'I couldn't breathe': South Korea's frenzied stock trading exposes margin loan risks

Lee Seung-ho watched the nearly 300 million won ($202,515) stock trading fortune he built with a 500% margin loan evaporate in just four weeks in May, but he plans to borrow again and return to the market the moment he has enough capital.

The 24-year-old South Korean university student in Seoul briefly turned the 20 million won he saved during mandatory military service into a 15-fold windfall, all by tapping a "tiny circle button" on his trading app that instantly unlocked five-times leverage.

Then the market turned.

Violent swings in South Korean stocks triggered a cascade of forced liquidations by his brokerage, wiping out the gains. Within weeks, his account had fallen below his initial investment, leaving him under such strain that he said: "I literally could not breathe."

"But I'm sticking to ⁠margin loans," Lee said from his studio apartment, barely larger than a parking space, next to an empty Hibiki whisky and an unboxed electric fan gifted by his brokerage after he qualified as a VIP client.

Lee's ability to take on a 500% margin loan, and the spectacular boom-and-bust that followed, captures the risks at the heart of South Korea's deeply leveraged retail investing culture - a trend that has regulators frantically sounding the alarm to contain what they see as an increasingly dangerous trading frenzy.

The Kospi, which recently reigned as the world's best-performing stock index after more than doubling in just six months, has since lurched violently, plunging more than 10% several times in a matter of weeks.

For many young South Koreans, the allure of leverage is rooted in a harsher reality beyond the trading screen. With Seoul apartment prices averaging about 14 years' worth of salary, young graduates feel locked out of traditional wealth accumulation, leaving the high-leverage stock app as their only economic equalizer.

"Since stocks are volatile assets, that volatility, if it moves upward, allows for rapid wealth creation," Lee said. "If ⁠I add five times leverage, I can build wealth five times faster than others," he added, when asked why he would take on more debt despite the stress he had endured.

Lee's ultimate goal is to buy an apartment in Seoul, hopefully before he can be happily married with "a son and a daughter, one day."

'POLICY ERROR'

According to the Korea Financial Investment Association, margin loan balances in the domestic stock market reached 38.63 trillion won on 24 June, the highest level on record. As of 15 July, balances were 34.37 trillion won.

Broader Bank of Korea data, which includes other forms of ⁠borrowing, showed total investor debt surpassed an unprecedented 60 trillion won at the end of May, which coincided with the transformation of the $4.1 trillion stock market into the world's hottest - and most volatile.

On Thursday (16 July), authorities moved to cool the speculative fever, announcing a ban on new listings of leveraged exchange-traded funds tied to individual stocks.
The abrupt intervention comes just two months after regulators initially approved the vehicles.

"The FSS Governor ⁠has already admitted these products were approved too hastily, so this is a correction of a known policy error," said Inki Cho, a senior financial market strategist at online trading platform Exness, referring to the Financial Supervisory Service.

"For retail investors holding these products, the risk is asymmetric: the leverage accelerates losses on the downside far faster than it builds wealth on ⁠the upside in a volatile tape like this."

Lee says he understands those risks but remains convinced leverage is the best route forward.

"I've often compared this to poker: if you go all-in every single time, you are bound to lose.

"But if you have the discipline to only deploy that capital when the mathematical odds are heavily in your favour, it is actually quite difficult to get repeatedly wiped out in a single shot."