Extreme Stock Market Volatility... Single-Stock Leverage ETFs Act as a Catalyst

Extreme Market Volatility Follows Launch of Samsung Electronics and SK hynix Leverage ETFs

'Short Gamma' Effect Amplifies Volatility as Prices Fall and Selling Intensifies

On the 27th of last month, when the single-stock leverage ETF (Exchange Traded Fund) based on Samsung Electronics and SK hynix soared immediately after its listing, the stock prices of each item displayed in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul, and the screen showing the SK hynix single-stock leverage ETF being traded that day. Photo by Yonhap News

It has been analyzed that the launch of single-stock leverage exchange-traded funds (ETFs) based on Samsung Electronics and SK hynix on May 27 has recently triggered sharp fluctuations in the Korean stock market.

According to the financial investment industry on June 10, the KOSPI 200 Volatility Index (VKOSPI), often referred to as the "Korean Fear Index," closed at 91.23 the previous day, up 19.04% from the previous session. This is the highest level since the Korea Exchange began officially publishing the index on April 13, 2009.

Even when examining VKOSPI data collected prior to the official launch of the index, the closing level surpassed the 89.30 recorded on October 29, 2008, during the global financial crisis.

The VKOSPI is an index that measures the market's expected future volatility as reflected in options prices. While it typically rises when the KOSPI plunges, it can also increase during market rallies if investor anxiety and overall market uncertainty are high.

Han Ji-young, a researcher at Kiwoom Securities, explained, "While the theoretically calculated daily expected price fluctuation for the VKOSPI is plus or minus 5.7%, over the last two trading days, we have seen actual fluctuations of plus or minus 8%, which is highly unusual," describing the volatility as extreme.

In the securities industry, many believe that single-stock leverage ETFs are the main driver behind the recent surge in market volatility. According to Mirae Asset Securities, the cumulative trading volume of the 14 single-stock leverage ETFs listed last month reached 58 trillion won over the seven trading days from May 27 to June 5, with net purchases by individual investors totaling 7.4 trillion won. During the same period, individual net purchases of all Korean equity-type ETFs totaled 7.7 trillion won, with semiconductor-related ETFs accounting for 79% of the total, highlighting a severe concentration of funds.

Yoon Jae-hong, a researcher at Mirae Asset Securities, stated, "Following the listing of single-stock leverage ETFs for Samsung Electronics and SK hynix in Korea, the concentration of funds in large-cap KOSPI stocks has intensified." He added, "As a result of this excessive capital concentration, a 'short gamma' phenomenon has emerged during downturns, exacerbating the magnitude of declines."

The short gamma phenomenon refers to a mechanical chain reaction in the financial ecosystem, where market makers are forced to buy more as prices rise and sell more as prices fall. When holding a short gamma position, market makers must chase the price upward by buying when prices rise and sell even more when prices fall in an effort to hedge their losses, thereby amplifying market volatility.

Researcher Yoon pointed out, "Currently, single-stock leverage ETFs listed in Korea are managed using both futures and spot assets. When the price of the underlying asset changes, market makers must buy or sell the underlying asset in the same direction as the price movement to maintain a neutral position, which further increases the volatility of the underlying asset."

Lee Jong-wook, a researcher at Samsung Securities, also noted, "As the scale of various leverage ETFs that include Samsung Electronics and SK hynix expands, both short gamma and gamma hedging volumes increase as well." He diagnosed, "Volatility itself has become structurally amplified, and the sharp rises and falls of the top two market cap stocks are now part of the new market environment that investors must accept."

This content was produced with the assistance of AI translation services.