Panic selling triggers forced liquidation of 344.2 billion won, South Korean stock market faces margin trading crisis

The South Korean stock market has experienced a rare wave of selling. The KOSPI index plunged nearly 9% on Monday, dropping below the 7000-point threshold, with semiconductor heavyweight stocks leading the decline and leveraged ETFs suffering heavy losses. Against a backdrop of previously high leveraged funds in the market, the drop in stock prices further triggered forced liquidations, forming a negative feedback loop of “decline–deleverage–further decline.”

On July 13, the KOSPI index closed at 6806.93 points, down 669.01 points from the previous trading day, a decline of 8.95%, marking the first fall below 7000 points in more than two months. The market triggered the sell-side program pause mechanism (sidecar) and the first-stage circuit breaker in succession on that day. The circuit breaker on the KOSPI has been triggered seven times this year, with five occurring in the past two months.

In terms of capital flows, foreign capital and institutions were the main sellers, with net sales of 1.87 trillion won and 2.7 trillion won respectively; retail investors bucked the trend with net purchases of 4.5 trillion won, but still failed to withstand downward market pressure.

More notably, the large amount of leveraged funds previously accumulated in the market is now facing liquidation pressure. According to the latest data from the Korea Financial Investment Association, forced liquidation on July 9 reached 142.2 billion won for the day, pushing the cumulative scale for July to 344.2 billion won. As there is a two-day trading lag in forced liquidation data, the nearly 9% plunge Monday means that subsequent announcements of liquidation scale may climb further, and deleveraging pressure has not yet been fully released.

Semiconductor Stocks Plunge; SK hynix Hits Record Drop

The core shock of this market adjustment comes from the semiconductor sector.

On Monday, SK hynix saw its stock price plummet 15.37%, marking its largest single-day drop in history; Samsung Electronics fell 10.7%. SK Square and Samsung Electro-Mechanics, related to these two companies, also dropped by 17% to 18%.

The market's main concern is focused on AI semiconductor profit expectations. Korea Investment & Securities reported that SK hynix's second-quarter operating profit may fall below market expectations, increasing pressure on investors to take profits.

Analysts believe this round of adjustment reflects more short-term funding pressure rather than a reversal of sector fundamentals. Mirae Asset Securities researcher Kim Seok-hwan stated, recent declines have mainly been influenced by the end of ADR listing-related events, overly high profit expectations, and the impact of leveraged fund liquidations, and do not indicate a substantive deterioration in the long-term profit capabilities of the semiconductor sector.

Shinhan Securities researcher Kang Jin-hyeok also noted that although SK hynix’s ADR listing performed well, the combined pressure of profit-taking and earnings expectation concerns drove this wave of concentrated selling.

Leveraged ETFs Crushed; “Short Gamma” Effect Amplifies Decline

Leveraged products became an important factor amplifying this market volatility.

On Monday, single-stock leveraged ETFs related to Samsung Electronics and SK hynix both hit new lows since their listing. “KODEX SK hynix single-stock leveraged” dropped to an intraday low of 14,835 won, down 66.6% from its June high; “TIGER Samsung Electronics single-stock leveraged” fell to a low of 12,035 won, a cumulative decline of 60.4% from its June high.

Samsung Securities pointed out that leveraged ETFs have a “short gamma” characteristic—that is, they require buying when the underlying rises and selling when it falls, thus further amplifying stock price volatility in extreme market conditions. Data show that despite the recent sharp declines, the combined market value of Samsung Electronics and SK hynix single-stock leveraged ETFs still exceeds 10 trillion won, so short-term volatility pressure may persist.

Delayed Forced Liquidation Data; Deleveraging Pressure May Not Be Fully Released

The biggest concern in the current market is that Monday’s decline has not yet been fully reflected in forced liquidation data.

Data from the Korea Financial Investment Association show that as of July 9, retail forced liquidation reached 142.2 billion won, the highest single-day scale this July, up nearly five-fold from the previous day’s 28.8 billion won. The proportion of forced liquidations to unsettled trades rose to 10.2%, breaking double digits for the first time in nearly a month.

Prior to this, the KOSPI had already slumped for two consecutive days, dropping 4.91% and 5.35% on July 7 and 8, respectively. The cumulative decline of over 10% led to a drop in collateral value in many margin trading accounts, triggering concentrated liquidations under the T+2 settlement mechanism.

Monday’s further 8.95% drop in the KOSPI means that a new wave of liquidation pressure may appear in data for later this week.

Retail Funds Contract; Market Holding Capacity Declines

Aside from leveraged liquidations, declining retail fund capacity has also amplified the market’s fragility.

Data from the Korea Financial Investment Association show that investors’ deposit balances have fallen from a high of 139.69 trillion won on June 4 to 107.13 trillion won by July 9—a decrease of 32.57 trillion won or 23.3% in just one month.

The latest liquidity tracking by CITIC Securities International Strategy team shows that as of July 10, Korean individual investors’ margin scale dropped rapidly by 9.4% over the past week, marking the largest single-week volatility in the past ten years and demonstrating that retail capital is receding quickly. Meanwhile, the financing balance for KOSPI and KOSDAQ as of July 3 fell by 3.9% and 5.4% respectively, and market leveraged funding is accelerating its contraction.

During the same period, the credit financing balance also dropped from a high of 38.63 trillion won on June 24 to 36.63 trillion won, down about 2 trillion won.

Looking at leveraged products, while the popularity of single-stock leveraged ETFs has cooled compared to before, overall capital concentration remains high. CITIC Securities International pointed out that as of July 10, Korea’s leveraged ETF market remains highly active, and the risk of amplified volatility due to concentrated capital holding structures has yet to be fully resolved.

Yuanta Securities researcher Kim Yong-gu stated that retail investors have long been an important support for the Korean stock market, but under tightened margin regulation, declining deposit balances, and increased market volatility, their ability to absorb further selling is weakening.

It’s worth noting that the decline in credit financing does not wholly reflect investors actively reducing risk; some of the funding reduction comes from passive forced liquidation. The synchronised contraction in deposits and financing balances highlights a deleveraging process driven by losses in the market.

Korean regulators had already required securities companies to strengthen risk management for margin trading and to study adjustments to relevant systems as of June 24. However, market participants note that concrete regulatory measures have not yet been put in place, while forced liquidation ratios have resurged to high levels.

Analysts believe that the previous rapid gains in the Korean stock market have also increased adjustment pressure. Daishin Securities researcher Lee Kyung-min pointed out that the KOSPI’s cumulative rise from its annual low surpassed 200% this year, resulting in obvious overheating risk. After a concentrated release of negative news in the semiconductor sector, deleveraging of funds became an important factor behind the sharp decline this time.

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