After plunging more than 10% on the 4th and then soaring around 10% on the 5th, the roller-coaster KOSPI has prompted Wall Street to call it a market ‘not for the faint of heart’. Despite repeated sharp swings, retail investors have come in with large sums, bottom-fishing and engaging in ‘all-in and leveraged investing’. However, as forced liquidations following sharp price drops were cited among the causes of the previous day crash, concerns are emerging that ‘borrowing to invest’ and ‘leveraged trades seeking 2x returns’ could deepen the declines in the domestic market.

After record drops of 12.06% and 14% the previous day, the KOSPI and KOSDAQ rose 9.63% and 14.1%, respectively, on the day. Over the past three trading sessions, the KOSPI and KOSDAQ have moved up or down by about 10% on average.

Even Wall Street is stunned by volatility exceeding 10%. Jim Bianco, a Wall Street veteran who leads Bianco Research, said on X on the 4th (local time), “The (Korean) market is not for the faint of heart” and added, “Korea stock market has a high share of retail investors; when it rises, it jumps twice as much, and corrections appear not as simple declines but as plunges.”

Jay Woods, chief market strategist at Freedom Capital Markets, told CNBC in the United States, “It is truly shocking to see an index of one of the world major countries fall by as much as 12%,” and added, “If the U.S. market fell 12% in a single day like the KOSPI, it would feel as if the world were ending.”

Although share prices have been surging and swinging wildly, retail investors have increased ‘borrowing to invest’ or moved to buy ‘2x leverage’ products. Over the two days when the indexes plunged (the 3rd-4th), individuals recorded net purchases of 903.7 billion won of ‘KODEX KOSDAQ 150 Leveraged’, which bets two times on a KOSDAQ rise, and also net-bought 886.6 billion won of ‘KODEX Leveraged’, which bets two times on a KOSPI rise. The day before, they bought roughly 1.1 trillion won combined of the two products, and seven of the top ten ETFs by net purchases were leveraged ETFs, showing how money has flooded into leveraged trades.

As demand for ‘borrowing to invest’ surged, NH Investment & Securities on the 3rd and Korea Investment & Securities on the 4th decided to halt new margin-lending transactions. According to the Korea Financial Investment Association, margin loan balances in the domestic market reached a record high of 32.8041 trillion won on the 3rd. That is an increase of about 20% from last year. An official at a financial investment firm said, “Since the bull market, the number of clients using leverage has increased significantly, so it is necessary to continuously manage (credit extension) limits.”

However, there are also concerns that leverage needs to be managed, as some analyses suggest that, behind the previous day crash, individual investors facing liquidation risk amid the plunge conducted large-scale selling.

Cho Joon-gi, a researcher at SK Securities, pointed out, “In a situation where buying interest disappeared the previous day, forced sell-offs and the like triggered additional selling,” and noted, “While funds are flowing in, (leveraged investing) exerts upward pressure on the index, but when the direction changes, it exerts downward pressure on the index.”