“Borrowed to buy stocks, then forced sales totaling 5.1 trillion won”—what happened to retail investors?

[Financial News] So far this year, the value of stocks forcibly sold by securities firms after investors failed to pay for credit purchases has exceeded 5 trillion won. That is about three times the total value of forced liquidations last year.
The month with the most forced liquidations was June, when the KOSPI set a record, not October, when it fell sharply. The concentration of forced sales is thought to have resulted from stock prices of investors’ holdings falling as credit trading increased.
Experts warned that forced liquidations could rise again if investors borrow money to buy stocks at lower prices, believing that share prices have fallen enough.
According to the Korea Financial Investment Association on the 28th, forced liquidations resulting from unsettled balances in brokerage transactions totaled about 5.1 trillion won from January through October 23 this year. That is 2.9 times the roughly 1.7 trillion won recorded over the whole of last year.
A forced liquidation is the process by which a securities firm forcibly sells shares bought on credit to recover an unpaid balance when an investor fails to pay the settlement amount by the deadline. It is also called a “forced closeout.”
The monthly value of forced liquidations was highest in June, at 1.1229 trillion won. June was the only month this year in which the total exceeded 1 trillion won. On June 9 in particular, forced liquidations totaled 169.8 billion won in a single day, the highest daily figure of the year.
Heavy buying concentrated in some large-cap stocks was cited as a reason forced liquidations surged despite the KOSPI’s rise. After single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix were launched on May 27, buying focused on those products. The KOSPI hit an all-time high of 9,114.55 on June 22, but other stocks were relatively left out of the rally, analysts said.
Lee Sang-heon, a research fellow at iM Securities, said forced liquidations were more common in other stocks, including those on the KOSDAQ, which were relatively overlooked as buying concentrated in Samsung Electronics and SK hynix. He explained that forced liquidations tend to increase when a downtrend persists, rather than in response to short-term share price fluctuations.
In June, there were several days when stocks plunged by 5–8% in a single day even as the KOSPI climbed toward a record high. Individual investors made net purchases of 56 trillion won on the securities market that month. As credit trading increased and some holdings continued to fall, large numbers of shares belonging to investors unable to pay the settlement amounts were forcibly liquidated.
The pattern of increased bargain buying through credit trading whenever share prices plunged also recurred. In October, while the KOSPI fell nearly 19%, individual investors made net purchases of about 12 trillion won on the securities market through the 23rd. Unsettled balances in brokerage transactions rose 34% in just one week, from 1.0635 trillion won on the 12th to 1.4293 trillion won on the 19th.
During this period, the KOSPI plunged 5.46% on the 13th and 7.57% on the 15th. As falling share prices coincided with rising unsettled balances, forced liquidations totaling 340.7 billion won occurred over the five trading days from the 13th through the 19th.
However, the value of forced liquidations has declined recently. It fell for four consecutive trading days from the 20th, dropping to 7.5 billion won on the 23rd. Unsettled balances in brokerage transactions also fell below 1 trillion won, to 934.3 billion won on the 23rd. Cumulative forced liquidations from October 1 through the 23rd totaled 499.1 billion won, with the daily average at about two-thirds of June’s level.
[email protected] Han Seung-gon Reporter