service, recently expressed regret regarding single-stock leverage ETFs and indicated plans to enhance investor protection measures. The Board of Audit and Inspection is also conducting an audit of the introduction and oversight of these ETFs by the Financial Services Commission and the Financial Supervisory Service.
* This article has been translated by AI.
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