As the KOSPI index plunged for a second straight day, concerns are growing about forced liquidation for individual investors who engaged in "bit-too (investing with borrowed money)." Forced liquidation refers to a securities firm forcibly disposing of the relevant stock when an investor buys shares with borrowed funds and, even after the collateral ratio falls below a certain level, fails to deposit additional margin. There are also concerns that if forced liquidation volumes flood the market, they could further fuel a decline in stock prices.
According to the Korea Exchange (KRX) on the 30th, the KOSPI index closed at 5663.24, down 360.42 (5.98%) from the previous trading day. As it fell 8% intraday, a "circuit breaker" was triggered on the main board, halting trading for 20 minutes. Including the previous day, the index tumbled 16% over two days.
As the index slumped for two consecutive days, concerns over forced liquidation are growing. In particular, with margin loan balances on the main board standing high at 26.2719 trillion won as of the 28th, the KOSPI's 16% plunge over two days is estimated to have sharply increased the number of accounts falling below the collateral ratio maintenance threshold. The market is watching the possibility that forced liquidation volumes will start to come out in earnest from the 31st.
A margin loan balance is the amount an investor borrowed from a securities firm to buy stocks and has not yet repaid. If the stock market plunges and a stock's collateral ratio falls below 140%, the securities firm demands additional margin, and if that is not met, the holdings are forcibly sold at the opening from the next day.
Forced liquidation on unsettled receivables from entrusted trading is also a concern. Unsettled receivables from entrusted trading refer to funds an investor borrowed ultra-short term from a securities firm to invest in stocks and has not yet repaid. According to the Korea Financial Investment Association, unsettled receivables from entrusted trading stood at 1.2237 trillion won on the 28th. If payment is not made by that day, the forced liquidation process proceeds on the next day (T+3).
In fact, after the KOSPI plunged about 10% over three days from July 6 to 8, the scale of forced liquidation on unsettled receivables from entrusted trading on the 9th came to 142.2 billion won. That is more than triple the usual forced liquidation volume of 30 billion to 40 billion won.
Some also noted that in the worst case, forced liquidation could trigger a vicious cycle that brings further declines. When collateral ratios deteriorate due to falling stock prices, forced unwinding occurs, and the selling pressure from that process can drag prices down again, causing additional forced liquidations.
There are also warnings that funds that moved to single-stock leveraged ETFs to avoid forced-liquidation risk cannot rest easy. In the four weeks after the market hit a peak (June 22 to July 16), 6.7 trillion won in new money flowed into 14 single-stock leveraged ETFs. Noh Dong-gil of Shinhan Investment & Securities said, "Margin trading carries forced-liquidation risk, but single-stock leveraged ETFs do not have forced liquidation, so investor demand shifted to those products."
Because single-stock leveraged ETFs are structured to track the underlying asset's daily returns at ±2 times, losses can expand faster than with ordinary stocks in a sharp downturn. In particular, in highly volatile markets, holding them for an extended period can worsen actual returns versus the underlying due to the "negative compounding effect (volatility decay)."