How did the deleveraging in the South Korean stock market unfold?

Original Author: qinbafrank (X: @qinbafrank)

The tragic deleveraging stampede has already occurred. Now is the time for a post-mortem to understand how deleveraging happened. From my perspective, this wave of deleveraging began with the Korean stock market. Although the US stock market started deleveraging on July 1st, in hindsight, the first long bearish candle on June 23rd marked the beginning of the deleveraging process. Today, let's trace the timeline of how this wave of deleveraging unfolded in the Korean stock market.

1. Before June 23rd, All Conditions for a Stampede Were Already in Place

To understand the subsequent crash, one must first look at the market structure formed between May 27th and June 22nd.

1. Single-Stock 2x Leveraged Products Further Concentrated Capital into Samsung Electronics and SK Hynix

On May 27th, the Korean market launched single-stock 2x leveraged and inverse ETFs tracking Samsung Electronics and SK Hynix. By June 19th, individual investors had net purchased approximately 8.2 trillion won in long leveraged ETFs, with about 4.6 trillion won for SK Hynix and 3.7 trillion won for Samsung Electronics; net purchases of inverse ETFs during the same period were only about 0.3 trillion won.

More critically, capital wasn't simply flowing from cash into the market. It was clearly shifting from more diversified semiconductor ETFs and KOSPI index ETFs into single-stock leveraged products. By June 19th, the AUM of the SK Hynix leveraged ETF had reached 9.15 trillion won, while Samsung Electronics-related products hit 5.22 trillion won.

This led to three structural changes:

1) Investors moved from diversified sector exposure to concentrated exposure in just two stocks;

2) Ordinary stock volatility was amplified by the 2x leverage;

3) As ETF sizes grew with the uptrend, the subsequent daily rebalancing trades also increased.

The Korea Capital Market Institute estimates that the AUM of SK Hynix-related leveraged ETFs increased by about 4.31 trillion won between June 10th and 19th. Of this, roughly 3.6 trillion won was not from new subscriptions, but from net asset value expansion driven by the underlying asset's rise. In other words, even without new investors entering, the market's own rise automatically created greater subsequent rebalancing demand.

2. The Two Stocks Were Approaching "Half of KOSPI"

The combined market capitalization weight of Samsung Electronics and SK Hynix in the KOSPI rose from 34% at the end of 2025 to 49% on May 26th, further reaching 52% by July 15th.

This is not leverage in the traditional debt sense, but it constituted a very strong index structural leverage:

A 10% decline in these two stocks, even if other stocks remained flat, could directly drag the KOSPI down by approximately 5%.

As of July 15th, the total market cap of the 16 single-stock leveraged or inverse products had expanded from 4.4 trillion won at their launch on May 27th to 11.9 trillion won, with daily trading volume increasing from 10.4 trillion won to 13 trillion won.

3. The Regulator's Statement on June 22nd Became the Confidence Turning Point

On June 22nd, the head of the Financial Supervisory Service publicly admitted that the approval of the relevant products was "too hasty" and stated that measures to stabilize the market were being studied.

The regulator also explained that the initial approval of domestic single-stock leveraged products was aimed not only at bringing demand for offshore products under domestic regulatory oversight but also at attracting Korean retail capital back from the US and Hong Kong markets to alleviate downward pressure on the won. However, the actual currency impact was limited.

As of the end of May, the total scale of various retail leveraged investments in Korea had reached approximately 60 trillion won.

The market implication of this statement was not "immediate trading ban," but rather:

• The expectation of policy support for product expansion was shattered;
• The room for product expansion by brokerages and asset managers was questioned;
• Foreign investors began to worry that regulation could alter market liquidity structure;
• The market seriously assessed the risk of the negative feedback loop of 2x ETFs for the first time.

2. Key Index Path

Below are the most important price points in this round. All relative declines are based on the close of 9,114.55 on June 22nd.

3. Dissecting the Deleveraging Process by Timeline

Phase 1: June 23rd – Price Crashed First, But Debt Did Not Decrease

On June 23rd, the KOSPI fell 9.99% in a single day. Samsung Electronics and SK Hynix both dropped over 12%, triggering a 20-minute market-wide trading halt.

Direct triggers included:

• The previous day's strong warning from regulators regarding leveraged ETFs;
• Foreign investors began concentrated selling of the two chip giants;
• A simultaneous global tech stock correction;
• After a sustained strong rally, institutions had demands to book profits and control portfolio weights.

With Samsung Electronics and SK Hynix already accounting for over half of the KOSPI, selling pressure on these two stocks quickly transformed from an individual stock issue into an index issue.

However, a very important and very dangerous phenomenon emerged on this day:

• Forced liquidation amounts rose from approximately 19.9 billion won the previous day to 42.427 billion won;
• Outstanding receivables actually increased by 181.6 billion won, reaching 1.4792 trillion won;
• Credit loan balances remained near 38 trillion won.

In other words, the first day's crash did not lead to widespread debt repayment by investors. On the contrary, some investors continued using short-term credit funds to add to their positions during the decline.

The essence of this phase

This was a price deleveraging, but not a balance sheet deleveraging.

Prices fell rapidly, reducing ETF net asset values and collateral values. However, retail investors did not retreat; they continued buying the dip. Existing leverage was not cleared, while new leverage was being added.

Emotionally, the market still interpreted the decline as a short-term technical mispricing caused by regulatory rhetoric, rather than a trend reversal.

Phase 2: June 24th to 25th – Forced Liquidations and Re-leveraging Occurred Simultaneously

On June 24th and 25th, the KOSPI rose by 3.26% and 5.42%, respectively. By the close on June 25th, it was only about 2% below the June 22nd high.

However, beneath the surface recovery, two completely opposite things were happening internally.

On one side: Forced Liquidations

Publicly reported forced liquidations on June 24th reached approximately 110.793 billion won. This mainly involved securities firms processing short-term credit transactions where investors had failed to provide sufficient margin in a timely manner.

On the other side: New Margin Financing

On the same day, credit loan balances actually increased by approximately 539.2 billion won, reaching a record high of 38.6328 trillion won.

This means:

Old accounts were being liquidated, while new or surviving accounts were borrowing more money to buy the dip.

Consequently, June 24th became the peak of the total market credit loan balance for this cycle, not the day before the June 23rd crash.

Why Leveraged ETFs Amplified the Rebound

A 2x long ETF must restore its 2x target exposure daily.

Assume the ETF's initial NAV is A, holding 2A in stock or derivatives exposure:

• After a 10% drop in the underlying asset, the ETF's NAV would fall to approximately 0.8A;
• The existing exposure value would change to roughly 1.8A;
• The new target exposure should be 1.6A;
• Therefore, it would need to sell approximately 0.2A.

Conversely, when the underlying asset rises, the ETF must buy more.

The Korea Capital Market Institute estimates that the rebalancing trade size for single-stock 2x ETFs is roughly proportional to "previous day's AUM × that day's stock price change," and adjustments occur in the same direction in both the spot and futures markets.

Thus, the rebound from June 24th to 25th was jointly driven by:

• Retail dip-buying;
• Short covering;
• Upward rebalancing by leveraged ETFs;
• Hedging adjustments by brokerages and market makers.

This was not a healthy rebound after completing deleveraging; it was more like re-leveraging in the middle of the deleveraging process.

Phase 3: June 26th to 30th – Foreign Capital Withdrew, Retail Investors Caught the Falling Knife, Risk Shifted to the Household Sector

On June 26th, the KOSPI fell again by 5.81%. Although the index only closed down 0.20% on June 29th, intraday volatility was extremely high. The Korea Volatility Index (VKOSPI) surged to an all-time high of 97.99, compared to just 28.85 at the end of 2025.

The most important change during this phase was not any single trading day, but the shift in shareholding structure.

Foreign investors were not simply "bearish on Korea," but reducing concentration

In the first half of 2026, foreign capital saw a net outflow of approximately 70.8 billion USD from the Korean stock market. Just in June, net outflows were roughly 12.63 billion USD.

These sell orders originated from various institutions:

• Mutual funds sold approximately $7.5 billion;
• Pension funds sold approximately $4.35 billion;
• Hedge funds sold approximately $1.87 billion.

Analysis suggests this capital wasn't solely due to a belief that the Korean economy or semiconductor profits would collapse, but because:

• Korean and Taiwanese chip stocks had risen too much;
• The weight of Samsung Electronics, SK Hynix, and TSMC in global funds had rapidly inflated;
• Both passive and active funds needed to control concentration risk in single countries, single sectors, and single stocks;
• Some capital was involved in currency hedging and benchmark rebalancing;
• Long-term institutions were booking profits.

Retail investors became the marginal buyers of last resort

Korean individual investors net purchased approximately 42.4 trillion won in KOSPI stocks cumulatively in June.

Thus, the core capital flow structure for June was:

Foreign capital, pension funds, and mutual funds reduced risk, while Korean retail investors absorbed these positions using cash, margin financing, and leveraged ETFs.

While this supported the index in the short term, it also had two consequences:

1. Risk shifted from global institutional balance sheets to Korean household balance sheets;
2. The average risk tolerance of the remaining market holders decreased, making them more sensitive to margin calls and price volatility.

Phase 4: July 1st to 3rd – Global Semiconductor Trade Reverses, ETFs Begin Systematic Selling Low and Buying High

On July 1st, the KOSPI fell 2.04%, and on July 2nd, it crashed a further 7.89%.

On July 2nd:

• SK Hynix fell 14.6%;
• Samsung Electronics fell 9.1%;
• Japan's Kioxia fell over 13.5%;
• US semiconductor stocks also experienced significant adjustments overnight.

The market narrative shifted from "current semiconductor profits are good" to questioning:

• Rumors of Meta selling computing power raised concerns about overcapacity;
• Whether US cloud companies could maintain high-intensity AI capital expenditure sustainably;
• Whether large-scale data center construction was entering a phase of marginal slowdown;
• Whether the hundreds of billions of dollars in new capacity from Samsung Electronics and SK Hynix could lead to future oversupply;
• How much longer the current memory price uptrend could last;
• Whether the pace and duration of profit growth were already fully priced into the stocks.

The industrial spark and market amplifier must be distinguished

The industrial-level sparks were:

• Profit-taking in global semiconductors;
• Doubts about the sustainability of AI capital expenditure;
• Potential peaking of memory price growth rates;
• New capacity plans potentially altering future supply and demand.

But what truly amplified the decline to nearly 8% was the market structure:

1. Foreign selling of heavy-weight chip stocks;
2. 2x ETFs forced to reduce exposure as the underlying assets fell;
3. Synchronized selling by futures and spot market makers for hedging;
4. Widening index decline, falling margin ratios in leveraged accounts;
5. Further position reduction by risk models, stop-loss algorithms, and programmatic funds.

On July 3rd, the KOSPI rebounded 5.76%, again explainable by the reverse operation of the same mechanisms: retail dip-buying, short covering, and ETFs re-leveraging.

Thus, this phase formed a classic pattern:

When the market falls, ETFs must sell; when it rebounds, ETFs must buy. Instead of gradually converging, the market had its fluctuations amplified in both directions.

The Korea Capital Market Institute also emphasizes that not all volatility can be attributed to ETFs, as volatility in US and Japanese memory stocks also rose sharply during this period, and factors like Middle East tensions, inflation, and global interest rate uncertainty were equally important. ETFs were amplifiers, not the sole root cause.

Phase 5: July 6th to 8th – "Good News Fails to Rally," Sentiment Shifts from Technical Correction to Earnings Sustainability Concerns

July 7th was the second key sentiment turning point

Samsung Electronics released preliminary guidance indicating that Q2 operating profit could increase roughly 19 times year-over-year. However, Samsung Electronics still fell 6.9% on the day, at one point losing over 10%; SK Hynix fell 6.1%.

This signaled that the market had entered a phase where "good news cannot push prices higher":

• It wasn't that earnings were bad;
• It was that prior expectations were already too high;
• Investors began to fear current earnings represented a cyclical peak;
• Good news was used as an opportunity to sell, not to chase higher.

On that day, foreign investors net sold approximately 2.9 trillion won, while individual investors net purchased approximately 3.2 trillion won. More alarmingly, the credit loan balance on the KOSPI market was still around 29.7 trillion won, only slightly below the late-June peak of 29.8 trillion won.

In other words, even though the index had fallen about 16% from its peak, KOSPI credit loan debt had barely decreased.

Risk Began to Spread to Other Industries

July 7th wasn't solely about semiconductors declining:

• LG Energy Solution estimated Q2 operating profit would drop 77% due to weak EV demand, with its stock falling 6.4%;
• Hanwha Ocean dropped 22.7% after Canada selected a German design for its submarine project.

This indicates the market's concerns were expanding from a semiconductor product structure issue to:

• Slowing battery industry profits;
• Uncertainty in defense and shipbuilding orders;
• Reduced risk budget for high-valuation growth stocks;
• More aggressive pricing of negative company-specific news.

July 8th Officially Enters Bear Market

On July 8th, the KOSPI fell 5.35%, marking a decline of over