The South Korean stock market has become a “gambling den,” claimed the leader of the largest opposition party, while accusing President Lee Jae-myung of causing the problem.
The comments from People Power Party leader Jang Dong-hyuk came amid criticism of the government for greenlighting leveraged single-stock exchange-traded funds as chipmaker stocks boom on the benchmark KOSPI index.
The controversy has accelerated in recent weeks. Many have hit out at the crypto exchange Binance’s launch of USDT contracts that provide leverage on the index and single stocks. The products allow traders to access leverage between 50x and 150x on single stocks and KOSPI futures.
“Ultimately, market disruptions intensified, volatility increased. And retail investors, intoxicated by the volatility, flocked in. This has turned the stock market into a gambling den,” Jang said, as reported by the South Korean media outlet EDaily.
Jang was speaking after an 8% KOPSI drop triggered a circuit breaker on the afternoon of July 7. To date, the mechanism has been triggered only 12 times. Half of those, however, have occurred this year, the South Korean newspaper Chosun Ilbo reported.
The drop came in the wake of a preliminary earnings report from Samsung Electronics. The firm warned of an “earnings miss” in its forthcoming second-quarter report.
Korean Stock Market: KOSPI is a Casino, Says Party Leader
A South Korean investor told CasinoBeats talk of “gambling” is intensifying in stock market circles.
“The spike in retail activity is surprising for us long-term investors,” Kim Min-seok, a Seoul-based part-time securities investor and office worker, told us. “People who have never traded stocks in their lives are snapping up single-stock leveraged ETF holdings. There’s certainly an element of gambling to all this.”
Jang said that the Korean stock market is not large enough to handle single-stock ETFs. The Korea Exchange has a market cap of just over $5 trillion.
The New York Stock Exchange, by contrast, is around 88% larger than its South Korean counterpart.
“If single-stock ETFs are allowed in the environment of our small stock market, capital will naturally flock to them,” Jang wrote. “It’s like releasing a shark into a small pond.”
The South Korean cabinet formally approved single-stock leveraged ETFs on April 21. Financial providers followed up by rolling out over a dozen products. Most of these are tied to big-name chipmakers like Samsung and SK Hynix.
Trading volumes in these ETFs have ballooned, reaching the $140 billion mark in a single month, dwarfing ordinary stock trading figures by a ratio of 4 to 1, per June 29 figures.
Investors Spending Loans on Leveraged ETFs
“People I know in the investment space all draw the comparison with gambling,” said Kim. “When you read media stories about civil servants investing bank loans in ETFs and other domestic stock market products, it makes me think of the kind of scenes you might witness at a casino.”
Jang, meanwhile, continued to draw a parallel between South Korean retail stock investors and casino-goers.
“Americans rarely trade in leveraged investments because the benefits of holding stocks for the long term are so significant,” he wrote.
Jang claimed that the biggest traders in NASDAQ-traded leveraged investments are all South Korean investors.
“Some Korean investors, with an abundance of boldness, demanded that NASDAQ leveraged products, which they had been gambling on, be allowed in the domestic market as well,” the opposition leader said.
Jang criticized the government for failing to “properly review the side effects” of leveraged ETFs.
“The result is the current KOSPI Casino,” he wrote. “If [the authorities] intend to conduct a genuine audit [into the matter], they must start by auditing the Blue House, which issued the order.”
The Blue House, or Cheong Wa Dae, is the official residence and offices of the South Korean President.
Lee swept to power in last year’s general election, promising to revitalize the nation’s long-stagnant stock market.
He pledged to help financial firms take measures to attract overseas investors.
