The imbalance also helps explain why South Korean retail investors were forced to dump borrowed stocks on one out of every six trading days over the past six months, signaling that many retailers were losing in the leveraged bets on the red-hot market.
According to data released Wednesday by a think tank affiliated with the Korea Financial Investment Association (KOFIA), the forced liquidation ratio exceeded 2 percent on 20 of the 122 trading days between Nov. 22 and May 22.
Although the 2 percent threshold is not an official regulatory benchmark, market participants widely view it as a warning signal because the ratio typically hovers around 1 percent under stable market conditions.
Analysts say the trend has moved beyond temporary volatility in individual speculative stocks and now points to mounting stress from excessive leverage and deteriorating investor sentiment.
The spike in liquidation ratios since November was concentrated mainly in March and May. Days exceeding the 2 percent threshold totaled one in November, two in February, nine in March, one in April and seven in May.
The highest single-day ratio was recorded on May 20, when 7.6 percent of margin credit accounts were forcibly liquidated. Outstanding margin credit stood at 1.64 trillion won ($1.1 billion), while actual forced liquidations reached 145.8 billion won.
The previous peak came on March 5, when the ratio hit 6.5 percent, with outstanding credit at 2.14 trillion won and liquidations totaling 77.7 billion won.
The liquidation ratio also breached the severe 4 percent level on five occasions: May 20 (7.6 percent), March 5 (6.5 percent), May 18 (6.0 percent), May 11 (5.4 percent) and May 19 (4.6 percent).
The recent figures mark a stark deterioration from earlier periods. Between May 22 and Nov. 22, 2024, the ratio exceeded 2 percent only three times, peaking at 4.6 percent on Aug. 6. During the preceding six-month period from Nov. 21, 2023, to May 21, 2024, it never crossed 2 percent, reaching a high of just 1.8 percent.
Average liquidation ratios have also climbed sharply. While average ratios during previous six-month periods ranged between 0.6 percent and 0.8 percent, the average over the latest six months jumped to 1.45 percent.
At the same time, both outstanding margin credit and liquidation volumes expanded significantly.
Average daily outstanding margin credit over the past six months reached 1.1 trillion won, exceeding the roughly 940 billion won averages recorded in the prior three periods. Average daily forced liquidations surged to 17.33 billion won, compared with 5 billion won to 8 billion won previously.
The data excludes other major leverage channels such as margin loans, stock loans and contracts for difference (CFDs), suggesting overall exposure to forced selling may be substantially larger.
Outstanding stock-collateralized loans, in which investors borrow against existing equity holdings, also climbed sharply from roughly 18.5 trillion won in late May 2024 to 25.7 trillion won this month.
Analysts warn that elevated leverage across multiple channels could amplify broader market sell-offs during periods of volatility, as forced liquidations trigger additional downward pressure on stock prices.
Concerns are also growing over the recent launch of single-stock exchange-traded funds (ETFs) and exchange-traded notes (ETNs) tied to companies such as Samsung Electronics and SK hynix, whose combined weighting in the local stock market exceeded 50 percent during Wednesday's intraday trading.
Critics argue that introducing such leveraged products under current market conditions could expose retail investors to even greater risks, including “volatility drag,” in which repeated market swings gradually erode returns over time even if the underlying stocks continue to rise.
"If leverage transactions accumulate excessively, massive volumes of forced liquidations can hit the market with a time lag," said Yom Dong-chan, an analyst at Korea Investment & Securities. "As the scale of liquidations expands, market volatility is highly likely to amplify in tandem, making this a period that demands extreme caution from investors."
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