South Korea’s stock market turmoil may be easing after historic selloff

South Korea’s stock market just lived through its worst stretch in decades. And there are early signs the bleeding might finally be slowing down.

The KOSPI index cratered approximately 40% from its June peak near 9,385 points during a brutal July selloff driven by the rapid unwinding of leveraged retail positions in AI-related chip stocks. The carnage peaked on July 28 with a single-day drop of 10.84%, the largest one-day decline the index had seen in months, erasing more than $2 trillion in market value and triggering multiple circuit-breaker halts.

What happened, and why it got so ugly

South Korean retail investors had piled into single-stock leveraged ETFs tied to semiconductor companies riding the AI wave, products introduced in May that attracted individual investors eager for quick gains amid rising housing costs and limited investment alternatives. When sentiment turned, those leveraged positions amplified losses on the way down just as effectively as they had amplified gains on the way up.

The unwinding was violent. Margin calls cascaded through the market, forcing sellers who had no intention of selling to dump positions at any price.

Retail investors bore the brunt of the losses, with reports pointing to young traders and even pensioners who had relied on borrowed funds finding themselves underwater.

The KOSPI was tracking toward its worst monthly performance since either the 2008 global financial crisis or the 1997 Asian financial crisis, depending on the final tally.

Regulators step in, markets start to breathe

South Korean regulators moved in mid-to-late July to raise barriers to trading single-stock leveraged ETFs and temporarily halted new listings of those products. They also tightened margin trading requirements, essentially trying to drain the speculative fuel that had accelerated the crash.

By early August, the KOSPI recorded an 18% surge in a single session, a whiplash rebound that underscored just how compressed and extreme the volatility had become.

An 18% daily gain sounds great until you remember it came after the index had lost roughly 40% of its value. Recovering from a 40% loss requires a roughly 67% gain just to break even.

The AI chip trade at the center of the storm

Companies like Samsung and SK Hynix sit at the center of the global memory chip supply chain feeding AI infrastructure buildouts worldwide. Korean retail investors had bet heavily that surging demand for AI hardware would keep pushing these stocks higher, and they used leverage to amplify that thesis. When global uncertainties around semiconductor demand started to surface — including intensifying competitive pressures from Chinese manufacturers — the leveraged positions in these names became a liability.

What to watch from here

The regulatory changes are a double-edged sword. Tighter controls on leveraged ETFs and margin trading should reduce the risk of another cascade, but they also remove a significant source of buying power that had helped inflate the market on the way up.

The scale of losses suffered by ordinary investors in July could create a lasting chill on retail participation, which has been a defining feature of the Korean market for years. When people lose money they borrowed, the psychological scars tend to run deeper than the financial ones.

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