Mandating "5 days of simulated trading"! South Korea employs various methods to "cool down" leveraged ETFs.

South Korean regulators are using a series of cumbersome entry requirements to curb the leveraged ETF craze that once caused severe market turmoil. Mandatory simulated trading requirements have become the "last straw" that broke the camel's back for retail investors, with trading volume for related products plummeting by more than 90% from its peak.

According to a Bloomberg report on August 29, the combined trading volume of leveraged ETFs linked to Samsung Electronics and SK Hynix fell to 4% of their June peak in August and is set to record its first monthly net outflow since listing. As of August 27, the combined assets under management of these ETFs had shrunk from a peak of $11.4 billion at the end of June to $5 billion, with a net outflow of approximately $1 billion in August alone .

The latest tightening measure is the mandatory simulated trading rule that took effect on August 19th —investors must download a special program on a Windows-only PC, complete at least one hour of virtual trading practice daily for five consecutive days to qualify for trading. Several South Korean retail investors stated that this hurdle is "too cumbersome," immediately deterring them from participating. Bloomberg Intelligence analyst Rebecca Sin stated, "With regulators continuing to tighten rules, capital outflows are likely to continue in the short term. South Korean authorities have shifted from supporting such products to actively curbing them."

It is worth noting that the regulatory cooling measures have begun to show results. The volatility index of the Korea Composite Stock Price Index (Kospi) has fallen from its peak of 97 at the end of June to a four-month low of around 50, indicating a significant improvement in market stability.

From "traffic-driving tool" to "political hot potato"

These leveraged ETFs were initially launched in May of this year with the aim of attracting retail investors back to the local market. However, the products quickly caused market chaos after their launch—at their peak, the combined trading volume of the two underlying stocks, Samsung Electronics and SK Hynix, and their leveraged ETFs accounted for more than 80% of the total trading volume of South Korea's $4.3 trillion stock market , triggering violent price fluctuations.

These two chip giants are key nodes in the global AI supply chain, and their leveraged products promised returns of up to twice the daily price fluctuations of the underlying stocks, quickly attracting a large influx of retail investors . However, with multiple rounds of sell-offs in global tech stocks—mainly due to market concerns about the high capital expenditures and commercialization prospects of the AI sector—the net asset value of related ETFs shrank significantly, and the products went from being market darlings to being seen as potential risks by regulators.

Regulatory "combination punches": from raising margin requirements to mandatory demo trading

In response to market irregularities, South Korean regulators have introduced a series of tightening measures since July. Early measures included raising the minimum margin requirement, requiring investors to hold at least 30 million won (approximately US$22,000) in cash to participate in trading.

The latest and most arguably most intimidating regulation is the mandatory completion of a five-day simulated trading course. This system provides investors with 100 million won (approximately US$73,000) in virtual funds, allowing them to experience firsthand the risks of leveraged trading, particularly the so-called "volatility decay" effect—the mechanism by which holding leveraged products for extended periods in volatile markets leads to a continuous erosion of returns.

However, the system's high barrier to entry deters many retail investors. The program is only available for download on PCs and not on mobile devices; the Korean exchange has also stated that it has no plans to launch a mobile platform at this time.

Retail investors: The entry barrier is too high, so I'm giving up.

According to reports, the personal experiences of many retail investors vividly demonstrate the actual effects of this policy.

Kim Jung-hoon, a 41-year-old retail investor living in Gyeonggi Province, a suburb of Seoul, said that his first reaction upon hearing about the mandatory demo trading requirement was, "I won't try it, it's too much trouble."

"It takes so much time every day, and I can only download on my PC. My work computer can't install external programs, and bringing an extra laptop to work isn't practical."

Another retail investor, who only revealed his surname as Lee, said he had met all the other prerequisites, including the minimum cash deposit of 30 million won, but got stuck at the demo trading stage.

"You have to download the program, there's a minimum time requirement, and you also have to register a new account. So I didn't continue and just closed it."

Park Ki-duck, a 39-year-old retail investor, attributed his exit to the cooling of the AI market itself.

"I don't want to go through these regulatory hurdles when the AI and memory chip industries are performing poorly. I'll only go through these processes if market conditions are better and I'm confident I can profit from them."

The market is cooling down, but the costs remain.

Tighter regulations have achieved their goal of stabilizing the market to some extent. The Kospi volatility index has fallen sharply from its peak of 97 at the end of June to around 50, a four-month low. South Korea's benchmark stock index has risen 61% year-to-date, but is still about 25% below its record high reached two months ago.

However, the rapid contraction in trading has also put investors who still hold related products and hope to sell at higher prices in a dilemma. The sharp drop in liquidity means higher exit costs, and some investors may face the predicament of being forced to hold positions passively.

Bloomberg Intelligence analyst Rebecca Sin points out that " regulators' attitudes have fundamentally changed—from previous support to proactive restraint, and the pressure of capital outflows is unlikely to dissipate in the short term." As the enthusiasm for AI trading fades and regulatory barriers accumulate, these once-popular leveraged ETFs are experiencing a rapid decline.

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