120,000 Korean retail investors face margin calls as market meltdown strikes

In July 2026, South Korea's capital markets underwent a dramatic stress test.

Within just a few weeks, the Korea Composite Stock Price Index (KOSPI) plummeted sharply from its historical high, entering a technical bear market and triggering the seventh circuit breaker across the entire market within the year—an exceptionally rare occurrence in global capital markets.

For many young Koreans, the capital market has long ceased to be about long-term investment, instead becoming a high-stakes gamble that determines their fate: win, and you change your destiny; lose, and you lose everything.

In the global AI hardware supply chain, South Korea captures approximately 35% of the profits due to the dominant market position of Samsung Electronics and SK Hynix in HBM (High Bandwidth Memory). The combined operating profits of these two giants are projected to exceed 220 trillion Korean won over the next three years.

This substantial profit has directly translated into increased purchasing power among semiconductor workers, especially young employees, through high bonuses and dividends. Data shows that in May 2026, luxury sales at department stores in regions like Gyeonggi Province, where major chip companies are headquartered, surged by over 50% year-over-year, with luxury jewelry and watches seeing even sharper increases.

Since 2026, the total market capitalization of South Korea's stock market has surpassed $5 trillion, with a large number of South Korean citizens achieving doubled paper assets through widespread stock trading, particularly by using leverage to buy semiconductor stocks.

The wealth creation effect brought by AI is extremely evident. This surge in asset prices has directly driven the early recovery of the luxury real estate and high-end consumption markets; Seoul’s luxury apartment prices have risen far beyond the national average, and the proportion of cash-only purchases of luxury homes has increased significantly.

To many young people, in the face of Seoul’s unattainable housing prices and rigid social stratification, working a conventional job seems destined to lead only to a respectable kind of poverty. As a result, countless individuals see the financial markets as their only lifeline.

Whether you win or lose, it’s better to go all in and chase that one-in-ten-thousand chance of turning things around.

This "rarity" is primarily reflected in the frequency of circuit breaker triggers and the extremity of historical comparisons.

Since South Korea implemented its full-market circuit breaker in 2000, it has been triggered only 13 times in history. However, in the first half of 2026 alone, the South Korean stock market has already triggered the circuit breaker seven times—meaning that the number of triggers in just six months has exceeded half of the total occurrences since the mechanism was introduced over two decades ago.

The last time such frequent and intense circuit breakers occurred was during the 2008 global financial crisis. Under normal market conditions, they may trigger only once every year or even every few years, yet in 2026, they occurred repeatedly within just a few weeks—an extremely rare and extreme market scenario in the history of Korea’s capital markets.

(Compared to the 2008 financial crisis)

Not only did these events occur frequently, but their timing was also extremely rapid. For example, on July 7, the Korean stock market first triggered the “sidecar” mechanism targeting algorithmic trading in the morning session, then directly activated a full-market circuit breaker in the afternoon—hitting the brakes twice in a single day. Within just a few trading days from July 9 to 13, the total amount of forced liquidations reached tens of billions of Korean won, with a single-day total setting a yearly high.

South Korea's stock market's most critical weakness lies in its highly concentrated and overly single-weight structure.

As of June 2026, the combined weight of Samsung Electronics and SK Hynix in the KOSPI index has risen to a staggering 60%, with these two companies accounting for 70% of the index’s doubling gain in the first half of the year.

This distorted situation, where the market thrives with the success of a single company and collapses with the failure of one industry, has effectively turned the Korean stock market into an ETF composed of just two stocks.

In capital markets, such concentration gives any single bearish or bullish position tremendous power.

In May this year, South Korean exchanges approved the listing of 2x leveraged ETFs linked to Samsung Electronics and SK Hynix. The launch of this product reflects significant policy, market, and fundamental factors.

Previously, South Korea prohibited single-stock leveraged ETF trading for reasons of investment diversification and market protection, requiring ETFs to diversify their investments across at least 10 stocks, with no single stock exceeding a 30% weight.

However, on April 28, 2026, during the height of South Korea’s stock trading boom, South Korea officially amended the Enforcement Decree of the Capital Markets Act, raising the maximum individual stock holding limit to 100% and eliminating the mandatory requirement that funds must include at least 10 individual stocks. This regulatory breakthrough removed obstacles to the launch of leveraged ETFs based on individual stocks.

The key driver behind this policy shift is South Korean retail investors seeking excess returns. Facing pressures from high housing prices, education costs, and retirement expenses, many young people hope to achieve asset transformation through high-risk investments.

Under the wave of AI, many Koreans have chosen to "gamble." Due to the long-standing lack of such high-risk instruments in Korea, a large number of Korean investors have turned to overseas markets.

In the first few months of 2026, leveraged ETFs listed in Hong Kong tracking Samsung Electronics and SK Hynitis attracted billions of dollars in inflows. To redirect this high-risk trading activity back home, alleviate pressure on the won exchange rate from capital outflows, and enhance South Korea’s global pricing influence over its leading tech giants, Korean regulators decided to open domestic trading.

In policy formulation, regulators have established strict eligibility criteria, such as a market capitalization share exceeding 10% and a trading volume share exceeding 5%; currently, only Samsung Electronics and SK Hynix meet these requirements.

Both companies are at the heart of an AI-driven supercycle in memory chips, reporting their best-ever quarterly results in the first quarter, with significant stock price gains year-to-date, providing ample market attention and liquidity to support leveraged trading demand.

Amid the booming semiconductor market, retail investors have shown strong demand for leveraged tools to amplify returns. Ahead of the listing of leveraged ETFs, over 130,000 investors have completed the mandatory educational courses required to purchase such products, indicating a substantial potential capital base.

In July, as global AI capital expenditure growth slowed and signs of oversupply in HBM memory chips emerged, the stock prices of Samsung and SK Hynix plummeted.

At this point, the squeeze began. With no other market sectors to absorb the selling pressure, the Korean stock market instantly lost its buffer, and the mechanical liquidation of leveraged ETFs created a death spiral of “falling prices and margin calls.”

The 2x leveraged ETFs linked to Samsung Electronics and SK Hynitz attracted significant retail investment, and their built-in "daily rebalancing" mechanism became a major downward force during market declines.

When the underlying stock declines, the ETF must passively sell without regard to cost to maintain its leverage ratio, directly triggering a vicious cycle: "stock price decline → passive selling by leveraged ETF → forced liquidation of retail margin positions → further stock price decline."

Suppose Retail Investor A holds a 2x leveraged ETF linked to Samsung Electronics. A has $100 in principal and borrows another $100, using the full $200 to buy Samsung Electronics stock.

At this point, the market begins to experience normal fluctuations. Suppose that, due to industry news, Samsung Electronics' stock price declines by 5% in a given day, causing the $200 worth of stock in the ETF to drop to $190. The $100 debt owed remains unchanged, so the ETF’s principal (net asset value) becomes $190 - $100 = $90. At this point, the ETF’s actual leverage becomes $190 ÷ $90 ≈ 2.11x.

Because the ETF's contract requires it to maintain a 2x leverage ratio daily, its current leverage of 2.11x has exceeded the limit, forcing the fund manager to sell a portion of the holdings to reduce debt and bring the leverage back to 2x. To comply, the manager must sell approximately $9.5 million worth of stocks before market close, regardless of price. This sudden, additional selling pressure of $9.5 million directly pushed Samsung Electronics' stock price down from a 5% decline to a 6% decline.

At this point, the avalanche began: many in the market had bought Samsung Electronics stock on margin. They could previously withstand a 5% drop, but now, due to passive selling by the ETF, the stock price fell to 6%, breaching the liquidation threshold for some traders. Brokerage systems automatically triggered margin calls, pushing the price further down to a 7% decline. The leveraged ETF’s leverage ratio once again exceeded its limit, so at the next open, it had to continue passive selling—leading to more retail investors and margin positions being liquidated...

See, what was originally just a normal 5% decline was artificially amplified into a 7% or even 10% crash due to the mechanical selling pressure from leveraged ETFs and a chain reaction of retail trader liquidations.

When thousands of accounts on the market are going through this process, the entire market can spiral out of control like an runaway snowball, triggering a systemic liquidity crisis and frequent circuit breakers. This is why what appears to be an ordinary financial derivative can become a fatal trigger for the entire market.

Previously, South Korean society was swept up in a frenzy of "national betting on semiconductors," with retail investors, driven by fear of missing out (FOMO), wildly leveraged their positions to buy in, while foreign investors had already been net sellers for five consecutive months.

In response to the out-of-control situation, South Korean regulators urgently announced in mid-July a suspension of approvals for new single-stock leveraged ETFs and raised investment eligibility requirements.

But for individuals, it’s already too late. According to statistics from South Korean authorities and multiple financial institutions, this round of leveraged liquidations in the South Korean stock market has been extremely severe.

This is a nationwide wealth plunder made tangible through data.

Across the entire market, more than 1.2 million retail leveraged accounts have reached their margin call threshold, putting them at risk of liquidation. Approximately 320,000 to 360,000 of these accounts have been fully liquidated by brokers, resulting in total loss of principal, with some accounts even owing money to their brokers. Additional estimates from certain brokers and foreign institutions suggest that the total number of fully liquidated accounts may range between 405,000 and 460,000.

Based on an estimate of approximately 35.7 million working-age Koreans aged 15 to 64, this means one in every 30 adults received a margin call and teetered on the brink of liquidation. Among these liquidated accounts, young retail investors aged 20 to 30 accounted for a staggering 62%, most of whom bet heavily on 2x leveraged ETFs tied to Samsung Electronics and SK Hynix—individuals who should have been the nation’s future, yet wagered all their hopes and savings in a single, high-stakes gamble on the capital markets.

According to total estimates by brokerage firms and foreign institutions, Korean retail investors incurred actual total losses of approximately KRW 2.15 trillion (around RMB 10 billion) over the past month’s sharp decline, due to leveraged trading, net value drawdowns of leveraged ETFs, options margin losses, and debts owed to brokers.

This forced, mechanical large-scale rebalancing generated substantial trading fees and spread income for investment banks and broker-dealers offering derivative contracts.

The head of South Korea’s Financial Supervisory Service even publicly expressed deep regret over having allowed the issuance of such high-risk products. This incident revealed the immense destructive potential of financial innovation in the absence of adequate risk hedging mechanisms.

In today's world, where the AI wave is sweeping globally, we need to be more vigilant than ever: don't let enthusiasm for technology turn into an irrational collective gamble.

When financial instruments stray from their fundamental purpose of serving the real economy, and when regulatory lag enables human weaknesses, what is called "innovation" may well be a sword of Damocles hanging over everyone's head. When this sword falls, it will not distinguish between seasoned veterans and hopeful newcomers—it will harvest all equally.

This article is from the WeChat public account "Lai Ka Intelligence" (ID: laikazk), authored by Chaiquan.