As the open interest in SK hynix single-stock futures approaches 40 trillion won, concerns are growing that share-price volatility could widen ahead. With futures positions surging after the recent listings of single-stock leveraged exchange-traded funds (ETFs) on Samsung Electronics and SK hynix, worries are mounting that the derivatives flows that lifted prices in a rising market could become a bomb that amplifies selling pressure in a downturn.
◇SK hynix open interest nears 40 trillion won… five times the size of KOSDAQ150 futures
According to the Korea Exchange (KRX) on the 4th, SK hynix single-stock futures open interest totaled 1,687,964 contracts as of the 2nd. Reflecting the multiplier (10 shares), the open interest size stands at about 39.8 trillion won.
Open interest refers to the number of futures contracts that have not yet been closed. It indicates the size of positions investors hold to bet on future price rises or falls. Typically, along with contract counts, the market's actual size is gauged by converting them into amounts as open interest size.
In particular, the recent pace of increase is steep. The open interest size of SK hynix single-stock futures was about 21 trillion won on the 20th of last month, but it jumped to about 34 trillion won on the 27th, when single-stock leveraged ETFs on Samsung Electronics and SK hynix were listed. Funds have continued to flow in since, surging to 39.84 trillion won as of the 2nd.
The scale itself is unusual. The current open interest size of SK hynix single-stock futures exceeds the entire size of KOSDAQ150 futures (about 7 trillion won) by five times. It is also approaching the size of KOSPI200 futures (about 65 trillion won). The heft of a derivative based on a single stock as the underlying asset has swollen to a level comparable to index futures that represent the entire KOSPI.
Brokerages see the recent boom in single-stock leveraged ETFs as the main driver behind the expansion of the futures market. Single-stock leveraged ETFs use cash equities, single-stock futures, and swaps to track twice the underlying's daily return. When investor funds flow in, liquidity providers (LPs) engage in hedging, such as buying futures to meet target returns.
On the first day of listing, the trading value of 18 single-stock leveraged and inverse exchange-traded products (ETPs) reached 9.8 trillion won. At that time, individual investors were net buyers of 1.2 trillion won in SK hynix leveraged products and 530 billion won in Samsung Electronics leveraged products.
The increased demand for futures in this process is assessed to have influenced the recent share-price rise. When LPs' futures buying pushes futures prices above cash prices, securities firms conduct arbitrage by buying cash equities and selling futures. As a result, individual leveraged funds flowing into the derivatives market created a unique flow structure in which they passed through asset managers and securities firms and then pushed up cash stocks again.
Kim Ji-hyun, an analyst at Daol Investment & Securities, said, "We judge that the concentration of individual funds at the start of listing led LP hedging demand to increase single-stock futures open interest," and noted, "The recent index gain appears to have been driven more by flows in derivatives such as futures than by inflows of cash buying."
◇Share prices lifted by derivatives flows… concern over a "domino" of liquidations if prices fall
In fact, cash-market flows are showing a trend opposite to the derivatives market. According to the Korea Exchange (KRX), during the five trading days after the listings of single-stock leveraged ETFs, foreigners were net sellers of 5.935 trillion won of Samsung Electronics cash shares and 5.46 trillion won of SK hynix cash shares. Even so, SK hynix single-stock futures open interest grew significantly over the same period. Investment demand is tilting toward the derivatives market rather than cash.
The simultaneous futures and options expiration on the 11th is also cited as a variable. Recently, as futures prices have been set higher than cash, arbitrage led mainly by financial investment has flowed in actively; however, if after expiration the arbitrage funds choose to realize profits rather than roll over positions, the accumulated cash-buying volume could be released into the market.
Because the futures positions piled up in the market have become so large, concerns are emerging that volatility could spiral if prices fall. Futures are a representative leveraged product that trades large amounts with small margin. If share prices plunge, forced selling and compulsory liquidations from investors unable to post additional margin could be released in succession, creating a so-called "domino effect."
A derivatives analyst at a securities firm said, "A large open interest means that many positions have accumulated in the market," and added, "In a situation where investment demand is concentrated in a specific stock like SK hynix, it amplifies flows on the way up, but conversely can be a factor that increases volatility on the way down."