Forced stock liquidations top 10% for first time this year as leveraged bets sour

As high-risk investment products proliferate — including single-stock leveraged exchange-traded funds that double the daily return of Samsung Electronics and SK Hynix shares — the share of forced liquidations among investors who bought stocks on partial margin and failed to cover the balance by settlement date exceeded 10% for the first time this year. It is the first time the ratio of forced liquidations to outstanding unsettled receivables has reached double digits since the Youngpoong Paper crisis in October 2023.

According to the Korea Financial Investment Association on Wednesday, the ratio of actual forced liquidations to unsettled receivables in brokered trading stood at 10.5% on June 9, the highest level recorded this year. That is 5.7 times the year-to-date daily average of 1.8%. The total value of forced liquidations also surged to 169.8 billion won (about $122 million) on June 9, more than nine times the daily average of 18 billion won so far this year.

In unsettled-receivable trading, an investor buys shares by putting up only a partial margin deposit and pays the remaining balance by the settlement date. The unpaid balance is the unsettled receivable. Domestic stocks settle on a T+2 basis — two trading days after the transaction date. If an investor fails to cover the balance in time, the brokerage typically liquidates the position by force on the following trading day, T+3, to recover the funds.

The surge in forced liquidations to a year-to-date high in June reflects short-term money that rushed in during a sharp rally but could not withstand the subsequent selloff. The Kospi climbed more than 3% on both May 29 and June 1, reaching 8,801.49 on June 2, before the mood shifted abruptly. The index fell 1.84% on June 4, then plunged 5.54% on June 5 and 8.29% on June 8, compounding losses in a short span.

The forced-selling pressure in June was heavier than during the sharp downturn in March. In March, the Kospi collapsed 7.24% and 12.06% on consecutive days amid Middle East-related risk. Although the single-day index declines were steeper in March, the total value of forced liquidations over the three days following each selloff rose from 196.3 billion won (March 5–7) to 475.1 billion won (June 5, 8 and 9) — a 2.4-fold increase. The ratio of forced liquidations to unsettled receivables also moved at higher levels in June (9.1%, 8.2% and 10.5% on June 5, 8 and 9, respectively) than in March (6.5%, 3.8% and 2.1% on March 5–7).

Forced liquidations had already run well above the year-to-date average during the May correction, but both the amounts and ratios climbed another notch in the June selloff. In the three days of peak forced selling that followed the May decline — June 18 through June 20 — total forced liquidations came to 305.2 billion won. By contrast, the three-day total for June 5, 8 and 9, which came after the June plunge that followed the launch of single-stock leveraged ETFs, reached 475.1 billion won — roughly 170 billion won more than during the May correction.

Market analysts say volatility in large-cap semiconductor stocks has intensified since the listing of single-stock leveraged ETFs. After Samsung Electronics and SK Hynix single-stock leveraged ETFs debuted on May 27, the Kospi repeatedly swung between gains and losses in the 5–8 percent range.

"The KOSPI 200 Volatility Index (VKOSPI), which measures implied volatility for the KOSPI 200, hit an all-time high of 91 points," said Han Ji-young, a researcher at Kiwoom Securities. "As long as leveraged ETF flows remain concentrated in semiconductors — the market's leading sector — and semiconductors continue to exert heavy influence on the Kospi, disorderly price swings will be a recurring feature."

The structure of leveraged ETFs itself amplifies market volatility. To track twice the daily return of the underlying asset, a leveraged ETF must rebalance its holdings every day. When share prices fall sharply, the fund must sell more of the relevant stocks or futures to restore the target multiple; when prices surge, it must buy more. This pattern — buying into rallies and selling into declines — can magnify already unstable price moves. When such flows concentrate in stocks like Samsung Electronics and SK Hynix, which carry heavy Kospi weighting, volatility in individual names can quickly translate into index-level volatility.

The persistently high balance of margin financing — a key gauge of debt-fueled investment — adds to the concern. According to the Korea Financial Investment Association, the outstanding margin financing balance stood at 37.929 trillion won on June 9, near this year's peak of 38.023 trillion won set on May 29. While unsettled-receivable forced liquidations reflect the problem of ultra-short-term money that fails to meet settlement deadlines, margin financing is the benchmark indicator of leveraged investing: as collateral values erode during a price decline, it too can trigger forced selling. The worry is that a prolonged downturn would pile pressure not only on unsettled-receivable accounts but on margin financing positions as well.

kacew@heraldcorp.com