South Korea's mock-trading rule cuts chip ETF turnover 96%

South Korea's mandatory five-day simulated trading course has drained leveraged chip ETFs to 4 percent of their June turnover peak.

South Korea's mandatory five-day simulated trading course has cut leveraged chip ETF turnover to 4 percent of its June peak, driving the first monthly outflow as regulators cool a $4.3 trillion stock market.

"South Korean authorities have shifted from supporting these products to actively restraining them," said Rebecca Sin, a Bloomberg Intelligence analyst. "The outflows may persist in the near term as regulators continue to tighten rules."

The single-stock ETFs, introduced in May to draw retail money into the local market, saw combined assets shrink to $5 billion as of Aug. 27 from $11.4 billion at their late-June peak, with about $1 billion of outflows in August. The Kospi's volatility gauge has slid to a four-month low of around 50, down from a peak of 97 in late June.

The crackdown has stabilized the benchmark even as it strands existing holders seeking higher exits. The Kospi is up 61 percent this year but remains 25 percent below the record reached two months ago, and the Korea Exchange has no plans to ease the new hurdles.

The latest and most onerous rule, effective Aug. 19, requires investors to complete five days of simulated trading before buying the leveraged products. Traders must download a Windows-only program on a personal computer and spend at least an hour a day learning the mechanics — and risks — of leveraged positions with virtual cash. The system grants a virtual deposit of 100 million won ($72,872) to demonstrate "volatility decay," the erosion of returns that leveraged products suffer in choppy markets.

The mock course adds to curbs imposed since July, including a higher minimum cash deposit of 30 million won. During the products' heyday, turnover in the leveraged ETFs and the two chipmaker stocks combined accounted for more than 80 percent of total market volume, triggering wild price swings that turned the products into a political liability.

Retail investors say the requirements are too cumbersome. Kim Jung-hoon, a 41-year-old resident of Gyeonggi province outside Seoul, said he would not attempt the course because it was "too much of a hassle," noting his work computer cannot install external programs. Another investor, who asked to be identified only by his surname Lee, said he met the 30 million won deposit threshold but abandoned the process at the simulated trading step, which required a new membership account. "I just turned off there," he said.

Park Ki-duck, a 39-year-old retail investor, said the fading AI trade has also sapped his appetite. "I don't want to brave all the regulatory hurdles when the AI or memory chip industry isn't doing great," he said.

Cooling the market, at a cost

The Korea Exchange declined to disclose how many investors have downloaded the program or attempted the mock trading since its launch, and said it has no plans to introduce a mobile-based platform. The contraction has helped stabilize trading: the Kospi volatility gauge has fallen from 97 in late June to about 50, a four-month low.

Yet the rapid drain in liquidity raises exit costs for investors still holding the products, who now face a thinner market to sell into. The last time Korean regulators moved to restrain speculative retail products, in the 2021 short-selling debate, the benchmark swung sharply before settling — a reminder that curbs can cut both ways. With global tech selloffs driven by concerns over AI spending and monetization compounding the regulatory drag, the leveraged ETFs face a prolonged retreat unless the chip cycle turns decisively.

This article is for informational purposes only and does not constitute investment advice.