South Korea's stock market has been hit by an intense wave of selling. The KOSPI index plummeted nearly 9% on Monday, falling below the 7,000-point mark, led by heavyweight semiconductor stocks, with leveraged ETFs suffering heavy losses. Against the backdrop of previously high market leverage, the falling stock prices further triggered forced liquidations, creating a negative feedback loop of "decline, deleveraging, and further decline."
On July 13, the KOSPI index closed at 6,806.93 points, down 669.01 points or 8.95% from the previous session, marking the first time it fell below 7,000 in over two months. The market triggered the sidecar mechanism and the first-stage circuit breaker on the same day. The number of circuit breaker triggers for KOSPI this year has reached seven, with five occurring in the past two months.
In terms of fund flows, foreign investors and institutions were the main sellers, with net sales of 1.87 trillion won and 2.7 trillion won, respectively. Retail investors made a net purchase of 4.5 trillion won against the trend, but this was insufficient to stem the market's downward pressure.
More concerning is the liquidation pressure facing the substantial leveraged funds previously accumulated in the market. According to the latest data from the Korea Financial Investment Association, the daily forced liquidation amount surged to 142.2 billion won on July 9, pushing the cumulative total for July to 344.2 billion won. As forced liquidation data is reported with a two-day lag, Monday's nearly 9% plunge suggests that subsequently reported liquidation figures may climb further, indicating that deleveraging pressure has not yet been fully released.
Semiconductor Stocks Plunge, SK Hynix Records Largest-Ever Drop
The core shock of this market adjustment came from the semiconductor sector.
On Monday, SK Hynix Inc shares plunged 15.37%, marking its largest single-day drop in history. Samsung Electronics Co Ltd fell 10.7%. Additionally, related companies SK Square and Samsung Electro-Mechanics Co Ltd also dropped between 17% and 18%.
Market concerns primarily center on AI semiconductor profit expectations. A report from Korea Investment & Securities stated that SK Hynix's second-quarter operating profit might fall below market expectations, intensifying investor profit-taking pressure.
Analysts believe this round of adjustment reflects short-term funding pressures rather than a fundamental reversal in the industry. Researcher Kim Seok-hwan from Mirae Asset Securities noted that the recent decline is mainly influenced by the conclusion of events related to the ADR listing, overly high profit expectations, and the liquidation of leveraged funds, and does not represent a substantial deterioration in the long-term profitability of the semiconductor industry.
Researcher Kang Jin-hyeok from Shinhan Securities also pointed out that despite SK Hynix's ADR listing performing relatively well, the combination of profit-taking and concerns over earnings expectations drove this concentrated selling.
Leveraged ETFs Suffer Heavy Blows, "Short Gamma" Effect Amplifies Decline
Leveraged products have become a significant factor amplifying market volatility.
On Monday, single-stock leveraged ETFs related to Samsung Electronics and SK Hynix both hit record lows since listing. Among them, the "KODEX SK hynix single stock leverage" ETF fell to an intraday low of 14,835 won, a cumulative decline of 66.6% from its June high. The "TIGER Samsung Electronics single stock leverage" ETF fell to an intraday low of 12,035 won, a cumulative drop of 60.4% from its June high.
Samsung Securities pointed out that leveraged ETFs have a "short gamma" characteristic, meaning they need to buy when the underlying asset rises and sell when it falls, thereby further amplifying stock price volatility during extreme market conditions. Data shows that despite the recent sharp declines, the combined market value of the single-stock leveraged ETFs for Samsung Electronics and SK Hynix still exceeds 10 trillion won, suggesting market volatility pressure may persist in the short term.
Forced Liquidation Data Lags, Deleveraging Pressure May Remain Incomplete
The current major market concern is that Monday's decline has not yet been fully reflected in the forced liquidation data.
Data from the Korea Financial Investment Association shows that as of July 9, the forced liquidation amount for retail investors reached 142.2 billion won, the highest single-day level in July and nearly five times the 28.8 billion won from the previous day. The proportion of forced liquidations to unsettled transactions rose to 10.2% that day, the first time it has broken into double digits in nearly a month.
KOSPI had already fallen sharply for two consecutive days prior, dropping 4.91% on July 7 and 5.35% on July 8, with a cumulative decline exceeding 10%. This caused the collateral value of many margin trading accounts to fall, triggering concentrated liquidations under the T+2 settlement mechanism.
Monday's further 8.95% drop in KOSPI suggests a new wave of liquidation pressure may become apparent in the data later this week.
Retail Funds Shrink, Market Absorption Capacity Declines
Beyond leverage unwinding, the declining capacity of retail funds has also intensified market fragility.
Data from the Korea Financial Investment Association shows that investor deposit balances have fallen from a high of 139.69 trillion won on June 4 to 107.13 trillion won on July 9, a decrease of 32.57 trillion won or 23.3% within a month.
The latest liquidity tracking data from CITIC Securities International's strategy team shows that as of July 10, South Korean individual investors' margin balances fell rapidly by 9.4% over the past week, marking the largest single-week fluctuation in the past decade, indicating a rapid retreat of retail funds. Concurrently, KOSPI and KOSDAQ margin balances fell by 3.9% and 5.4%, respectively, compared to July 3, showing market leverage is contracting at an accelerating pace.
During the same period, credit financing balances also fell from a high of 38.63 trillion won on June 24 to 36.63 trillion won, a decrease of approximately 2 trillion won.
Looking at leveraged products, although the popularity of single-stock leveraged ETFs has cooled compared to earlier periods, overall fund concentration remains high. CITIC Securities International noted that as of July 10, the South Korean leveraged ETF market still maintains high activity, and the concentrated fund holding structure implies the risk of amplified market volatility has not been fully eliminated.
Researcher Kim Yong-gu from Yuanta Securities stated that retail investors have been a key supporting force for the South Korean stock market, but their ability to continue absorbing selling pressure is weakening amid tightening margin regulations, declining fund balances, and intensifying market volatility.
It is worth noting that the decline in credit financing does not entirely mean investors are actively reducing risk; part of the fund reduction comes from passive forced liquidation. The simultaneous contraction of deposits and margin balances reflects the market undergoing a loss-driven deleveraging process.
South Korean regulators required securities firms to strengthen credit transaction risk management on June 24 and are studying adjustments to related systems. However, market participants point out that specific regulatory measures have not yet been implemented, while the forced liquidation ratio has already risen back to high levels.
Analysts believe that the previous rapid rise in the South Korean stock market also increased adjustment pressure. Researcher Lee Kyung-min from Daishin Securities pointed out that the KOSPI's cumulative gain from its low this year once exceeded 200%, indicating the market had accumulated significant overheating risks. After the concentrated release of negative factors in the semiconductor sector, fund deleveraging became a major factor driving this sharp decline.
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