Key points
- The Kospi closed up 17.91% at 6,595.45 on July 31, its biggest one-day rise on record, past the 11.95% from Oct. 30, 2008.
- A new rule that took effect the same morning requires 30 million won ($21,000 USD) in cash to buy single-stock leverage funds. 94.1% of Korean stock accounts hold less than that.
- Those funds returned about 60% that day. Trading in them fell to 3 trillion won from 12.4 trillion the session before.
- SK Hynix closed limit up at 1,718,000 won ($1,207 USD). Samsung Electronics rose 26.81%, its best day ever.
On Friday, July 31, the Kospi closed up 17.91 percent at 6,595.45. No day in the index's history has been bigger, in points or in percent. The record it broke was 11.95 percent, from Oct. 30, 2008.
SK Hynix finished at 1,718,000 won. A Korean stock can't rise more than 30 percent in a session, and it closed at the ceiling, up 29.95 percent. It has never once closed there since the band was widened to 30 percent in 2015. The last limit it hit at all was in January 2009, back when the cap was 15 percent. Samsung Electronics had the best day it has ever had, up 26.81 percent to 262,500 won, and it has now made back its whole July loss in three sessions.
Meritz Securities analyst Yang Seung-soo put it down to nerves settling. "As confidence recovered, buying concentrated across the whole semiconductor sector," he said.
Foreigners bought 7.22 trillion won of Kospi shares, about $5.07 billion, and they have never bought more in a day. Half of that went into SK Hynix alone. Korean individuals sold 8.25 trillion won, which is also a record, and that number is where this gets strange.
They weren't betting against the market
The assumption outside Korea has been that small investors here spent July betting on the fall. The flow data says otherwise. Through the worst of it they were buying the funds that return double what a stock does.
Take July 28, the session the Kospi fell 10.84 percent and trading halted. Individuals put about 1.1 trillion won into five leveraged ETFs that day, close to $773 million, which was more than a quarter of everything they bought. KODEX SK Hynix Single-Stock Leverage alone took 420 billion won.
The inverse funds, the ones that pay when a stock drops, they were selling. KODEX 200 Futures Inverse 2X saw 144.6 billion won of individual net selling on July 28. Another 71.4 billion left KODEX Inverse. People who had bought protection earlier in the month were cashing it in and moving the money to the rebound side.
Kang Song-chul at Eugene Investment Securities told reporters on July 29 to watch exactly this. "Investor capitulation selling can signal near-term market bottoms," he said, and he pointed at money leaving the Samsung and SK Hynix leveraged products. The Kospi's lowest close of the month came the next session.
The funds are part of why July happened at all
Lee Kyung-min, who heads FICC research at Daishin Securities, doesn't treat these products as a side story to the crash. "Behind July's Kospi crash sat extreme concentration in semiconductors and the reaction to the growing influence of single-stock leverage ETFs," he said. He now has the Kospi's forward earnings multiple at 4.74 times, which he calls extreme undervaluation territory and the lowest since 2000.
"The explosion in trading of single-stock inverse products is also raising the secondary volatility output," Kiwoom Securities researcher Han Ji-young had said a day earlier. The firms providing liquidity in those funds hedge by buying and selling the real shares, so when the money piles into one name, the hedging moves that name. Korea has paused trading 41 times this year, against 26 in all of 2008.
Here is what a 30 percent day does to both sides of that trade.
| Fund | Friday |
|---|---|
| TIGER 200 IT Leverage | +60.00% |
| KODEX Semiconductor Leverage | +59.98% |
| SOL SK Hynix Single-Stock Leverage | +59.93% |
| TIGER 200 Futures Inverse 2X | -44.23% |
| PLUS Samsung Electronics Futures Single-Stock Inverse 2X | -52.61% |
| SOL SK Hynix Futures Single-Stock Inverse 2X | -59.95% |
That last line is the worst day the fund has had since it listed in May.
94.1 percent of accounts were locked out that morning
Friday was day one of a new restriction. Buying a single-stock leverage fund now takes a cash deposit of 30 million won, near $21,000, up from 10 million. Shares, ETFs and bonds already held don't count toward it. Only cash.
Yoo Dong-soo chairs the National Assembly's National Policy Committee. He pulled the numbers from six brokerages and read them to the regulator on July 29. Accounts holding less than 30 million won are 94.1 percent of all of them. Those same accounts do 58.1 percent of daily trading value.
"Since you raised the basic deposit standard to 30 million won as a supplementary measure for single-stock leverage ETFs, I got the statistics on what 30 million won actually means," he told the regulator. "Did the financial authorities who make and enforce the policy understand what 30 million won means when they made this?" He wasn't finished. "I wish they would actually trade an ETF, experience on the ground what problems come up, and then make the law knowing what the risks are."
Two days later the rule landed. Trading in the single-stock leverage and inverse funds came to about 3 trillion won on Friday, against 12.4 trillion on Thursday and 15 trillion on July 29. So the products returned 60 percent on a quarter of the previous day's volume, with most of the people who had been trading them standing outside.
Hyundai Motor Securities doesn't expect much more from the rule than that. Analyst Kim Jae-seung reckons the buying had already cooled on its own. "Individual investors' net purchase intensity for single-stock leverage ETFs already weakened in July, and the regulatory impact should be limited," he added.
56 trillion won is already gone
Citi has tried to size the damage. It puts Korean retail losses on these funds at about 56.3 trillion won, or $38.7 billion. The market value of leverage ETFs built on Korean assets stood at $52.5 billion on June 22 and had fallen to $19 billion by July 29. The biggest single piece of that sits in the SK Hynix products, down some $17 billion.
The bank was not calling a bottom. Individual investors had not yet capitulated, it said, so it was early to look at any of this optimistically.
So why sell a record amount into a record rally
Two reasons, and only one of them is a choice.
Plenty of people here had been under water since the start of July, and Friday was the first chance to leave at a price that didn't hurt. They'd already started selling on July 29 and 30 after absorbing foreign selling for weeks.
Some of it was forced. A brokerage sells the position itself when it was bought with borrowed money and the price falls far enough. Those sales are up 596 percent this year, and HSBC reckons only about 2 percent of Korean margin accounts have been closed out, so most of the borrowed positions are still sitting there.
Im Jeong-eun and Tae Yun-seon at KB Securities are already looking past all of it. "Next month there are still earnings from major companies like Palantir, AMD and SanDisk, and the US July non-farm payrolls on the 7th," they wrote. "With the supply and demand worries clearing and the upside factors taking the lead, we expect the market to enter a bottoming phase."
Meanwhile the won strengthened. A dollar bought 1,424.0 won at the Seoul close on Friday. On Thursday it bought 13.4 won more.
Sources
- 머니투데이, 주식 계좌 94%가 레버리지 ETF '매수불가'..."3000만원 의미 알고 정책 만드나", on the account statistics and the Yoo Dong-soo remarks
- 서울신문, 코스피 사상 최대 '17.9%' 폭등...'60% 불기둥' 레버리지 거래대금은 4분의 1토막, on the collapse in leverage fund trading and the Meritz comment
- 헤럴드경제, "10% 폭락은 매수 기회" 개인, 레버리지 ETF에 1조 베팅...인버스는 차익실현, on what individuals bought and sold on July 28
- 머니투데이, 씨티증권 "레버리지 ETF 투자한 개미들, 56조 손실 추정", on the Citi loss estimate
Won figures are converted at 1,424 won to the dollar, the July 31, 2026 rate. This article is for information only and is not investment advice.
