South Korea’s regulators have recently further tightened trading requirements for single-stock leveraged ETFs, aiming to curb speculative fervor that had previously fueled market volatility. Since the new rules took effect, trading activity surrounding products linked to Samsung Electronics and SK Hynix has significantly cooled, and capital has begun to flow out.
Only 4% of the August trading volume remains.
According to Bloomberg on August 29, the single-stock leveraged ETFs linked to Samsung Electronics and SK Hynitz saw their combined trading volume in August drop to 4% of the June peak. As of August 27, the assets under management for these products fell from a June peak of $11.4 billion to $5 billion, with net outflows of approximately $1 billion in August alone.
These products were launched in May this year and were originally intended to attract retail investors back to the Korean stock market. However, at their peak trading activity, the combined turnover of the underlying stocks and leveraged ETFs once accounted for more than 80% of the total trading volume in the Korean stock market, amplifying market volatility.
Five-day simulated trading becomes the new benchmark
Since July, South Korean regulators have gradually raised the participation requirements. Early measures included requiring investors to hold at least 30 million KRW in cash to trade these products.
The new regulations take effect on August 19. Investors must download the dedicated program on their PC, complete at least one hour of simulated trading daily, and continue for five consecutive days to qualify for trading. The system provides 100 million KRW in virtual funds to demonstrate the risks of leveraged products in volatile market conditions.
However, many retail investors consider this process overly cumbersome. Since the program only supports Windows PCs and lacks a mobile version, some investors say the installation restrictions and time requirements are enough to deter them from participating.
Volatility has declined, but liquidity has weakened.
Following tighter regulation, the volatility indicator related to the Korea Composite Stock Price Index has declined from 97 at the end of June to around 50, reaching a four-month low, indicating a moderation in short-term market volatility.
However, the rapid shrinkage in trading volume has created new challenges. For investors still holding the relevant ETFs, reduced liquidity means it is harder to exit positions, potentially increasing selling costs. Bloomberg Intelligence analyst Rebecca Sin believes that Korea’s regulatory stance has shifted from supportive to restrictive, and capital outflow pressures may persist in the short term.