There is analysis that the concentration of supply and demand in cross-border financial products linked to SK hynix, the No. 2 corporation by market capitalization in Korea's stock market, is amplifying volatility not just in the stock's price but across the entire KOSPI. Regardless of corporations' fundamentals or industry outlooks, observers noted that liquidity flocking to U.S.-listed depository receipts (ADR) and single-stock leveraged exchange-traded funds (ETF) is triggering mechanical trading and shaking the domestic market.
On the 20th, the financial investment industry said the premium on SK hynix ADR, which made a splashy debut on the U.S. Nasdaq, is one of the factors increasing KOSPI volatility.
As inclusion of SK hynix ADR in some global semiconductor ETFs and related indexes moves forward, passive money has begun to flow in. In the process, with buying concentrated in the United States, a premium is forming in which the U.S. ADR price, converted into won, trades at a higher price than the domestic common shares.
An official at a domestic asset management company said, "The gap between domestic and overseas share prices is becoming a target for arbitrage by foreign investors, including global hedge funds," and added, "Mechanical program trading continues in which they sell U.S. ADRs while buying a large amount of the Korean common shares, or, conversely, when the gap narrows, they sell large volumes of domestic stocks."
When large-scale program orders from foreigners pour into the No. 2 stock by market capitalization, it affects the KOSPI 200 cash and futures markets. As the price gap between ADRs and domestic common shares widens, arbitrage to exploit it increases. In this process, foreigners' cash-futures linked program trading rises, and SK hynix, which carries a large market-cap weight, influences KOSPI 200 and index futures prices, thereby increasing market volatility.
In the domestic financial market, the steep growth in size and concentrated flows into the SK hynix(000660) single-stock 2x leveraged ETF are also cited as key factors stoking volatility across the index.
This product must track twice the one-day return of SK hynix, the underlying asset, each day. To do this, asset managers and liquidity provider (LP) securities firms must buy or sell actual SK hynix shares at the market close every day.
Recently, as individual investors' funds have concentrated in single-stock leveraged ETFs, there is criticism that the sheer scale of mechanical stock trades required near the close to reset leverage has become abnormally large.
Lee Jin-woo, head of research at Meritz Securities, said, "Because of the acceleration principle (volatility amplification) inherent in single-stock leveraged ETFs, volatility in the domestic market is growing," and explained, "Generally, if a retail investor buys 1 unit of a leveraged product, the securities firm or LP operating it must buy 2 or 3 units of the underlying asset to maintain the leverage."
The root cause behind the growing impact of derivatives and linked products—now strong enough to sway the entire KOSPI—is cited as a severe "supply-demand vacuum" in the domestic market. As Korean semiconductor stocks gain influence globally, overseas derivative products have sprung up in droves, but the domestic cash market, with its depleted fundamentals, lacks the capacity to absorb the shock.
Lee said, "When overall market volume is ample and flows are dense, buying and selling balance each other and the direction does not collapse to one side," but noted, "In a state like the current KOSPI, where volume is lacking and flows have dried up, large trades in externally linked products end up encroaching on the market's own supply and demand."
He continued, "When flows are insufficient and the direction begins to break to one side, the lack of long-term investors to defend it makes the magnitude of volatility spiral out of control," adding, "In particular, as even the national pension funds have cut back on domestic stock trading, a structural 'supply-demand vacuum' has emerged across the market, and mechanical flows from derivatives are occupying this empty space and steering the indexes."