Another day at the casino. Another circuit breaker in the wild, wild east.
On Friday, the Kospi plunged as much as 9% at the lows, erasing the entirety of the prior two sessions’ gains, which themselves represented an effort to recoup Tuesday’s egregious losses. Local shares were halted for volatility. Again.
Consider this: South Korean regulators have suspended trading less than a dozen times in a quarter century. Five of those halts came in the past four months alone, three of those five came this month and two of those three this week.
How’s that for “escalatory?” Cue the 80s-era anti-drug PSA: “These are your markets on leveraged single-stock ETFs.”
The simple figure above — and you’ve probably seen some version of it already this week — gives you a sense of silly this is by now. Here’s a benchmark equity index for an almost-developed market regularly swinging by 5% on a close-to-close basis.
Note that this was already going on before local regulators decided to approve the launch of single-stock leveraged ETFs referencing SK Hynix and Samsung. So, yes, they should’ve known better. I think it’s fair now to call that decision misguided, and woefully so. (The country’s top regulator conceded as much.)
Regular readers know I’ve spilled gallons of digital ink in recent weeks, including quite a bit in recent days, cautioning on the inherent peril of giving excitable Korean retail investors access to leveraged products tied to a pair of companies which between them comprise more than half of local market cap.
On Thursday, in “How Leveraged ETFs Turn Markets Into Casinos,” I cited a great SocGen piece which put some numbers on the distortions those products, with their embedded short gamma profile, are creating.
If you didn’t read that article when it was published, I strongly encourage you to read it today. Because Friday’s session was just another example of how those ETFs “reinforc[e] momentum and increas[e] short-term volatility,” as SocGen’s Asian equity team put it.
In a short followup on Friday, the bank’s Rajat Agarwal reiterated that the demonstrable shift in Korea’s volatility landscape is attributable to increased retail investor participation “alongside the rapid growth of single-stock leveraged ETFs.”
The figure above gives you some context for 2026’s fireworks via a comparison with the onset of the pandemic in 2020.
I don’t know if this is feasible (I do know it’s possible, because anything is), but local regulators might want to consider banning the leveraged single-stock ETFs.
“While [the] products remain small in notional terms, their significance lies in flow intensity,” SocGen’s Agarwal went on, in the same Friday dispatch. “High retail participation combined with embedded leverage has created a self-reinforcing loop between flows and returns, mak[ing] positioning and liquidity a dominant driver of price discovery.”
When that’s what counts as “price discovery,” you’re in a lot of trouble.
Seems like greed, leverage and derivatives, while initially welcome guests, always spoil the party.
I’d say the underlying problem is that the logical conclusion of indices weighted by market cap is that a single stock snowballs into taking almost the entire index weight, forcing passive investors to position correspondingly, with single stock like volatility ensuing. Levered ETFs are just the cherry on top of a broken algorithm.
The stock market’s reason for existing is for the public to invest in companies, and for those companies to raise capital to fund/grow their business. The current markets are unapologetically dominated by leveraged products and derivatives, whose only function is to exacerbate price moves of the underlying securities. This is opposed to market regulators’ rules that are supposed to govern these markets. There was a time where traders would run afoul of regulators, if for example, they bought a lot of calls with the sole purpose of running a security up in the close. Not only don’t they seem to be policing this sort of behavior, but they have embraced it.
Brh – a great point worth repeating. Capital markets are supposed to be a forum where cash-needy companies and entrepreneurs meet those with money to invest or lend.
That certainly is not the case anymore, is it. As you said, financial markets have gradually become little more than government-protected casinos for leveraged speculators to run rampant.
Ok, now were getting somewhere. Good group of comments.