From Momentum To Mayhem: Korean ‘Plunge Protectors’ Meet As Leverage Unwind Sparks Chaos

‘Leverage goes both ways…’

That is a lesson that many are learning in a painful manner as the army that enjoyed the momentum escalator ride up are now decrying the elevator plunge lower… and the poster-child for this pain is Korea.

Following anxiety over new Chinese competition, and disappointing earnings from SK Hynix overnight, Korea’s stock market has plunged 44% from its record highs in June (but remains up 27% YTD still)…

Triggering yet another circuit-breaker…

You didn’t pray hard enough

The Kospi Index slid as much as 12.6%, triggering a circuit breaker for a second straight day. The gauge is on course for a record monthly loss of ~35%. https://t.co/PmULRxoa1Y

— zerohedge (@zerohedge) July 29, 2026

And prompting panic among Korean regulators:

As Bloomberg reports, South Korea will hold an emergency meeting Wednesday evening to discuss the market situation after a stocks rout that has wiped billions of dollars off investors’ holdings. The meeting, hosted by Finance Minister Koo Yun Cheol, will involve all of the country’s top financial authorities, starting from 6 p.m. local time, according to lawmaker Yoo Dong-soo.

Top administration officials faced multiple rounds of questioning by lawmakers at the country’s parliament Wednesday.

Lawmakers have linked the rout in part to South Korea’s rollout of leveraged single-stock products in May.

As CNBC reports, South Korea’s finance minister apologized on Wednesday after retail investors racked up heavy losses from leveraged bets on stocks, following rule changes earlier this year.

The May 27 introduction of single-stock leveraged Exchange Traded Funds has seen Korean retail investors pile in with net purchases of 14 trillion won ($9.7 billion), compared with roughly 2 trillion won by foreign investors, according to KB Financial Group.

But the speculative trading boom that helped fuel one of the world’s hottest equity markets has resulted in those investors nursing heavy losses as Korea’s Kospi index has experienced a sharp correction, led by a downturn in chip stocks.

“We’ve already put in place a package of measures, but if it’s needed we’ll introduce additional steps to help normalize the market,” Koo told lawmakers Wednesday.

Cue – the plunge protectors.

Rubbing salt into into the wounds, The FT reports that The Bank of England is probing the rapid growth of exposure to Asian equities among investment banks operating in London, as officials seek to avoid a build-up of highly concentrated bets on a few AI-linked companies.

The BoE’s Prudential Regulation Authority, which supervises UK banks, has launched a review of lenders’ prime brokerage operations in London to check whether they are taking on excessively concentrated exposures to Asian equities, according to people briefed on the move.

When the BoE believes prime brokers are taking on excessive risks, its supervisors can increase the amount of liquid assets they are required to hold to help them survive a potential market sell-off or the collapse of a large client.

…which would be yet another forced deleveraging event for those Korean/Asian equity market investors.

On the potentially bright side, Goldman Sachs’ Alvin So – who has been tracking the Korean leveraged ETF market like a hawk – notes that a great deal of the exposure to levered Korean ETFs has already been unwound…

Incorporating today’s price action, Korea-focused leveraged ETF AUM has declined to US$15–16bn (~70% domestically listed), equivalent to roughly 1.5% of Korean free float on a leveraged-exposure basis.

This is down 70%+ from the peak of US$53bn (3.2% of free float) on June 22.

Over the same period, Korean equities have declined by 40%.

We have also started to see net outflows from these products over the past two weeks (-US$2bn, as of yesterday), despite +US$8-9bn of buy-the-dip inflows between June 22 and July 15. 

“The deleveraging and selloff in Korea have increasingly taken on a life of their own,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management.

“Concerns about excessive optimism around AI initially triggered the correction in semiconductor stocks, but the latest acceleration lower looks less driven by fundamentals and more by positioning, forced selling and investor psychology.”

Circling back to the carnage, unless the market stages a meaningful bounce over the next two trading days, the KOSPI is set for its worst month ever.

Korean opposition lawmakers questioned why the levered products were introduced at an unusual speed despite concerns from much of the asset-management industry, arguing officials prioritized efforts to boost stock prices over market stability.

“The country has turned into a casino,” People Power Party lawmaker Lee Jongwook told Koo during the hearing.

“These are products that should never have been allowed onto the market. I consider this a policy failure.”

Funny, we didn’t hear you complaining on the way up??

We give the last word to Goldman Sachs Korean traders who noted that despite foreign flows switching to net sellers, they did not sense any material change in flow snapshot throughout the day, as it continued to be two-way but better sell skewed in memory. The Goldman desk also notably caught some dip buyers in memory intraday, so would not necessarily distinguish flow today as ‘capitulation’.

This is far from over as the degenerate gamblers keep catching that falling knife…