Forced liquidations top W400b this month as margin calls hammer retail investors

Forced liquidations of debt-funded stock positions by retail investors have surpassed 400 billion won ($266 million) so far this month as domestic markets tumbled, raising fears of a vicious cycle in which forced selling drives share prices lower and triggers yet more margin calls.

According to the Korea Financial Investment Association, forced liquidations tied to unsettled brokerage balances totaled 425.8 billion won from the start of the month through July 10. A single day — Thursday, July 9 — saw 142.2 billion won worth of shares forcibly sold, with an additional 81.6 billion won hitting the market the following day. The ratio of forced liquidations to outstanding unsettled balances reached 10.2 percent on July 9, the highest since June 9, when it stood at 10.5 percent.

Unsettled margin trading allows investors to borrow from their brokerage for up to three trading days to cover a shortfall in settlement funds. If the investor fails to make up the deficit within the allotted period, or if the collateral ratio falls below a set threshold, the brokerage forcibly sells the investor's holdings on the open market.

Analysts say the recent convergence of Middle East geopolitical risk, debate over whether semiconductor stocks have peaked, and mounting losses in single-stock leveraged products has rapidly eroded collateral values for a growing number of investors. Those already sitting on losses are now having their positions liquidated against their will, adding further selling pressure across the broader market.

Forced liquidations are particularly worrying because they can amplify price declines through a chain reaction, and the market is on alert. Because a lag exists between the moment a collateral shortfall occurs and the actual forced sale, additional liquidation supply could continue to weigh on the market for now.

The Kospi plunged nearly 9 percent on Monday and is now down 27.47 percent from its June 19 peak of 9,385.59. Some investors in margin-financed positions reportedly lack the funds to post additional collateral, leaving them with little way to avoid forced liquidation.

Some analysts, however, suggest that selling pressure could gradually ease once the bulk of forced liquidations has run its course. The Kospi's 12-month forward price-to-earnings ratio has fallen to the high-5x range — below the lows seen during the global financial crisis and in the immediate aftermath of the Iran war in March.

"In a highly volatile market, large leveraged positions can be forced into liquidation even on small price moves," said Kim Seok-hwan, a researcher at Mirae Asset Securities.

The prevailing view in the brokerage industry is that while valuation concerns have largely been priced in, a sharp near-term rebound is unlikely. Uncertainty surrounding corporate earnings, the semiconductor sector outlook and Middle East tensions continues to hang over the market.

"The lower PER valuation, improved earnings levels, and the bottom of the semiconductor cycle are unlikely to look the same as before," said Jeong Da-un, a researcher at LS Securities. "There is no need to panic, but it would also be unrealistic to expect a new all-time high shortly after a brief correction as we have seen in the past." She added that "the market will move by confirming earnings."

Forced liquidations are not simply a matter of individual investor losses — they are a variable that affects overall market supply and demand. How quickly the remaining forced-sale overhang is absorbed, and whether corporate earnings and the global macro environment can restore investor confidence, will be the key factors determining when the market finds its footing.