[Reporter’s Notebook] Hastily Launched Single-Stock Leverage Products Demand a Thoughtful Prescription

Single-Stock Leverage Products Amplify Volatility
Authorities Rushed Launch on Grounds of Exchange Rate and Investor Choice
Industry Voices Say "Should Never Have Been Released"
Careful Deliberation Needed for Real Solutions

"This was a product that never should have been launched in the first place."

This is how an industry insider responded when the topic of single-stock leverage products came up. Since May, when financial authorities led a wave of listings of single-stock leverage products, the market’s reaction has been filled with concerns and criticism. Voices from the asset management industry are clear: this product was fundamentally flawed from inception.

As volatility in domestic and international stock markets reached its peak, single-stock leverage products began acting as a fuse, amplifying market fluctuations. Whenever the underlying assets, namely Samsung Electronics and SK hynix, wavered, these leverage products intensified the swings. The “short gamma structure,” which involves selling even more during market downturns and buying even more as stocks rise, has further exacerbated volatility. Since the launch of single-stock leverage products, the KOSPI sidecar was triggered 18 times and circuit breakers five times. More than half of all market stabilization mechanisms activated this year took place in just a month and a half.

Financial regulators cited the return of so-called Seohak ants (Korean retail investors who trade overseas stocks) and efforts to stabilize exchange rates as justifications for introducing single-stock leverage products. The process moved quickly from a revision of the enforcement ordinance at the end of April to the simultaneous listing of 16 products on May 27. However, the actual effect was minimal, and regulators have acknowledged the substantial side effects. Lee Chanjin, Governor of the Financial Supervisory Service, admitted, "Looking back, it's true that we rushed the preparations," and added, "I am now reflecting on whether I should have lain down at the time and blocked this no matter what."

In a wave of optimism about the stock market, little consideration was given to the unique characteristics of the Korean market and the risks of the products themselves. The problem was brought to light despite the fact that the market is already dominated by a few leading stocks, and despite the clear tendency for retail investors to flock to leverage and inverse ETFs. Nonetheless, products were introduced that maximized risks. Even investor safety nets were little different from those prepared for index and theme-based leverage products. The 10 million won minimum deposit requirement was the same as for existing leverage products, and only an additional one-hour online training was introduced.

The authorities’ warning to use these products "for short-term trading only" quickly devolved into a "day trading" atmosphere. It has become rare to see investors pulling back or waiting opportunistically for sector rotation amid extreme market swings. Instead, repeated trading of leverage and inverse products in pursuit of windfall profits has become the norm. Since the listing of single-stock leverage products, as of July 14, the ETF with the highest average trading value was KODEX SK hynix Single Stock Leverage, recording 4.2851 trillion won. Products ranked 4th through 7th in average trading value were also single-stock leverage products.

"Delisting is the answer." This is a candid admission from an ETF manager at an asset management firm—an indication of just how difficult the current problems are to resolve. Authorities have decided to bring together CEOs and working-level employees of securities firms and asset managers to discuss raising the minimum deposit and other voluntary measures to protect investors, but there are voices saying this is not enough. At a work report on July 15, President Lee Jaemyung ordered, "Promptly and thoroughly prepare supplementary measures (for single-stock leverage products)." Since these products were created "quickly," what is needed now is not speed but careful preparation of well-thought-out measures. It is hoped that the financial authorities will deliver policies that reflect a deep consideration of the market's unique structure.

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