Working directly on client portfolios means you spend a lot of time not just on asset-allocation, security selection, time-horizons, return expectations, time horizon, and concentration checks; but also to observe the trends around the market structure itself.
In general, the market structure has evolved beautifully across time. We are at a sweet spot in time when spreads are razor-thin, liquidity is abundant, and execution venues are increasingly kept open for much longer.
And yet, every now and then, you come across a market where something doesn’t appear right under the hood.
Like something is freakishly off.
There appears to be something Squid Games-like about the Kospi now.
Like most markets, the KOSPI rules are uncompromising: an 8% drop triggers an automatic Level 1 circuit breaker, freezing all trading for 20 minutes to force a cooling-off period.
And these circuits have been triggered in the past.
Nothing out of the ordinary there.
But consider this.
In the entire history of the KOSPI, these halts have only been triggered 12 times.
Remarkably, 6 of those 12 market-wide halts have occurred this year.
Some of the reasons for this are well documented.
The fuel powering this frenetic trading is an active, domestic retail trading base that routinely drives volumes. Outstanding local margin debt recently exploded to a record-shattering 38 trillion won (~$24.8 Billion), with massive chunks of that focused on SK Hynix and Samsung.
What is less documented are the causes.
1. The Gamma Squeeze
When retail traders hoard out-of-the-money (OTM) calls on Samsung or SK Hynix, institutional market makers sell them the contracts. To hedge their risk, market makers must immediately buy the underlying shares. As this buying pushes the price up, Gamma accelerates their risk, forcing them to buy even more shares.
And that’s the wicked gamma squeeze playing out in all its horror.
2. The 20-50x Leveraged Perpetual Contracts (LPC)
There are other causes, more gory in nature:
Because local regulators enforce strict safety caps on-exchange to protect investors, an aggressive, stateless grey market has stepped in to feed the hunger for maximum risk. Major offshore crypto platforms have bypassed traditional capital controls entirely by launching synthetic futures contracts on Korea-linked equities.
Traders are potentially using stablecoins to buy into 20x-50x LPCs built on top of U.S.-listed 3x leveraged KOSPI ETFs.
The result?
A staggering 120-150x structural leverage on the underlying index.
A minor sub-1% daily swing in the KOSPI is all that it would take to completely wipe out a trader’s principal.
