Senior market analysts indicate that the South Korean government's efforts to curb the leveraged products creating chaos in its financial markets may be insufficient to halt the extreme volatility gripping the nation's stock market. As the total value wiped from the Korean stock market surpasses $2 trillion and continues to grow, the pain felt by retail investors and public anger are intensifying. Regarding the government's contingency tools, it has come perilously close to being forced to upgrade the "market stabilization fund" from an emergency plan into a liquidity-boosting instrument ready for immediate execution.
This reversal of what was once the world's hottest trade has seen the Korean stock market fall roughly 40% in one month. The deepest wounds are borne by local retail investors who borrowed money and flooded into the market late in the cycle—including young people under 30, retirees, and ordinary household investors. This has ratcheted up the pressure on the government, which had previously cheered the market rally. Now facing a downturn, some investors have even placed condolence wreaths outside the National Assembly building in protest. According to Wall Street giant Goldman Sachs, the peak of forced selling may have passed, but net exposure, funding capacity, market-making depth, and investor confidence have not recovered. Consequently, any macroeconomic shock could reactivate mechanical selling pressure.
This assessment aligns closely with the real-world situation in the global semiconductor market. The Philadelphia Semiconductor Index briefly retreated nearly 30% from its June high, marking one of its worst monthly performances since the turn of the century. Meanwhile, the Korea Composite Stock Price Index (KOSPI) plunged nearly 11% on July 28, then fell a further 12.6% intraday on July 29, triggering a trading halt. It eventually closed down roughly 6%, bringing its total decline from the June peak to approximately 40% and erasing about $2.18 trillion in market value. The critical point is that the earnings of Samsung Electronics and SK Hynix have not collapsed in tandem. In fact, SK Hynix's profit even grew significantly year-over-year. Yet, failing to meet extreme market expectations still triggered a sell-off, demonstrating that current prices are no longer driven by current earnings but by leveraged ETF rebalancing, quantitative momentum reversals, foreign capital outflows, and compression of crowded valuations.
The "condolence wreaths" in front of the National Assembly have escalated a financial deleveraging event into a political and regulatory crisis. Combined, Samsung Electronics and SK Hynix account for nearly half of the KOSPI's market capitalization. Retail investors had made highly concentrated bets through daily 2x single-stock leveraged ETFs. Declines in the underlying stocks force these funds to reduce derivative exposure, creating a feedback loop: falling stock prices lead to ETF rebalancing sales, which trigger margin calls, leading to further price drops. In response, the South Korean government plans to limit individual investment in such products to 20% of total assets, raise transaction costs and simulation trading requirements, and increase the minimum cash threshold to 30 million won starting July 31. Previously, it had halted new product listings and advertisements and began building a legal basis for emergency market stabilization measures. While these steps do not equate to announcing the activation of the "stabilization fund," they signal that the policy response function has shifted from investor education to directly curbing incremental leverage and preparing market support tools if necessary.
During Wednesday's market crash, the Governor of the Bank of Korea and the head of the financial regulator held an immediate meeting that evening to discuss how to stem the market losses. Following the meeting, financial regulatory authorities agreed to impose limits on individual investment in single-stock leveraged funds and increase the transaction costs for such ETFs. These products played an exceptionally prominent role in both the preceding rally and the subsequent liquidation, turning the market's largest stocks into a violent roller coaster ride. However, market participants note that these regulations do not directly limit the leverage multiple of the ETFs, as Hong Kong regulators did this month. As long as there are investors hoping to get rich quickly, weakening the influence of these products will remain very difficult.
Kim Jin-wook, a veteran economist covering the Korean market for Citigroup, stated, "These measures will help ease volatility in the Korean stock market, but introducing a liquidity put option like a market stabilization fund would have a more significant effect." Another analyst, a research head at a major Seoul-based securities firm who requested anonymity due to the sensitivity of the topic, said the latest government regulatory measures might prove ineffective because the investment cap was announced hastily without adequate policy consideration amidst the market crisis. This analyst noted that Hong Kong's related regulations helped reduce volatility by limiting forced selling during market stress. However, he pointed out that the ETF investment cap set by Korea would not help existing investors, as they would not be forced to sell their holdings en masse. Furthermore, since Korean financial regulatory rules do not affect similar leveraged products listed in New York and Hong Kong, price fluctuations could still persist.
A pessimistic sentiment of "slaughtering retail investors" is growing among young people in Korea. Amid this week's market turmoil, about 40 condolence wreaths were placed on the sidewalk outside the National Assembly building in Seoul to protest the government's handling of the single-stock leveraged fund issue. One white wreath's ribbon read, "Slaughtering retail investors." Another stated, "Wait for the retribution; I'll repay you at the next vote." Inside the National Assembly on Wednesday, Finance Minister Choi Sang-mok faced questions from opposition lawmakers and expressed regret that these leveraged products were introduced without careful consideration. The backlash has even spread to online communities that usually support the government, and voices within the ruling Democratic Party calling for stricter regulation have emerged. Chung Cheong-rae, a candidate for the party's leadership, suggested a temporary suspension of single-stock leveraged ETF trading, arguing that extraordinary measures are necessary after extreme market volatility pushed the KOSPI below 6,000 points.
The KOSPI appeared to stabilize slightly on Thursday after two consecutive days of heavy losses, but still fell 1%, remaining far from ending its downtrend. Since hitting an all-time high in June, this sell-off has erased $2 trillion from the index's market value. The Korean stock market is heading for its largest single-month decline on record, even though top chipmakers Samsung Electronics and SK Hynix this week reported a combined quarterly profit of 150 trillion won (approximately $100 billion). Trading volume in the current market is notably low, suggesting many investors are holding their positions and waiting for a rebound. However, data shows that foreign investors net sold about 18.5 trillion won ($13 billion) worth of Korean stocks in July. Tom Graff, Chief Investment Officer at Facet in Phoenix, Maryland, said, "We were overweight Korea until last Friday because of the volatility." He added, "I do believe there's a logical selling limit to how far this crash can fall. But I don't want to try and catch a falling knife."
The recent string of circuit-breaker-style crashes in the Korean stock market has brought the policy response to a critical juncture. The KOSPI plunged 10.84% on July 28, then fell as much as 12.6% intraday on July 29, triggering a 20-minute market-wide trading halt, before closing down 5.98%. These two days of violent decline brought its drop from the June high to about 40%, erasing over $2 trillion in market value. Meanwhile, the Philadelphia Semiconductor Index had already entered a technical bear market on July 17, falling 20% from its June 22 record high, with the maximum retracement nearing 30% by late July. This is no longer a single-market adjustment in Korea, but a cross-market liquidity shock formed by the simultaneous unwinding of Korean leveraged ETFs, global quantitative momentum, crowded semiconductor positions, and AI valuations. If forced liquidations continue to create a liquidity vacuum, repeatedly trigger market-wide circuit breakers, and begin to impact the funding market and financial institution balance sheets, the South Korean government may activate or restart the "stock market stabilization fund." This would involve financial institutions jointly purchasing KOSPI 200 index assets.
Korea has clear precedents for this. In 2020, a 10.7 trillion won stock market stabilization fund was established, which planned to directly invest in the KOSPI 200 index. In 2024, regulators also stated they could deploy a 10 trillion won financial market stabilization fund at any time. The government's current regulatory and leverage-limiting measures can only limit new future risks; they cannot quickly digest existing leverage and overseas contagion channels. Korea plans to limit the proportion of individual investment in single-stock leveraged ETFs and raise transaction costs, and has already suspended new product listings and advertising. However, these rules do not directly reduce the 2x leverage ratio of the products, do not require existing holders to reduce their positions, and cannot constrain leveraged products linked to Samsung and SK Hynix that are listed in New York and Hong Kong. For this reason, the Citigroup Korea economist explicitly pointed out that a "liquidity put option," similar to a market stabilization fund, would have a stronger effect than the current restrictive measures. The rational function of a so-called stabilization fund is not to push the KOSPI back to its historical highs, but to purchase broad market indices or large blue-chip assets when buy-side depth disappears, restore two-way pricing, and break the mechanical death spiral of "falling prices leading to forced ETF deleveraging, leading to margin calls, leading to further price declines."
The condition that truly makes the stabilization fund "unavoidable" would be the KOSPI experiencing repeated circuit breakers, further deterioration in market breadth and trading depth, or the stock market stampede beginning to spill over into the Korean won, corporate bond financing, and financial institution balance sheets. South Korea has mature policy precedents for this. During the political turmoil in 2024, regulators were prepared to deploy a 10 trillion won stock market stabilization fund at any time, while the government simultaneously initiated larger-scale market stabilization arrangements. Therefore, the current assessment should be that "a policy bottom is forming, but direct market intervention is still at the final stage." If volatility remains uncontrollable after limiting leverage, the political cost, wealth effect losses, and contagion risk to the global AI computing chain will be higher than the moral hazard of market intervention itself, should the government fail to introduce a stabilization fund with a clear scale, purchase scope, and activation conditions.
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