Retail Margin Investors Forced to Liquidate $307 Million in South Korea in 10 Days

$307 million in forced sales in July as fears of margin liquidations grow

Forced-sale value reaches 425.8 billion won this month alone

More than $100 million unloaded on July 9 alone

Extreme volatility raises risk of further liquidations

Retail investors who borrowed money to buy stocks in South Korea were forced to liquidate more than 400 billion won this month after failing to repay those loans on time. The local stock market has remained under heavy pressure as renewed conflict in the Middle East, debate over whether semiconductor shares had peaked, and distorted flows into leveraged single-stock products battered sentiment. With no clear market floor in sight, concern is growing that forced selling will add further downward pressure.

Actual forced sales tied to unpaid balances in consignment trading totaled 425.8 billion won ($307 million) from the start of July through July 10, according to the Korea Financial Investment Association. On July 9 alone, forced stock liquidations reached 142.2 billion won ($102 million). The share of unpaid balances that resulted in forced sales was 10.2% that day, the highest since 10.5% on June 9. Another 81.6 billion won ($58.8 million) of shares was dumped into the market at below-market prices on July 10.

Unpaid-balance consignment trading is a form of leveraged stock investing in which brokerages lend money to investors for three trading days when they do not have enough cash to settle a purchase. If they fail to make up the shortfall within that period, brokerages forcibly sell the shares on the next trading day at prices below the market.

As the stock selloff has intensified, individual investors who bought with borrowed money are being liquidated in large numbers. Because there is a lag between the point at which collateral becomes insufficient and the point at which brokerages execute forced sales, additional liquidation supply may continue to hit the market for the time being. The Kospi plunged nearly 9% the previous day and was down 27.47% from its peak of 9,385.59 on July 19.

There is growing concern that forced-sale supply will add to downside pressure as volatility remains extreme. In a volatile market, highly leveraged positions can lead to forced liquidations even on small price moves, Kim Seok-hwan, an analyst at Mirae Asset Securities, said.

Brokerages estimate the market is nearing a bottom, but they also see volatility persisting for now because there are few events on the horizon that could improve sentiment. As of the previous day, the Kospi's 12-month forward price-to-earnings ratio was estimated in the upper-5 range. That is below the lows reached during the global financial crisis and immediately after the outbreak of the Iran war in March.

Jung Da-woon, an analyst at LS Securities, said already-depressed valuations, higher earnings levels and the semiconductor cycle suggest the market may not revisit the same trough seen in the past. Still, she said there is no need for excessive panic, while it is also difficult to expect a repeat of the earlier pattern in which a short-term correction was followed by fresh record highs. The market will move as earnings are confirmed, she added.

Ko Jung-sam, Hankyung.com reporter jsk@hankyung.com