South Korea's Leveraged ETF Curbs Slash Trading Volume 75%

South Korea's first-day enforcement of single-stock leveraged ETF restrictions cut trading volume 75.3 percent to 3.31 trillion won, as regulators moved to curb speculative bets that drove sharp swings in the KOSPI.

"It seems accurate to say the measures have had an effect, as trading volumes have significantly decreased," said Lee Sang-hyun, a researcher at Meritz Securities. "Today, other stocks have risen in prominence instead of the leveraged products that previously dominated the top trading volumes."

Trading across 16 leveraged and inverse ETFs on the Korea Exchange totaled 3.3071 trillion won on July 31, down from 12.4485 trillion won the prior session, according to KRX data. The minimum cash deposit requirement rose to 30 million won ($20,646) from 10 million won, effective July 31. The KOSPI fell 5.98 percent Wednesday after dropping 10.84 percent in the previous session, swings authorities blamed partly on concentrated bets in single-stock products tied to Samsung Electronics and SK Hynix.

The curbs are the first step in a broader clampdown that could reshape retail trading in Asia's fourth-largest equity market. Authorities plan to cap an individual's investment in such products at 20 percent of total investment assets, introduce "excessive quoting fees" to deter ultra-short-term trading, and mandate simulated trading before investors can buy. If the measures hold, brokerage commission revenue from ETF trading and retail participation in leveraged products could shrink further, while KOSPI volatility may ease as leverage availability tightens.

Trading Volume Plunges to One-Fourth

The presence of single-stock leveraged products in overall ETF trading rankings diminished sharply. KODEX SK Hynix Single-Stock Leverage and SOL SK Hynix Futures Single-Stock Inverse 2X, which had competed for the top two spots, fell to fifth and ninth place, respectively. Trading volume of 3.3071 trillion won was also below recent lows of 7.4 trillion won on July 27 and 8.2 trillion won on July 28.

Park Woo-yeol, a researcher at Shinhan Securities, cautioned against judging the policy's effectiveness on the first day alone. "While leveraged product trading decreased today, SK Hynix hit its upper price limit, and the prices of these two products formed highs from the early session, which may have reduced trading," he said. "The policy's impact should be observed further."

Additional Curbs on the Way

Financial authorities are preparing supplementary measures, including revising the Capital Markets Act to establish a legal basis for market stabilization measures during emergencies. They are also referencing Hong Kong's variable leverage ratio system, after the Securities and Futures Commission issued guidelines on July 24 allowing adjustments to leverage ratios of listed leveraged and inverse products based on asset managers' capabilities.

The individual investment limit, set at around 20 percent of total investment amounts per securities account, aims to prevent retail investors from concentrating most of their assets in single-stock leveraged products. Measures to curb excessive ultra-short-term trading, including "excessive quoting fees" similar to those imposed for excessive order submissions in the futures market, are also under consideration. A source from the financial authorities said, "We plan to swiftly finalize detailed measures for each key supplement and implement them as early as possible."

The clampdown follows a period of extreme volatility in the KOSPI, which authorities said had been exacerbated by concentrated bets in single-stock leveraged products. South Korea has already halted new listings of single-stock products and banned advertising for them. The last time authorities moved to rein in leveraged trading, in 2015, KOSPI volatility eased within two months as retail leverage ratios fell, though the comparison is imperfect given the current products' higher leverage multiples.

This article is for informational purposes only and does not constitute investment advice.