Forced margin liquidation in Korean retail investors hits highest in 13 years

[Graphics by Song Ji-yoon]

The number of margin accounts that led to forced liquidation has reached the highest in 13 years in Korea as unsettled funds continue to surge due to stock price drops and a cash shortage amid rising uncertainties in the financial market.

According to industry sources on Thursday, margin calls on outstanding shares reached 38.3 billion won ($26.76 million) as of Tuesday, more than doubling from the previous day and the highest since 39.4 billion won on October 6 last year.

The share of margin calls to unsettled funds was 20.1 percent, the highest since 21.8 percent in July 2009 when the country was hit by the global financial crisis.

Margin calls on outstanding funds are executed when stocks bought on margin are not settled within the next two trading days.

The surge in margin accounts is also seen as contributing to the growing uncertainties in the stock market. Margin calls may lead to further stock price declines as they are usually settled on the lower end of the stock price of the previous trading day. Investors who are worried about margin calls may resort to panic selling, exacerbating the stock market¡¯s slide.

Margin trading is used by investors who seeks a short-term rise in stock prices by leveraging, said Kim Hak-kyun, the Research Center Director at Shinyoung Securities, adding the surge in margin calls on unsettled funds indicates that retail investor anxiety is at an all-time high.

The National Pension Service of Korea, which is the largest investor in South Korea, has sold 1.42 trillion won worth of stocks since May just before the U.S. Federal Reserve delivered a rate hike of 75 basis points.

On Thursday, the Kospi and the Kosdaq gained 2 to 3 percent during the early hours of trading but the indexes ended up recovering only 0.08 percent and 0.18 percent, respectively, due to massive selling of 469.2 billion won by retail investors.

[¨Ï Maeil Business Newspaper & mk.co.kr, All rights reserved]