Seoul authorities have been rolling out one emergency action after another for damage control as the epic downward spiral in chip stocks themed around single-stock leveraged ETFs hemorrhaged investors from pensioners to teenagers.
The public anger soon evolved into a broader debate over who should bear responsibility for one of the biggest retail-investor wipeouts in recent years.
Regulators are now tightening rules on single-stock leveraged exchange-traded funds (ETFs), while the financial industry has agreed to overhaul trading practices to reduce the products' impact on the broader market.
Yet some economists argue that restricting risky products cannot eliminate speculative demand and may instead discourage investors from learning how to manage risk.
Following an emergency market review meeting chaired by Finance Minister and Deputy Prime Minister Koo Yun-cheol, the government announced four additional measures late Wednesday.
The package caps individual holdings of single-stock leveraged ETFs at 20 percent of total investment assets, introduces an excessive-order surcharge modeled on the futures market, requires investors to complete simulated trading before purchasing the products and creates a legal basis for emergency market-stabilization measures, including temporary leverage adjustments similar to Hong Kong's variable-leverage framework.
The new measures will complement a separate package of safeguards taking effect Friday. They include raising the minimum cash requirement for new or additional purchases to 30 million won ($20,600) from 10 million won, increasing the minimum trading unit to 20 shares, suspending new leveraged ETF launches, restricting securities firms' marketing activities and strengthening investor-education requirements.
The latest steps followed a two-day market rout that exposed how quickly leveraged bets on South Korea's artificial-intelligence champions could unravel. The benchmark KOSPI plunged 10.84 percent on Tuesday and another 5.98 percent on Wednesday after falling as much as 12.6 percent intraday.
Koo said single-stock leveraged products had amplified market swings by funneling investor money into a narrow group of companies. "We will manage the overall volume by setting individual investment limits," he said after chairing the emergency market review meeting at the Government Complex Seoul.
Industry shifts trading practices
Alongside the tighter regulations, the financial industry unveiled its own measures to reduce the products' influence on underlying share prices.
The move reflects growing concern that ETF rebalancing has itself become a source of market volatility. At an emergency meeting hosted Wednesday by the Korea Financial Investment Association (KOFIA), chief executives from eight asset managers and liquidity providers (LPs) at major securities firms agreed to spread ETF rebalancing trades throughout the trading day instead of concentrating large buy and sell orders near the market close.
Leveraged ETFs must rebalance their positions every trading day to maintain their target leverage ratio. When large volumes of buying and selling are concentrated toward the close, they can amplify swings in the underlying shares. Spreading those trades throughout the session is intended to reduce that feedback loop.
Participants also pledged to reduce unnecessary LP trading, closely monitor ETF premiums and discounts, strengthen investor risk disclosures and cooperate with the government's investor-protection measures, including the higher minimum cash requirement and expanded investor education.
Together, the government's regulations target speculative demand, while the industry's voluntary changes are designed to lessen the market impact of ETF trading itself.
Even if the stock recovers, the ETF may not
While the new rules may temper market volatility, they cannot change the mathematics behind leveraged ETFs.
Hanyang Securities said Thursday that even if Samsung Electronics and SK hynix eventually recover to their previous price levels, investors in the corresponding leveraged ETFs could still suffer substantial losses because of the products' daily compounding structure.
Between May 27, when the products were launched, and July 22, Samsung Electronics fell 15.2 percent while its associated leveraged ETFs lost an average of 40.2 percent. SK hynix declined 18.4 percent, but the corresponding leveraged ETFs dropped 49.4 percent.
The brokerage also modeled a hypothetical scenario in which both stocks experienced the same day-to-day gains and losses but ultimately finished exactly where they started. Despite the full recovery in the underlying shares, Samsung-linked leveraged ETFs still lost an average of 14.4 percent, while SK hynix-linked products declined 21.1 percent.
Single-stock leveraged ETFs are designed to deliver a multiple of a stock's daily—not cumulative—return. Because leverage is reset every trading day, gains and losses compound unevenly, meaning investors can lose money even if the underlying stock eventually returns to its starting point. The phenomenon is widely known as volatility drag.
The findings underscore the need for stronger investor education, with Hanyang Securities arguing that many retail investors continue to buy two-times leveraged ETFs without fully understanding how the products work or the risks they carry.
Can tighter rules break the vicious cycle?
Yang Jun-sok, professor of economics at the Catholic University of Korea, said the latest measures are likely to reduce market-wide volatility but would do little to shield investors who have already accumulated heavy losses.
Yang compared the new restrictions with South Korea's market-wide short-selling ban imposed in late 2023 after regulators uncovered illegal short-selling by several global investment banks.
The ban helped calm volatility, he said, but came at the cost of capital-market development. By restricting access to a broader range of investment products and strategies, it reduced opportunities for retail investors to gain practical experience in managing risk. The policy also fueled complaints that individual investors had been unfairly excluded from higher-return strategies, adding to pressure to lift the restrictions.
"One role of a mature capital market is to introduce various financial products and help investors — particularly retail investors — develop risk-management skills," Yang said.
"When potentially risky products are repeatedly restricted or banned, investors may instead come to believe that anything still allowed by regulators is inherently safe." He argued that speculative demand itself is unlikely to disappear. Instead, investors may simply seek increasingly risky products overseas without improving their understanding of the risks involved.
"If South Korea develops a reputation for not allowing higher-risk investment products, it could ultimately limit the growth and competitiveness of its capital market."
Whether the latest restrictions ultimately succeed may depend less on limiting access to leveraged products than on whether they reduce the speculative behavior that fueled the boom in the first place.
If investors simply migrate to higher-risk products overseas, South Korea could end up with a calmer market at home but little improvement in retail investors' understanding of risk.
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