South Korea’s KOSPI fell 5% to 6,257 after rebounding roughly 20% in the previous session, underscoring how forced deleveraging has turned the equity market into a sequence of unusually sharp reversals. The swings have already wiped out hundreds of thousands of retail leveraged positions and prompted regulators to make it harder to trade single-stock leveraged exchange-traded funds.
Goldman Sachs data cited in market commentary showed that more than 1.2 million Korean retail leveraged-trading accounts had received margin calls by July 13. An estimated 320,000 to 360,000 accounts had been fully liquidated by then. After the KOSPI subsequently fell about 18% from its July 13 level, estimates put the number of fully liquidated accounts above 500,000.
A margin call occurs when a broker requires a trader to add collateral after losses erode the value of a leveraged position. If the trader cannot meet that request, the broker can sell the holdings automatically. When many accounts face the same pressure, those sales can deepen a market decline and trigger more liquidations.
The reported scale of the Korean washout places retail leverage near the center of the recent volatility. The estimated 320,000 to 360,000 liquidated accounts as of July 13 represented about 3.4% of South Korea’s adult population, according to the Goldman Sachs figures cited in the market commentary. The later estimate of more than 500,000 full liquidations indicates that the selloff continued well beyond the first round of forced sales.
Cash shifts from brokerage accounts to bank deposits
The deleveraging has coincided with a marked retreat from cash pools used for equity trading. Korea Financial Investment Association data showed deposits in securities accounts fell from a record 139.69 trillion won on June 4 to 107.20 trillion won on July 28, a decline exceeding 32 trillion won in less than two months.
Separate association figures released on Aug. 3 placed client deposits at 104.6584 trillion won as of July 30, when the KOSPI marked a local low. That represented a drop of more than 35 trillion won from the June record, suggesting that retail trading capacity diminished as the market sold off.
Margin-financing balances also declined. Credit-trading financing stood at 33.19 trillion won, down about 4.5 trillion won, or nearly 12%, from the 37.72 trillion won peak recorded on July 2. Falling balances can reflect traders voluntarily cutting leverage, but they can also result from brokers closing positions after collateral values fall.
Funds appear to have moved toward more conventional savings products. Banking and industry data showed the combined balance of time deposits at South Korea’s five major banks reached 973.49 trillion won at the end of July, up 24.09 trillion won from the previous month. It was the largest monthly increase in time deposits reported this year.
The parallel drop in brokerage cash and rise in bank deposits points to a defensive response among households after the market’s rapid decline. It also leaves fewer readily available funds in securities accounts for immediate dip-buying, which could make future rebounds more dependent on institutional and foreign flows.
Regulators raise entry barrier for leveraged ETFs
The Financial Services Commission and Financial Supervisory Service have responded by tightening access to single-stock leveraged ETFs, products designed to amplify daily moves in individual shares. From July 31, the minimum margin requirement for these products rose to 30 million won from 10 million won.
Trading activity dropped immediately after the rule change. Turnover across 16 single-stock leveraged and inverse ETFs totalled 3.3071 trillion won on the first day, down 75.3% from 12.4485 trillion won on July 30. The figure also sat well below the 12.27 trillion won daily average recorded for the group during July.
Excluding inverse ETFs, turnover in 14 major single-stock leveraged ETFs fell 64.4% in a day to 2.4686 trillion won from 6.9354 trillion won. The immediate decline suggests the higher capital threshold reduced participation in products that can magnify both gains and losses over short periods.
Regulators are also preparing potential revisions to capital-markets rules that could alter leverage multiples, impose exposure limits and establish an emergency-intervention framework. The proposals have emerged as authorities weigh how much retail speculation can be accommodated in instruments tied to volatile individual stocks.
Foreign buying collides with retail selling
Foreign trading flows were especially volatile during the late-July rebound. In the session when the KOSPI rose more than 17% intraday, foreign traders bought a net 1.6 trillion won of Korean equities within just over two minutes of the opening, according to the trading data cited in market commentary. Net foreign purchases reached 7.18 trillion won by the close, described as a record daily total.
Retail traders moved in the opposite direction, recording net sales of 8.2 trillion won during that session, also a one-day record in the cited data. The opposing flows illustrate a market in which forced or precautionary retail selling can coincide with aggressive purchases by larger market participants seeking exposure after a steep decline.
Morgan Stanley raised Korean equities to overweight from equal-weight in published research led by strategist Daniel K. Blake. The bank retained a 9,000 KOSPI target, implying about 36% upside from levels prevailing when the note was published, while projecting a broad near-term range of 5,500 to 10,500.
That range captures the tension now facing the market: a constructive longer-term view of Korean equities, particularly technology-linked shares, alongside immediate risks from leverage, rule changes and unstable retail participation.
Political pressure has also entered the debate. Lee Jong-bae, a former Seoul city council member backed by the People Power Party, filed a criminal complaint against Kim Yong-beom, the presidential office policy chief, over listings connected to semiconductor-linked leveraged ETFs. The complaint alleged abuse of authority, coercion and obstruction of business.
The dispute arrived as President Lee Jae-myung’s approval rating edged lower in a Realmeter survey. Positive evaluations stood at 45.9%, down 0.4 percentage points from the previous week, while negative evaluations rose 1 percentage point to 50.5%. The Democratic Party’s support measured 45.1%, compared with 37.7% for the People Power Party.
With brokerage deposits down more than 35 trillion won from their early-June peak and leverage balances falling, the next phase of the KOSPI’s recovery will likely be shaped less by highly leveraged retail trading and more by whether foreign demand and domestic institutional buying can absorb further volatility.
Worried about volatility and liquidations? Learn how to avoid liquidation and manage leverage more safely in turbulent markets.
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