On the first day the financial authorities put shackles on single-stock leveraged ETFs, related transaction value plunged to one-fourth of the previous day's level.
Immediately after the tighter rules, the KOSPI market staged a sharp rebound, including a buy sidecar being triggered, but experts said this should be seen as a "supply-demand illusion" caused by a short-term flow shift from policy restrictions overlapping with short covering (closing short positions).
According to the status of single-stock leveraged ETF transaction value that ChosunBiz requested from the Korea Exchange (KRX) on the 31st, the total transaction value of 16 single-stock leveraged and inverse ETFs on the first day of the rules was 3.3071 trillion won. That was a steep 75.3% drop from the previous day (12.4485 trillion won).
Even compared with the July daily average transaction value (12.27 trillion won), the strong clampdown by the financial authorities appears to have had an immediate effect in controlling flows.
Excluding inverse products, the transaction value of 14 major single-stock leveraged ETFs also fell 64.4%, from 6.9354 trillion won the previous day to 2.4686 trillion won.
Starting that day, the financial authorities tripled the basic margin deposit for ordinary individual investors to 30 million won from 10 million won and fully excluded substitute securities when calculating deposits, sending transaction value down sharply.
In particular, by applying a T+2 cash deposit standard, repetitive ultra-short-term churn trades (scalping) during the day were blocked, which appears to have driven a rapid exodus of speculative funds.
The securities industry assessed that easing the concentration of funds into single-stock leverage played a partly positive role in resolving supply-demand imbalances across the entire KOSPI market.
Kim Jae-seung of Hyundai Motor Securities said, "The net buying intensity into single-stock leveraged ETFs was already weakening in July," adding, "While net purchases that reached 1.13 trillion won in May–June fell to 380 billion won since July, net buying of general equity ETFs expanded from 220 billion won to 470 billion won."
Kim went on, "As the single-stock leverage concentration normalizes, the ADR (advance-decline ratio) indicator within the KOSPI is improving and a rotation-led market centered on large caps is flowing in," adding, "However, since the movement of funds is occurring within the ETF market, it will be difficult for the benefits to spread to the KOSDAQ market, which is centered on individual stocks."
On social networking services (SNS), there was a flood of complaints from individual investors that the regulatory barrier happened to rise on a day when Samsung Electronics and SK hynix(000660), which lead the domestic stock market, were soaring.
Internet users lamented, "Coincidentally, on a day of a big rally like today, the government started regulations that block purchases of leveraged ETFs," and, "Because of the 30 million won cash balance rule, even the chance to recover losses has disappeared for people whose assets have been melting away."
Experts said the sharp jump in the KOSPI index and the near-limit-up surge in large semiconductor stocks that day was driven more by global flow shifts and a rush of foreign short covering (closing short positions) than by the effects of leverage rules.
Hwang Su-uk of Meritz Securities said, "Given the plunge in transaction value of single-stock leveraged ETFs, the effect of the rules in easing concentration of flows is clearly confirmed," but drew a line, adding, "Interpreting the day's large-cap surge as a direct result of the higher leverage margin rule is an overreach."
He said, "Along with the impact from the U.S. stock market, news of liquidations by global leveraged funds such as Citadel and Situational Awareness was perceived by the market as a bottom signal, which had a large effect in untangling the twisted global flows," adding, "As the supply-demand imbalance that had constrained the market is resolved, this should be seen as a process of re-reflecting fundamentals."
Lee Sang-heon of iM Securities also assessed that "rather than the single-stock leverage rules driving the large-cap spike, a temporary overshooting occurred as a large volume of foreign short covering (switching to buys) came in while they unwound short positions built up during the global reversing process." Lee added, "Once the explosive flow into single-stock leveraged ETFs, which had been concentrated in the No. 1 and No. 2 names by market cap, temporarily subsides, it is worth watching for a shift in which warmth spreads to a variety of stocks rather than a solo run by specific large caps."
The asset management industry also pointed out that the essence of the sharp rebound that even triggered a buy sidecar that day was largely technical. An official at a domestic asset management firm said, "There is no meaningful change in the macro headwinds that were weighing on the market, such as high interest rates, the Iran war, and high oil prices," evaluating it as "an optical illusion created as existing long positions were closed and excessive short positions were lifted amid a steep drop in the yen-dollar exchange rate."