Margin trading soars in Korea amid strong battery stocks

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A growing number of investors in South Korea are borrowing money from securities firms to engage in ultra-short term stock trade as they seek to benefit from the rise in secondary battery stocks such as those of EcoPro Co. and POSCO Holdings Inc.

Concerns, however, rise that the stock market may see more speculative investors.

According to financial investment industry sources on Wednesday, outstanding margin loans in the Korean stock market reached a record high of 773.3 billion won ($596.37 million) as of July 28.

The loan amount stood at 729 billion won on the following day, setting a record high for two straight days.

Outstanding margin loans refer to short-term loans that need to be repaid within two trading days to avoid forced liquidation of positions.

At the end of January, outstanding margin loans were in the 180 billion won range. Typically, the margin rate required for receivables is 40 percent.

Some analysts suggest that the demand for leveraged trading has shifted to outstanding margin trading after regulations on contract for difference (CFD) trading were tightened in May.

Outstanding margin loan balances have risen significantly since the beginning of last month when secondary battery stocks were on the rise.

The country’s tech-heavy Kosdaq index fell by 6 percent for two days from July 26 before rebounding by 6 percent in the next two days, showing extreme volatility.

The index also fell by 3.18 percent on Wednesday, indicating that ultra-short-term investments are gaining even more momentum. Unreliable sources from social media platforms have also triggered investors to eye volatile stocks.

“The increase in outstanding margin trading means an increase in ultra-short-term leveraged trading with high turnover, which is a factor that heightens market instability for surging stocks,” said Park So-yeon, an analyst at Shin Young Securities Co.

If outstanding margin loans are not settled within three trading days, securities companies will forcefully sell the stocks at the opening call auction after three days.

To avoid forced liquidation, individuals have no choice but to sell their shares at a loss on the same day. The turnover rate of stock investors, in fact, has increased almost twice compared to the beginning of the year, regardless of age group.

According to an analysis of a major Korean securities firm, the turnover rate of conservative investors aged 60 and older has increased to 16.6 percent in July from 10.9 percent in January.

As ultra-short-term trading has become the norm, the benchmark stock index Kospi, which mainly consists of large-cap stocks, has been on a roller coaster ride. After hitting an annual high on Tuesday, the Kospi fell 1.9 percent on the next day.