Financial Investment Industry Moves to Stabilize Single-Stock Leveraged Products on Its Own... Rebalancing Spread Out, LP Trading Reduced

[Financial News] The financial investment industry is moving to stabilize the single-stock leveraged exchange-traded fund (ETF) market. The move comes as market volatility has recently increased and investor losses have widened.
According to the financial investment industry on the 30th, the Korea Financial Investment Association held an emergency meeting the previous day and decided to spread rebalancing trades, which had been concentrated at the close, across intraday trading and after the market close. It will also reduce liquidity provider (LP) trading volume and tighten management of tracking error.
The meeting was attended by executives in charge of LP operations from major securities firms, along with the heads of eight asset managers, including KB Asset Management, Mirae Asset Global Investments, Samsung Asset Management, Shinhan Asset Management, Kiwoom, Hana Asset Management, Korea Investment Management, and Hanwha Asset Management.
A single-stock leveraged ETF is a product that tracks the daily return of an individual stock at a fixed multiple. It can generate high returns when the stock price rises, but losses can also grow sharply when the price falls.
The industry said the single-stock leveraged ETF, launched in May, has helped draw investment demand that had been flowing overseas back into the domestic market. It added that the product has expanded investor choice and boosted trading in the local stock market.
However, as stock market volatility has recently increased, especially in global semiconductor shares, side effects have also emerged. Retail trading has become concentrated in certain products and stocks, and losses have widened during sharp price declines. Concerns have also been raised that large-scale rebalancing trades could amplify price swings in the underlying assets.
Rebalancing refers to trades that adjust the amount of underlying assets held in order to maintain the ETF's target leverage ratio. Single-stock leveraged ETFs rebalance their assets every day based on the closing price. If orders cluster around the close, volatility in the underlying stock can increase.
In response, asset managers have decided to spread rebalancing orders that were concentrated at the close across intraday trading and after the market close. The goal is to ease order concentration at specific times and reduce the impact on underlying asset prices.
Securities firms will also scale back LP trading volume. LPs help keep ETF trading smooth by quoting buy and sell prices in the market. But in periods of high volatility, large LP trades can intensify price movements, according to industry concerns.
The industry plans to manage LP trading volume carefully while ensuring ETF liquidity is not undermined. It will also closely monitor tracking error, the gap between an ETF's market price and its net asset value (NAV). If the gap widens too much, investors may end up buying the ETF above or selling it below its true value.
The industry will also align with the government's investor protection measures. It plans to actively cooperate with efforts to raise the minimum deposit requirement starting on the 31st, as well as strengthen investor education and risk disclosures. It also plans to make clear to investors that single-stock leveraged ETFs are high-risk products.
The Korea Financial Investment Association and the industry will continue to monitor retail trading volume and market volatility. After reviewing the effectiveness of the voluntary stabilization measures, they plan to discuss additional responses if market instability continues.
Hwang Sung-yeob, chairman of the Korea Financial Investment Association, said, "The industry is also seriously aware of the recent increase in market volatility and the losses suffered by some investors," and added, "We will swiftly implement voluntary measures such as spreading out rebalancing trades and managing LP trading volume." He also said, "We will work closely with the government to do our utmost for market stability and investor protection."

[email protected] Kim Hyun-jung Reporter