As trillions of won in retail money has poured into single-stock leveraged exchange-traded funds (ETFs) tracking Samsung Electronics and SK hynix, amplifying market volatility, the financial authorities rolled out measures.
But in the market, many say that simply raising the bar to entry will not curb the structural volatility of single-stock leveraged ETFs. That is why calls are growing for fundamental regulatory fixes beyond the authorities' temporary supply-and-demand curbs.
◆ "Even if you raise the entry barrier, you can't stop 'negative compounding'"… mere patchwork
President Lee Jae-myung on the 21st ordered at a Cabinet meeting at the Blue House that "there is criticism in the market that the system for single-stock leveraged ETFs has fueled instability more than necessary," adding, "We should not stop at the level of existing measures but swiftly and thoroughly craft supplemental steps." Lee added, "In an upturn it intensifies the rise, and in a downturn it deepens the fall."
The core of the single-stock leveraged ETF supplements unveiled by the Financial Services Commission on the 16th is to raise the entry threshold for retail investors. The basic deposit was increased from 10 million won to 30 million won, the minimum trading unit was expanded from 1 share to 20 shares, and new listings were temporarily suspended.
Industry participants said that while the latest steps may somewhat reduce short-term speculative demand, they do not prevent the leveraged ETFs' inherent "negative compounding" structure or the concentration of hedging orders right before the close. There is also strong criticism that it may only stoke controversy over reverse discrimination against less wealthy investors.
In the securities industry, many said there may be no fundamental additional measures that can realistically be taken to reverse the trend without distorting the market.
Na Hyun-seung, president of the Korean Securities Association (professor at Korea University Business School), said, "There do not seem to be many clear steps the government can take," adding, "With scrapping the products virtually difficult, what can be done now is to raise the entry barrier a bit further."
Na added, "Since you cannot keep changing policy and applying it to the market, it is necessary to take an approach of carefully reviewing as needed while watching how conditions develop."
Among additional measures expected in the market is adjusting the trading unit—such as through a "reverse stock split"—to sharply raise the unit size and physically block speculative short-term flows.
A person in the securities industry said, "For example, from the perspective of retail investors, if there is a 10,000-won stock and a 1 million-won stock, wouldn't the 10,000-won stock be easier for small investments?" adding, "In the end, there is a high possibility that measures will emerge to raise the trading unit and further increase the psychological entry barrier."
◆ Cash hedging that rocks the market… "Ease derivatives rules to reduce volatility"
Experts say what is urgently needed is not simple supply-and-demand suppression but structural regulatory enhancements that soften market shocks and align with global standards.
In particular, they single out as the top priority the problem of large hedging orders clustering at the closing auction, which heightens market volatility. Under the current domestic ETF regime, strict limits are imposed in the name of investor protection, including the "100% derivatives risk exposure" rule. Because of this cap, products cannot be composed solely of futures and other derivatives, forcing managers to hold and directly trade large amounts of cash equities, which is a structural constraint. The more money piles into leveraged ETFs, the more the stock market wobbles near the close—fueling the observed side effects.
An asset management industry source said, "The most certain fix is to relax rules so that the hedging tools for leveraged ETFs can shift from cash equities to derivatives such as futures," adding, "Overseas, most hedging for leveraged products is handled with derivatives like futures and options to minimize shocks to the cash market." The person added, "If Korea also eases the method for calculating derivatives risk exposure for leveraged products, it could significantly reduce the volatility transmitted to the cash market."
There are also calls to benchmark the "average price calculation method" adopted during past ELS (equity-linked securities) and ELW (equity-linked warrants) episodes to prevent hedging orders from clustering just before the close and shaking stock prices.
A securities industry expert explained, "In the past, setting the final settlement price based on the closing print alone led to problems of unfair trading or sudden volatility near the close," adding, "To address this, if regulations are eased to use a 3–5 day average price or an average during a certain intraday window as the divergence threshold, the end-of-day concentration and vicious cycle can be naturally dispersed."
In addition, to block speculative flows at the end of the session caused by continuous matching, there is discussion of switching to call auctions for a set period before the close. The aim is to create a buffer that eases end-of-day liquidity shocks rather than imposing extreme trading curbs.
◆ Lowering leverage and delisting carry costs… risk of losing Korean retail investors trading U.S. stocks and lawsuits
Proposals such as "lower the leverage multiple" (2x→1.5x), "induce delisting," and "convert to full call auction trading" are seen as difficult to implement in practice. That is because they would damage the essence of the products and could trigger fierce investor backlash.
With many retail investors already sitting on losses after buying near the top, if trading is forcibly restricted or the product structure is changed to lock in losses, the authorities and the exchange would have to shoulder the full risk of class-action lawsuits and strong pushback. There is also the burden of criticism that such steps infringe on market autonomy and run counter to global standards.
Another reason the financial authorities are hesitant to go hard-line lies in the "birth background" of single-stock leveraged ETFs. The authorities actively eased rules to introduce these products to draw Korean retail investors trading U.S. stocks—who were heading overseas with dollars to chase high-multiple leveraged plays in names like Tesla and Nvidia—back to the Korean stock market. The goal was to resolve asymmetric rules versus markets like the United States and Hong Kong and to offer a choice to seek high returns in top-quality domestic blue chips, thereby preventing capital outflows.
In the end, if the authorities scrap the system created to stop capital flight or leave only an empty shell, they face the burden of undermining the original policy intent. Critics say that restricting trading in domestic products will not eliminate investment demand itself but merely spur a "balloon effect," with money converting currencies and flowing into high-multiple leveraged products on U.S. exchanges.
A person in the securities industry said, "The financial authorities are likely torn between the two values of investor protection and financial market stability," advising, "Rather than unconditional suppression, additional measures should be crafted to improve the capital market's structure—such as boosting the use of futures and making settlement more flexible, as seen overseas."