[MarketING] Multiple Limit-Downs, Warning for Increased Supply-Demand Volatility

The KOSPI and KOSDAQ indices started higher but then turned lower, marking a fourth consecutive day of decline. Concerns about increased volatility in supply and demand are growing as stocks that hit the lower limit prices en masse the previous day continued to plunge.

As of 10:20 a.m. on the 25th, the KOSPI was at 2,522.53, down 0.97 points (0.04%) from the previous day. The KOSDAQ fell 6.08 points (0.71%) to 849.15. Both KOSPI and KOSDAQ started higher but then turned lower. The KOSPI fluctuated around the flat line in early trading, while the KOSDAQ extended its losses after turning lower, falling below the 850 level.

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Following a mixed close near flat in the U.S. stock market the previous day, the domestic market showed a similar pattern. On the 24th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 0.20%, and the S&P 500 increased 0.09%, while the Nasdaq fell 0.29%. Sangyoung Seo, a researcher at Mirae Asset Securities, said, "The U.S. market rose early in the session as some fears of a hard economic landing eased due to strong economic indicator details. However, with major tech companies' earnings announcements approaching, caution was high, and selling pressure centered on tech stocks caused the Nasdaq to decline." He added, "Concerns ahead of the earnings reports of major U.S. tech companies are increasing, making volatility expansion inevitable."

Concerns about increased volatility in supply and demand are also growing. Following the previous day's mass lower limit price hits by five KOSPI-listed companies?Samchully, Daesung Holdings, Seoul Gas, Sebang, Daol Investment & Securities?and three KOSDAQ-listed companies?Harim Holdings, Dow Data, Seongwang?these stocks continued to plunge on this day. Seongwang, Sebang, Samchully, Daesung Holdings, Seoul Gas, and Dow Data again hit the lower limit price, while Harim Holdings and Daol Investment & Securities fell 13.31% and 13.22%, respectively, recording double-digit declines. These stocks saw a flood of sell orders at the Soci?t? G?n?rale (SG) Securities counter, a foreign securities firm, the previous day.

Jungyoon Kim, a researcher at Daishin Securities, explained, "The market points to forced liquidation of Contracts for Difference (CFD) accounts as the cause, but CFD trading data is technically difficult to access and analyze." He added, "Based on margin loan data, it is reasonable to infer that the cause of increased volatility in supply and demand was the heightened leverage burden." The margin loan balance for KOSPI and KOSDAQ combined reached 20.4 trillion won, up 3.9 trillion won from the beginning of the year. For KOSDAQ alone, it reached 10.5 trillion won, hitting levels seen in April-May 2022.

Kim said, "Margin trading is a double-edged sword that can both open the market upward and increase downward pressure. Particularly, KOSDAQ, which is more influenced by individual investors than KOSPI, is sensitive to leverage risks." Since the beginning of the year, individual investors' cumulative net buying amount in KOSDAQ is 6.3 trillion won, nearly 60% of the KOSDAQ margin loan balance. The recent 20-day average of new margin loans in KOSDAQ is 1.3 trillion won, higher than the level during the investment boom in 2020 after the COVID-19 outbreak.

Stocks that hit the lower limit price the previous day shared the common characteristic of excessive margin loan provision rates and margin loan balance ratios compared to the market. The 5-day average margin loan provision rate for all KOSPI stocks is 7.44%, and the margin loan balance ratio is about 0.98%. However, KOSPI stocks that hit the lower limit price showed an average margin loan provision rate of around 30%, and the average balance ratio exceeded 10%. For KOSDAQ, the overall balance ratio and provision rate are 2.2% and 6.9%, respectively, but stocks hitting the lower limit price had an average balance ratio of 10.2% and provision rate of 22.7%, significantly above market averages. Kim explained, "The higher the margin loan provision and balance ratios, the more the risk of sharp selling increases when downward price pressure occurs. When stock prices move abnormally due to simple supply and demand rather than fundamentals, price adjustments occur due to increased volatility in supply and demand."

It is expected that the lower limit price incidents caused by some stocks will not have a significant impact on the overall domestic stock market. However, since KOSDAQ has a high proportion of individual investors and has recently experienced a sharp and sustained decline in stock prices, leading to weakened investor sentiment, preparations for increased volatility are necessary.

Jiyoung Han, a researcher at Kiwoom Securities, said, "Considering the market capitalization of the eight stocks that hit the lower limit price, the impact of the lower limit price incidents they caused on the overall domestic stock market is unlikely to be significant." However, she added, "Given that KOSDAQ margin loan balances surged from about 7.7 trillion won at the beginning of the year to 10.5 trillion won at the end of April, and the index, which was above 900, has fallen sharply for three consecutive days, dropping more than 6% from the peak, investor sentiment has weakened. Therefore, it is necessary to prepare for increased volatility in KOSDAQ stock prices caused by supply and demand inflows from leveraged bets for the time being."

There is a view that caution is needed for small-cap stocks in KOSPI and large- and mid-cap stocks in KOSDAQ. Kim said, "Looking at margin trading status by index size, the margin loan balance ratio and provision rate for KOSPI small-cap stocks are 1.7% and 8.0%, respectively, exceeding those of KOSPI overall. For KOSDAQ, large-cap stocks have 2.5% and 9.6%, and mid-cap stocks have 2.4% and 12.0%, both exceeding KOSDAQ averages." He analyzed, "Especially, KOSDAQ mid-cap stocks have the highest margin loan provision rate, so volatility expansion triggered by supply and demand should be primarily guarded against."

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