The Shadow of Debt Investment... Largest Forced Sale in 10 Years

Average Daily 17.5 Billion KRW This Month
Scale Expected to Increase Reflecting Market Crash
Credit Loan Balance Also Reaches 17 Trillion KRW

[Asia Economy Reporter Oh Ju-yeon] Even when the global stock markets experienced corrections in September, the domestic stock market maintained a relatively solid trend. However, since the KOSPI fell below the 2400 mark on the 21st, it has shown a decline for three consecutive trading days. The problem lies in margin trading, where investors borrow money to invest in stocks. During a market downturn, it becomes difficult to bear the high interest rates, and investors may face forced liquidation, making it risky. The average daily scale of forced liquidations this month has reached its highest level in over a decade.

According to the Korea Financial Investment Association on the 23rd, the average daily amount of forced stock liquidations from the 1st to the 21st of this month was 17.565 billion KRW. The forced liquidations triggered by the sharp market drop on the 21st have not yet been tallied, so the average daily forced liquidation amount is expected to increase further once those figures are included.

Forced liquidation occurs when an investor fails to deposit additional settlement funds for stocks purchased on credit (unsettled trades), prompting the securities firm to forcibly sell the stocks to recover the funds. When forced liquidations increase, investors inevitably suffer losses.

The average daily forced liquidation amount has steadily increased since the beginning of this year. In January and February, the average daily forced liquidation amounts were approximately 10.732 billion KRW and 11.728 billion KRW, respectively, but surged to 16.256 billion KRW in March. This is interpreted as a result of the stock market crash caused by the COVID-19 pandemic, which triggered a wave of forced liquidations. The March average daily forced liquidation amount was the highest in 10 years since May 2009 (14.3 billion KRW), and recently it has even surpassed that level.

Although it slightly decreased to 13.886 billion KRW in April, it rose again to 15.453 billion KRW and 17.3 billion KRW in May and June, respectively. In August, the average daily forced liquidation amount was also around 17.288 billion KRW. Even after the March market crash, individual stocks experienced sharp short-term fluctuations, and investors who invested in such stocks accumulated unsettled stock debts, leading securities firms to frequently resort to forced disposals.

The KOSPI showed strength by closing at 2443.58 on the 15th but began to adjust around the 2400 level and then plunged 2.75% intraday on the 22nd. As of 9:58 AM that day, the KOSPI stood at 2309.26, down 1.00% from the previous trading day and more than 100 points below its recent high. In the KOSPI market, 624 stocks declined, and in the KOSDAQ market, 941 stocks fell. The number of rising stocks was only around 200 in each market. When stock prices fall like this, forced liquidations can increase further, so caution is necessary.

However, individual investors continue to "buy alone" despite the stock price decline. Even though the market fell by over 2% the previous day, individuals net purchased more than 1 trillion KRW in total in the KOSPI and KOSDAQ markets. On the morning of the same day, although the index fell by more than 1%, individuals net purchased 223.6 billion KRW in the KOSPI market and 92.9 billion KRW in the KOSDAQ market. This contrasts sharply with foreigners and institutions, who have been consistently selling in both markets.

The balance of margin loans has also not decreased significantly. The margin loan balance, which was in the 15 trillion KRW range last month, increased to 16 trillion KRW at the beginning of this month, then started to grow to 17 trillion KRW from mid-month, reaching a record high of 17.9 trillion KRW on the 17th. Since then, the margin loan balance has remained in the 17 trillion KRW range. Due to this excessive borrowing for stock investment, warnings have been issued in various places. Securities firms, feeling the burden of credit limits, have suspended margin trading, and some voices have expressed concerns about potential losses during a market downturn. Especially, the annualized interest rates ranging from 4% to 9% may be manageable if the market rises and yields higher returns, but they can become a significant burden during a decline.

A securities industry official said, "For those who bought certain individual companies or theme stocks at peak prices during the recent stock price surge, it is advisable to reduce their holdings," adding, "If additional shocks occur, it may be difficult to respond."

This content was produced with the assistance of AI translation services.