Forced liquidations after debt-fueled stock purchasing rises to record

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The number of forced liquidations, where investors who borrowed money from a brokerage house are forced to sell their stocks due to a plunge in shares, has soared to the highest level on record in South Korea. The amount of margin trade for stocks exposed to forced liquidations is also increasing.

According to Korea Financial Investment Association last Thursday, the amount of forced liquidations to settle receivables came to a record 59.72 billion won ($45.15 million) as of May 3.

The amount of forced liquidations, which averaged around 10 billion won per day until mid-April, surged to 35.1 billion won on April 26 and had been on a steep upward curve until May 3. Considering that the volume of stock purchases on credit, a leading indicator, is increasing, such forced liquidations are likely to increase further.

Forced liquidations of margin trade and contracts for difference transactions, which are not fully counted, are also estimated to have increased significantly.

A margin trade is when a trader buys a stock by depositing only 40 percent of the actual purchase price with a securities firm. For example, if you have 400,000 won of your own money, you can borrow up to 600,000 won from securities firm to buy a total of 1 million won worth of stocks. However, if you fail to deposit the receivable in two days, securities company will automatically sell your shares the following day.