South Korea’s artificial intelligence-driven stock boom is turning into a warning about the dangers of excessive leverage, after a sharp fall in SK Hynix triggered billions of dollars in forced selling and deepened a broader decline in the Kospi index.
SK Hynix fell a record 15 per cent on Monday, prompting managers of leveraged products linked to the chipmaker to sell large volumes of shares. The pressure transformed what had begun as a reassessment of AI valuations into a wider market rout, with the Kospi sliding about 25 per cent in three weeks.
The episode has highlighted how margin loans, single-stock leveraged exchange-traded funds and concentrated index weightings can reinforce one another, magnifying market moves in both directions.
SK Hynix Fall Triggers Billions in Forced Selling
According to a Goldman Sachs sales and trading note cited in the report, SK Hynix’s double-digit decline may have forced leveraged funds to sell about $5 billion worth of shares to rebalance their exposure.
That amount represented around 18 per cent of the combined value traded in SK Hynix shares and stock futures that day.
The selling was driven largely by market mechanics rather than a fresh change in the company’s underlying business outlook. Leveraged products are designed to deliver multiples of daily returns, requiring managers to adjust their positions sharply when the underlying stock moves.
The effect has been amplified by the size of the products involved. More than a dozen single-stock leveraged products tracking SK Hynix and Samsung Electronics began trading in Seoul in late May. Together, they hold more than $14 billion in assets under management.
A Hong Kong-listed product offering twice the daily return of SK Hynix, launched in October, quickly became the largest product of its kind globally.
The prices of more than a dozen leveraged exchange-traded funds tracking the two memory-chip companies have fallen by about 40 per cent since their Seoul listings, according to data cited in the report.
Korea’s AI Market Becomes a Global Volatility Channel
South Korea occupies a central position in the global AI hardware supply chain, while SK Hynix and Samsung Electronics together account for more than half of the Kospi index.
The concentration means sharp moves in the two companies can have an outsized effect on the broader market. SK Hynix also trades in the United States through American depositary receipts, allowing sentiment to move between Wall Street and Seoul across different trading sessions.
That feedback loop was visible when the Kospi rebounded by more than 6 per cent on Wednesday, supported by a recovery in SK Hynix shares after its US-listed receipts rose 27 per cent.
Market participants warned that volatility generated in one market could increasingly spill into the other, creating an almost continuous cycle of gains, losses and forced portfolio adjustments.
Analysts said South Korea’s semiconductor industry continued to benefit from genuine structural demand, but the rapid expansion of leveraged trading had made the market more fragile.
Margin borrowing has added another layer of risk. The value of margin loans in South Korea reached more than 38 trillion won, or about $25.4 billion, in June and stood at 34.8 trillion won as of Monday.
A prolonged decline could trigger additional margin calls, forcing investors to sell shares and potentially accelerating the downturn.
Regulators Consider Limits as Losses Mount
South Korean authorities are monitoring the effect of single-stock leveraged exchange-traded funds and considering whether additional measures are required.
The country’s top financial watchdog recently expressed regret over approving the listings, according to the report.
Possible responses include stronger investor education, tighter restrictions on leverage and a reduction in the permitted leverage ratio from two times to 1.5 times. However, policymakers face the challenge of limiting instability without disrupting the structure of the financial markets.
Regulators may also have limited influence over leveraged products listed outside South Korea, including those traded in Hong Kong and the United States.
The recent decline has raised concerns for retail investors who may hold leveraged products longer than their intended daily trading horizon. Such products can produce substantial losses when volatility persists, even when the long-term fundamentals of the underlying company remain unchanged.
Market participants warned that a sell-off in New York could set the tone for Seoul, where leveraged funds and margin calls might deepen the move before the effects return to the US session. The result could be a nearly round-the-clock cycle of volatility driven less by corporate performance than by leveraged positioning.
About the author — Suvedita Nath is a science student with a growing interest in cybercrime and digital safety. She writes on online activity, cyber threats, and technology-driven risks. Her work focuses on clarity, accuracy, and public awareness.
