Forced selling surges to historic levels amid Kospi plunge; margin debt near all-time high raises fears of a vicious cycle
Fears of a margin debt unwind are becoming reality as South Korea's stock market suffers back-to-back "Black Friday" and "Black Monday" sessions. With forced selling surging amid the market rout, analysts warn that the record-high level of margin debt still outstanding could pile additional selling pressure on an already battered market.
According to the Korea Financial Investment Association, forced selling tied to unsettled brokerage trades reached 166.2 billion won (about $107 million) on Friday — the "Black Friday" session — up roughly eightfold from the previous trading day's 24.3 billion won. The figure is in effect the highest ever recorded. The official all-time peak stands at 548.7 billion won, set on Oct. 24, 2023, but that figure reflected a special circumstance: forced-sell orders went unexecuted after trading in Youngpoong Paper was suspended, causing unsettled amounts to accumulate.
Forced selling occurs when an investor who has purchased shares using brokerage credit fails to repay the funds within the required period. In unsettled brokerage trades in particular, investors must settle within two trading days; if they fail to do so, the brokerage forcibly liquidates the held shares on the third trading day.
The Kospi tumbled more than 5 percent on Friday, dragged down by a sharp rise in the exchange rate and weakness in semiconductor shares — triggering what analysts described as a historically large wave of forced selling.
Monday's session proved even more severe, shaking the market enough to trigger both a circuit breaker and a sell-side sidecar simultaneously. The Kospi closed at 7,484.41, down 676.18 points, or 8.29 percent, from the previous session — the second-largest single-day point decline in history since March 4. The volume of forced selling from that session is also expected to be substantial.
The deeper concern is that leverage in the market remains elevated despite the selloff. Outstanding unsettled brokerage balances — a measure of ultra-short-term margin debt — stood at 1.6885 trillion won as of Friday, down from 1.8292 trillion won the previous trading day but still more than 360 billion won above the June 2 reading of 1.3277 trillion won. Margin loan balances, the most widely watched indicator of leveraged investment, are also near record highs. As of Friday, the outstanding balance stood at 37.8383 trillion won, slightly below the all-time high of 38 trillion won set on May 29 but still the second-largest figure in history.
Experts advised investors to review their leverage exposure and build up cash holdings to manage risk, warning that volatility is likely to remain elevated for now. Stocks with high margin loan balances are particularly vulnerable to amplified swings as forced-sell volumes hit the market, they said, urging investors to exercise caution.
"Retail investors significantly ramped up leveraged investment during the recent rally, and an unexpected market plunge has now triggered a sharp surge in forced selling," a securities industry official said. "If additional forced-sell volumes continue to emerge, falling share prices could trigger fresh collateral shortfalls, setting off a vicious cycle."
th5@heraldcorp.com
