A textbook-level slaughter of retail investors just went down in South Korea, and it was orchestrated with the help of regulators.
Here's the lowdown: Samsung and SK Hynix are about to announce their best-ever earnings, and right at that moment, South Korea's top financial watchdog stepped in to harshly criticize leveraged ETFs tracking these two stocks, claiming these products benefit only brokerage firms and harm retail investors. The Financial Stability Agency estimates related trading commissions could reach up to $3-6.4 billion and is considering measures to rein it in.
At the peak of earnings, the regulators are calling for a deleveraging. For those who experienced the 2015 crash, this script is all too familiar.
Koreans are known for their willingness to gamble and accept losses, but they absolutely hate it when the house cheats. Right now, the situation is: the house sets up the table, everyone places their bets, and after that, the house says the table is poorly designed and wants to switch tables. Do you think Koreans will agree to that?
After this round of plummeting prices, most retail investors in Korea were using borrowed money to double down on ETFs, resulting in an effective leverage of nearly 4x. With SK Hynix dropping 10%, retail investors are facing a 40% loss. Then the regulators apologize, and the stock price rebounds, but those who got liquidated have truly lost everything; once the money's gone, it's gone. What else could you call this but a slaughter?
The biggest takeaway from this is simple: hold on to good companies and avoid leverage.
Once capital and regulators form a two-way partnership, retail investors have no strength to fight back. In the future, Samsung and SK Hynix might reach new highs, but behind those new highs lies the cost of countless liquidated investors. They chose to leverage themselves, but the regulators made their move at the most sensitive time; they can’t escape blame and will just wait for an apology. Regulators, standing in opposition to the people, will eventually pay the price.
Here's the lowdown: Samsung and SK Hynix are about to announce their best-ever earnings, and right at that moment, South Korea's top financial watchdog stepped in to harshly criticize leveraged ETFs tracking these two stocks, claiming these products benefit only brokerage firms and harm retail investors. The Financial Stability Agency estimates related trading commissions could reach up to $3-6.4 billion and is considering measures to rein it in.
At the peak of earnings, the regulators are calling for a deleveraging. For those who experienced the 2015 crash, this script is all too familiar.
Koreans are known for their willingness to gamble and accept losses, but they absolutely hate it when the house cheats. Right now, the situation is: the house sets up the table, everyone places their bets, and after that, the house says the table is poorly designed and wants to switch tables. Do you think Koreans will agree to that?
After this round of plummeting prices, most retail investors in Korea were using borrowed money to double down on ETFs, resulting in an effective leverage of nearly 4x. With SK Hynix dropping 10%, retail investors are facing a 40% loss. Then the regulators apologize, and the stock price rebounds, but those who got liquidated have truly lost everything; once the money's gone, it's gone. What else could you call this but a slaughter?
The biggest takeaway from this is simple: hold on to good companies and avoid leverage.
Once capital and regulators form a two-way partnership, retail investors have no strength to fight back. In the future, Samsung and SK Hynix might reach new highs, but behind those new highs lies the cost of countless liquidated investors. They chose to leverage themselves, but the regulators made their move at the most sensitive time; they can’t escape blame and will just wait for an apology. Regulators, standing in opposition to the people, will eventually pay the price.