Regulatory démarche in Korea turned into a rally of small-cap companies: KOSDAQ soared by 30%
The South Korean authorities' attempt to cool down the overheated stock market has had the opposite effect. Restrictions on the use of borrowed funds in exchange-traded funds (ETFs) focused on tech giants' stocks not only failed to dampen speculative fervor but also triggered a massive capital shift into the small-cap segment.
The introduced measures affected leveraged ETFs on Samsung Electronics and SK Hynix securities. Regulators aimed to reduce volatility by raising cash collateral requirements for retail investors. In practice, however, this merely redirected the flow of liquidity: private capital poured into stocks of companies in the KOSDAQ index, which has surged 30% from its July 30 lows.
Side Effect: KOSDAQ in Turmoil
On Monday, the KOSDAQ index jumped 6.8%, triggering an automatic trading halt on the Korea Exchange for the third time this month. This is a classic example of how administrative intervention distorts market mechanics. Instead of stabilization, we are witnessing a classic rotational shift: money is moving from "blue chips" into riskier assets.
Analysts are recording a steady inflow of funds into KOSDAQ. Retail investors, who previously actively used leverage in ETFs on semiconductor manufacturers, are now seeking new opportunities for high volatility. And they are finding it in small companies, where the speculative component is traditionally higher.
Notably, the KOSPI index previously plunged about 40% from its June peak to a low in late July. The main driver of the sell-off was artificial intelligence-based instruments, which triggered forced liquidations and the closure of margin positions worth billions of dollars. The leveraged ETF on SK Hynix lost 45% during this period, forcing regulators to admit that such products only amplify market fluctuations.
Gap Between Indices — Highest Since 2000
We are now seeing the largest divergence in performance between KOSDAQ and the benchmark KOSPI since the dot-com era. While KOSDAQ is steadily rising, KOSPI is losing ground. This indicates that retail investors, driven by a thirst for quick profits, are completely ignoring fundamental indicators in favor of pure speculation.
Interestingly, the same audience previously fueled the boom in ETFs on semiconductor manufacturers. Now the same cohort of players has shifted to small caps. Regulators once again find themselves in a reactive role, responding to changes that have already occurred rather than preventing them.
The sustainability of the current KOSDAQ rally directly depends on whether the correction in AI company stocks has ended. If this is merely another turn of the speculative cycle, exchange circuit breakers will keep triggering, and the market will continue to be in turmoil.
My view: This situation is a vivid example of how regulatory measures designed to reduce risks in reality merely redistribute them. As long as Korean authorities fight symptoms rather than the cause — the structural dependence of the retail market on leverage and high-risk instruments — we will continue to see new spikes in volatility. For investors, this is a signal: in current conditions, classical analysis gives way to understanding liquidity flows and regulatory decisions.