Following SK Hynix's successful American Depositary Receipt (ADR) offering, leveraged trading products related to the South Korean memory chip company are preparing to enter the US market. With several leveraged ETFs linked to its share price soon to be launched, the high volatility already observed in the South Korean market may further spread to Wall Street.
South Korean market trading is highly concentrated
In the South Korean stock market, SK Hynix, Samsung Electronics, and leveraged products tracking these two companies account for over 70% of trading volume. This increased concentration of funds has led to significantly amplified volatility in related stocks and the Korea Composite Stock Price Index (KOSPI).
John Cho, portfolio manager of Korean equities at JPMorgan Asset Management, said that retail investors are increasingly inclined to chase short-term trends, and the continued expansion of single-stock ETFs is driving up trading volume and volatility of top-weighted stocks. He believes that the large-scale issuance of leveraged ETFs is usually not a healthy sign, and often occurs in the later stages of a market rally when retail investors are entering the market in large numbers.
US expansion may amplify volatility.
Analysts believe that excessively large leveraged products for individual stocks could, in turn, influence the underlying stock price through derivatives trading itself. If more related products are introduced in the US market, the daily rebalancing demand will continue to amplify, potentially further increasing the intraday volatility of SK Hynix's stock price.
Bloomberg industry research points out that when leveraged products are too large, it becomes more difficult for issuers to consistently achieve their target of double daily returns, and the product's net asset value is more likely to deviate from the underlying stock's performance. Bloomberg ETF analyst Rebecca Sin also noted that if market demand far exceeds the available underlying stock shares, issuers will face limitations in building positions and hedging, potentially leading to more significant tracking errors.
- Leveraged products in the South Korean market once managed over $16 billion.
- SK Hynix raised approximately US$26.5 billion in its ADR offering.
- Related stocks and leveraged products accounted for over 70% of trading volume in the South Korean stock market.
The issuer is optimistic about overseas demand.
For product issuers, SK Hynix's leveraged instruments possess clear commercial appeal. With the listing of ADRs in the United States, overseas investors have gained more direct access to trading, and product issuers have also seen new demand opportunities.
Francis Oh, Head of Business Development for Asia at Rex, said the new product is expected to address pent-up demand from global investors. Previously, SK Hynix shares were primarily traded in South Korea, limiting access for overseas investors; the listing of ADRs has significantly expanded the scope for designing leveraged products around the stock.
However, such high-risk products have always been controversial in South Korea. Opponents argue that leverage amplifies retail investors' buying and selling behavior, exacerbates market imbalances, and some South Korean politicians have even proposed delisting these products.
