Market volatility has overwhelmed investors. Recently, the frequency of volatility control device (VI) activations in the domestic stock market has surged. Following the launch of single-stock 2x leverage exchange-traded funds (ETFs), the market has entered a phase of volatility surpassing that seen during the COVID-19 pandemic, characterized by sharp declines and increases. The VI, a safety mechanism designed to prevent drastic price fluctuations in individual stocks, has been activated intensively over the past two months, significantly heightening investors' perception of volatility.
According to the Korea Exchange, from January 2 to July 29 this year, the VI was activated a total of 83,834 times in the domestic stock market. This figure is 50% higher than last year's total of 55,875 activations. It also exceeds the annual activation count of 83,604 recorded during the height of the COVID-19 crisis in 2020. With the second half of the year still ahead, the number of VI activations this year is on track to reach an all-time high. Notably, the past two months have seen a marked increase in volatility. In June, the VI was activated 21,257 times, and in July, it was activated 18,085 times, totaling 39,342 activations over the two months. This translates to an average of about 913 activations per trading day during this period.
The VI is a system that switches trading to a single-price method for two minutes when the price of an individual stock rises or falls beyond a certain threshold, providing investors with time to reassess prices during rapid fluctuations. There is no limit on the number of activations, meaning the same stock can trigger the VI multiple times in a single day.
The KOSPI index has also experienced unprecedented volatility. Since June, there have been 16 trading days where the KOSPI fluctuated by more than 5%. Of these, there were five days of gains and 11 days of losses, indicating a greater number of sharp declines. For instance, on June 9, the KOSPI rose by 8.18% in a single day, while on June 23, it fell by 9.99%. This pattern of significant fluctuations continued, with the KOSPI rising by 5.42% on June 25 and falling by 5.81% the following day. In July, the index also saw unpredictable movements, including a 5.76% rise on July 3, a 5.35% drop on July 8, an 8.95% plunge on July 13, and a 6.24% rebound on July 15, followed by a 6.37% decline on July 16.
On July 28, the KOSPI plummeted by 10.84% in a single day, dropping more than 700 points, and during the session, it even showed a decline exceeding 12%. Analysts suggest that the increased size of the index compared to the past has amplified the impact of these daily fluctuations on investors.
Overall market anxiety is also rising. The KOSPI 200 Volatility Index (VKOSPI), often referred to as the 'Korean fear index,' soared to a peak of 93.27 during the recent downturn. The VKOSPI reflects the expected future volatility of the market as indicated by option prices. After spiking to the 97 level last month and then stabilizing in the 80s, it has surged again in response to the ongoing market decline, reflecting heightened investor anxiety.
The recent increase in volatility is attributed to a growing concentration in large-cap stocks following the launch of single-stock 2x leverage ETFs. Since the introduction of leverage ETFs based on Samsung Electronics and SK Hynix on May 27, demand for leveraged investments among individual investors has surged. However, this has coincided with a downturn in the semiconductor sector, leading to increased losses and a decline in investor sentiment. While it is difficult to definitively state that leverage ETFs directly cause volatility, analysts suggest that they can amplify price fluctuations by increasing buying pressure in rising markets and triggering sell-offs in declining markets.
In light of these developments, financial authorities and lawmakers are recognizing the impact of single-stock leverage ETFs on market volatility and are working on regulatory improvements. On this day, Financial Services Commission Chairman Lee Ok-keun acknowledged the criticism that this situation is a 'man-made disaster' by the financial authorities, stating, "I feel a heavy responsibility as the final decision-maker." He also mentioned additional measures, including setting a 20% investment limit for individual investors in single-stock leverage ETFs.
* This article has been translated by AI.
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