To The Moon

Can the Korean Stock Market Stabilize?

$SK hynix(SKHY)$  

$CSOP SK Hynix Daily (2x) Leveraged Product(07709)$  

$Direxion Daily MSCI South Korea Bull 3x Shares(KORU)$  

The Korean stock market has become one of the world's most important market indicators. Many traders now watch Korea before their own markets open.

Ironically, before the Korean stock market even opens, many investors are already watching HyperLiquid, a crypto exchange popular with Korean traders. Its TraderXYZ perpetual futures platform has become an unofficial price discovery mechanism.

On Wednesday morning, between 7:00 and 7:01 AM, only one SK Hynix perpetual contract traded.

Just one contract.

It was executed at 1.27 million KRW, nearly 20% below the previous day's closing price of 1.55 million KRW. The trade was worth only around US$800-900, yet it shocked the market.

Many traders immediately assumed SK Hynix would open down 20%, creating panic even before the stock market opened. Within four hours, about US$80 million worth of SK Hynix perpetual positions were liquidated from a market with roughly US$500 million in open interest.

When the Korean market finally opened, SK Hynix reported record earnings, but they fell short of investors' high expectations. Heavy selling followed, and the stock plunged almost 20%, triggering one of the biggest sell-offs in Korea's history. Samsung also reported record profits, yet its shares eventually turned negative as panic spread across the entire market.

The result was devastating.

The KOSPI index plunged around 12%, briefly falling below 5,300 points, with market-wide circuit breakers triggered for two consecutive days.

Many analysts are now questioning whether a single trade on a highly leveraged crypto derivatives market should be able to influence the valuation of one of Korea's largest listed companies. Some even suspect the trade reflected advance knowledge of SK Hynix's earnings, although there is no evidence proving insider trading.

However, derivatives were only part of the problem.

In May, South Korea launched 2x single-stock leveraged ETFs on companies such as SK Hynix and Samsung. Retail investors rushed in, pouring roughly 14 trillion KRW into these products. About 92% of investors were retail traders.

When stock prices started falling, margin calls forced investors to sell.

Those forced sales pushed prices even lower.

Lower prices triggered even more margin calls.

At the same time, leveraged ETFs had to rebalance daily to maintain 2x exposure. In a falling market, that meant fund managers were forced to sell even more shares, creating a vicious downward spiral.

Earlier this year, investors said:

"The higher it goes, the more people buy."

Now the market has become:

"The lower it goes, the more people are forced to sell."

The damage has been enormous.

Around 1.7 trillion KRW worth of positions were forcibly liquidated in a single day. Reports suggest roughly 360,000 leveraged ETF accounts have already been wiped out.

Ordinary investors suffered heavily. A 45-year-old office worker lost about half of his 34 million KRW investment despite repeatedly adding margin. A 25-year-old university student who borrowed money to invest also lost about half of his capital.

Public anger has exploded.

More than 30 funeral wreaths were placed outside the National Assembly, accusing regulators of failing to protect investors. Many criticized the government for promoting the "KOSPI 5000" vision during the bull market, only to refuse support after the crash.

The Korean government has apologized for introducing high-risk products too quickly but has rejected calls for a market rescue fund, saying the market is simply undergoing a natural repricing.

Instead, regulators are tightening the rules:

- Minimum margin requirement increased from 10 million KRW to 30 million KRW.

- Retail investors may face limits on total leveraged ETF exposure.

- Authorities are considering restricting some leveraged ETFs to professional investors.

- A 1357 debt assistance hotline has reportedly been established to help distressed investors negotiate with brokers or seek debt restructuring.

Goldman Sachs estimates that more than 1.2 million leveraged retail trading accounts in South Korea had triggered margin calls as of July 13, with 320,000–360,000 accounts already fully liquidated.

That means roughly 3.4% of South Korea's adult population received margin calls.

Since July 13, the KOSPI has plunged another ~18%.

Based on the continued market selloff,  the total number of fully liquidated accounts has now surpassed 500,000.

Meanwhile, Hong Kong has taken a different approach.

From 3 August, leveraged products linked to SK Hynix, Samsung, Nvidia and Tesla will move from a fixed 2x leverage to a flexible leverage model. Fund managers can reduce leverage to as low as 1.1x during volatile periods, helping to reduce forced selling while still offering leveraged exposure.

The goal is clear: better risk management instead of allowing leverage to amplify every market swing.

My view

The Korean market is still going through a painful deleveraging process.

The biggest problem is no longer company earnings. It is the massive amount of leverage that accumulated during the rally. Those leveraged positions are almost fully unwound. 

Once forced selling, margin calls and ETF rebalancing begin to fade, selling pressure should gradually ease. If that happens, August could see market stabilization, although sharp volatility is likely to continue until leverage falls back to healthier levels.

The Korean market has become a reminder that, in today's financial system, derivatives can sometimes move the underlying market instead of merely following it.

The Korean stock market may never be the same after this massive leveraged sell-off. With so many retail investors wiped out, speculative trading is likely to decline. Future rallies and sell-offs could become much more moderate as leverage falls and investors become far more cautious.