Amidst sharp fluctuations in the South Korean stock market, a leveraged ETF tracking SK Hynix exhibited a significant price misalignment. While the underlying stock fell nearly 8% that day, the ETF surged in the final minutes of trading, closing up over 50%, a clear departure from its intended purpose and highlighting the liquidity issues of single-stock leveraged ETFs in South Korea.
Prices derailed after closing quotes failed to function.
This product is the KIM ACE SK Hynix single-stock leveraged ETF, which closed at 30,000 won on Monday, a record high. Based on its 2x leverage tracking of SK Hynix's daily price fluctuations, it should theoretically have recorded a drop of approximately 15% that day.
Fund manager Korea Investment Management Co. subsequently stated that the abnormal fluctuations were related to a malfunction in the liquidity provider's quoting system. The company explained that near the close of trading, the liquidity provider ceased its obligation to provide continuous quotes, causing the bid-ask spread to widen rapidly. Some investors then placed market orders, pushing the ETF price significantly off-balance-sheet for a short period.
The sharp drop in South Korean stocks amplified the liquidity vacuum.
On the day the incident occurred, the South Korean market was under pressure. The Kospi fell nearly 9% at one point during the session, and the Korea Exchange initiated a 20-minute circuit breaker shortly after the market opened. Trading on the Kosdaq was also temporarily suspended in the afternoon.
The market sell-off was primarily concentrated in the technology and chip sectors. As funds withdrew from AI trading, memory chip stocks such as Samsung Electronics and SK Hynix faced significant selling pressure. In this highly volatile environment, niche ETFs are more prone to liquidity shortages and price decoupling.
Jung In Yun, CEO of Fibonacci Asset Management, said that such misalignments are not common, but this is not the first time they have occurred. ETFs usually rely on market makers to keep trading prices close to the underlying assets, but this constraint may weaken during the closing auction, making products with lower trading volumes more prone to distortion.
The risks of single-stock leveraged products are once again under scrutiny.
The KIM ACE SK Hynix ETF is one of a batch of newly listed single-stock leveraged ETFs in South Korea last month, primarily tracking chip stocks. Such products require daily rebalancing to maintain a predetermined leverage ratio.
Goldman Sachs' sales team previously pointed out that such rebalancing trades often involve buying more during uptrends and selling more during downtrends, potentially amplifying the volatility of the underlying asset. In recent sharp market declines, rebalancing flows in leveraged exchange-traded products have been considered one of the factors exacerbating market volatility.
The risk is particularly direct for investors who bought the ETF at the close of trading. If the market-making quotes return to normal on the next trading day, the product price may return to a range closer to its fair value, and those who bought at the close will face significant unrealized losses.
This incident once again demonstrates that when liquidity is weak at the close of trading, the trading price of a single-stock leveraged ETF may be significantly decoupled from the underlying assets, and it has also reignited discussions in the South Korean market about product design and market-making mechanisms.
