Will fears of forced liquidation hit on the 5th?

Under-margined accounts surge 136%

₩33 trillion in leveraged stock buying becomes a falling 'time bomb'

As South Korea’s stock market has plunged for a second straight session, fears of forced liquidation are growing among retail investors. With most of the recent gains already erased, there are concerns that any further decline in share prices could trigger a wave of forced sell-offs due to insufficient collateral.

According to the Korea Financial Investment Association on the 4th, the outstanding balance of margin loans stood at ₩32.8041 trillion the previous day. This is an all-time high, up by about ₩5.5 trillion from ₩27.2865 trillion at the end of last year. Margin loans refer to the amount retail investors have borrowed from brokerages to buy stocks and have yet to repay. If the maintenance margin ratio on an account falls below a certain threshold, the brokerage executes a “forced liquidation,” selling the shares at prices below the market.

After the Kospi index tumbled 7.24% on the 3rd and then plunged 12.06% on the day, worries are spreading that the number of under-margined accounts subject to forced liquidation could surge. Under-margined accounts at five major domestic brokerages—Korea Investment & Securities, Mirae Asset, Samsung, Daishin and Meritz—were tallied at 3,708 on the 3rd, up 136% from 1,571 on the 13th of last month. Factoring in the day’s steep drop, the number of under-margined accounts is estimated to have risen much further.

An official at a brokerage said, “The sharp drop on the 3rd merely gave back the gains from the last week of February, but adding the decline on the 4th effectively takes prices back to early-February levels, so concerns over insufficient collateral are significant,” adding, “If the downtrend continues, forced-liquidation accounts could swell beyond control.”

Another concern is that ultra-short-term credit purchases—where investors borrow from brokerages to buy stocks and repay within two business days—are at a record high. As of the 3rd, the figure reached ₩1.0606 trillion. Credit purchases are also subject to forced disposal if payments are not made on time. In particular, observers note that accounts that engaged in such trading on the 27th of last month or on the 3rd of this month could see a large volume of forced-liquidation selling. Because forced liquidation mechanically sells shares at prices below the market, it can amplify downside volatility.

Reporter Park Han-shin phs@hankyung.com