Korean stocks plummet as a warning sign; Nomura: U.S. stocks may face large-scale passive selling of leveraged ETFs.

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The South Korean stock market suffered a "Black Tuesday," with blue-chip giants Samsung Electronics and SK Hynix both plunging over 10%, triggering intraday circuit breakers. While the market is still digesting the sharp volatility, Nomura’s quantitative team warned: The US market may face similar risks. If volatility rises further, large-scale rebalancing trades from leveraged ETFs could trigger passive sell-offs.

According to Reuters, South Korean regulators earlier admitted to hastily approving leveraged ETFs linked to Samsung Electronics and SK Hynix, which exacerbated market speculation and volatility. Financial Supervisory Service chief Lee Chang-jin even said, “Perhaps I should lie on the ground to stop it.” On Tuesday, after overseas investors dumped chip stocks, the KOSPI index closed down about 10%, the largest one-day drop in three months. Samsung Electronics and SK Hynix lost hundreds of billions of dollars in market value, triggering a 20-minute trading halt on the Korea Exchange.

As for the US market, Nomura cross-asset strategist Charlie McElligott’s team is concerned that similar leveraged fund structures are also accumulating risks. Nomura’s latest quantitative team report says if the market falls further, passive deleveraging from leveraged ETFs could create “mechanical selling,” amplified through the futures and volatility markets.

Concerns Sparked by Korean Stock “Black Tuesday”

This Tuesday, the South Korean stock market saw a dramatic correction.

Previously, the KOSPI index had just broken historic highs of 9100 points driven by the AI boom, but the market’s structure had become highly concentrated. Samsung Electronics and SK Hynix account for over half the market value of South Korea’s stock market. Combined with heated retail margin and leveraged ETF activity, market fragility was rising.

This sell-off in Korean stocks was not an isolated event—it was compounded by global macro uncertainties, geopolitical risks, and a sudden shift in investor sentiment.

The volatility in Korea sent immediate signals to global asset pricing systems. As a key export-oriented economy, Korea’s market performance is often viewed as a barometer of global risk appetite. The plunge rapidly pushed implied volatility indicators higher—precisely the trigger for downstream leveraged products’ forced trading.

CLSA chief strategist Alexander Redman remarked: “Volatility is out of control; this level of price swing can’t be explained without massive retail involvement.” He especially noted: even more concerning is that regulators allowed single-stock leveraged ETFs, adding fuel to the fire.

Regulators in Korea had already warned investors against excessive leverage. By June, the margin lending balance in Korea had hit record highs.

Nomura Quantitative Model: Momentum Selling Mechanism of Leveraged ETFs

Nomura’s quantitative strategists gave a detailed analysis of the structural risks of leveraged and inverse ETFs. These products must rebalance daily to maintain a fixed leverage ratio, which means that when the underlying asset drops, funds must sell their stock exposures before market close the same day; when the market rises, they must buy.

Nomura’s models show that at current volatility levels, intraday rebalancing by US leveraged ETFs may result in large-scale one-way sell-offs, especially concentrated in the final hour before the US close. This period is already one of concentrated, but fragile, liquidity—large-scale mechanical sell orders can easily put extra downward pressure on the index.

It’s noteworthy that Nomura emphasizes this forced selling is not driven by fundamentals, but is purely passive, mechanical trading dictated by product structure—though its impact on market prices is essentially the same as that of active selling.

Rising Volatility Is the Core Transmission Link

The core logic of Nomura’s quantitative analysis is: volatility determines the scale of forced rebalancing for leveraged ETFs. The higher the volatility, the larger the notional exposure that must be rebalanced, and the stronger the resulting buy/sell pressure.

The collapse in Korea boosted global volatility expectations, which in turn affected US equities’ implied volatility through correlation channels. If US volatility rises in tandem, leveraged ETFs tracking the S&P 500, NASDAQ, and other major indices will be forced to conduct mass rebalancing in the same narrow time window, creating a resonance effect.

Nomura’s model estimates that if volatility remains at current levels, related forced selling could reach tens of billions of dollars. For institutional investors, this means they need to pre-assess liquidity risks around market close and manage positions prudently.

Potential Impact on the US Market

Nomura’s warning focuses market attention on a risk source rarely discussed in the mainstream: the leveraged ETF market has grown large enough to influence the underlying market under certain conditions.

The size of these products has exploded in recent years, with 2x and 3x leveraged ETFs tracking major US indices attracting huge inflows from both retail and some institutional investors. When markets are calm, intraday rebalancing effects are typically absorbed by liquidity; but in the face of surging volatility, this amplifying mechanism becomes much more pronounced.

Nomura’s analysis advises investors that external shocks (like the one from Korea) can, via volatility and the mechanical rebalancing of leveraged ETFs, create extra, non-fundamentally driven price pressure during the US close. This is an underappreciated tail risk in the current market structure. For traders active late in the US session, this warning is directly actionable.

Risk Warning and DisclaimerMarkets are risky and investments should be made cautiously. This article does not constitute personal investment advice and does not consider the unique investment goals, financial situation, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their specific circumstances. You bear sole responsibility for your decisions based on this article. ```