Korean stock market investors face more forced sale amid bullish Kospi

[Image source: Gettyimagesbank]

Korea’s stock markets have been witnessing a large volume of forced sale by brokerage firms of defaulted stock purchases, driven by an increase in the number of investors taking their long positions, with deposit payment only, in anticipation for gains with the Kospi hovering at record level for the year.

Larger fluctuation in the stock prices at many stocks is also believed to be another attributor to the recent trend, which is considered to be odd as it is a reversal of the general pattern. Usually, the volume of forced sales drops in a bullish market and increases in bearish market.

According to the Korea Financial Investment Association (KOFIA) on Tuesday, the amount of forced sale on defaulted transactions reached 272.9 billion won ($215 million) for only six trading days this month, after topping a record of nearly 1 trillion won last month. The average daily volume of forced sales was 48.1 billion won this month, mostly not changing much from 48.9 billion won last month. The previous record for daily volume was 59.7 billion won on May 3.

The KOFIA data on the forced sales only includes defaulted purchases. Since the data does not include margin calls on purchases made by individual investors, the actual volume of all forced sales in the market, including margin calls, is estimated to be larger than the KOFIA figure.

Investors can buy stocks with only 40 percent of the total price to pay as deposit at the brokerage houses. If the outstanding amount is not paid two days later, the brokerage automatically sells the stocks held by the investor the next day. The increase in the forced sales means practically an increase in the number of pending transactions only paid with the deposit. According to KOFIA, the volume of forced sales was an average 200 billion won a day in April, but the figure now hovers around 500 billion won.

“The volume of pending transactions has recently increased significantly, standing at 400 to 500 billion won,” said Kim Hak-kyun, head of the research center at Shinyoung Securities Co. “A larger number of investors buying stocks with deposits because their more anxious about making gains.”

The increase in the forced sale may be able to happen irrelevant to the bullish Kospi market, said Kim Dae-jun, head of the investment strategy team at Korea Investment & Securities Co., as the majority of those purchases with deposits only are made for small- and mid-cap stocks or at the Kosdaq market, while the Kospi is largely driven by large-cap stocks, Kim said. “When the market is bullish, investors tend to buy more actively with deposits only as they anticipate additional stock price rises during the two to three day pending period for the purchase.”

The last time such a large volume of stock purchases made only with deposits was in 2006 and 2007. KOFIA data shows that the amount of pending transactions per day often exceeded 1 trillion won in 2006 and 2007, and even exceeded 2 trillion won in January 2006. Despite the large volume of deposit-only purchases at that time, however, daily volume of forced sales stood at about 50 billion won at most, indicating the recent volume of forced sales is pretty high.

Indeed, the forced sales rate stands at about 8 percent to 10 percent. While this is lower than the 16.4 percent in early May due to the stock price collapse driven by Societe Generale Securities at the end of April, the figure remains still higher than in mid-April. Higher forced sales rate implies a higher number of investors losing money following their aggressive long positions made on debts.

Analysts warn that any investment on debt hoping for gains following short-term stock price fluctuations is not recommended, alerting that an increase in forced sales may lead to chained stock prices fall. For example, investor A defaulted on the payment for the purchase of company B’s stocks, so A’s pending shares on B stocks are forcibly sold. However, if that forced sale does not pay off the purchase, the brokerage house will forcibly sell other stocks held by A.

It is why many stocks went through sudden falls in early May when there was a surge in forced sale triggered by contract for difference trading. By mid-May, 59 stocks had hit their lows so far this year, a 2.7-times increase over the same period a year before and a 1.8-times increase compared to 2021. By market, 19 stocks listed on the Kospi and 40 stocks on the Kosdaq experienced said plunges.

The volume of credit financing in the overall markets, however, has remained around 18.8 trillion won, back down from over 20 trillion won in late April.