Faded 'Bittu'... 30 Billion Won in One Day Forced Sales, Largest in 9 Years

Monthly Average Daily Forced Liquidation Amount Hits 10-Year High
'Daily Forced Liquidation' Scale Also Largest in 9 Years
24 Days Over 20 Billion Won in Daily Forced Liquidation in 10 Years... 17 Occurred This Year

Forced Liquidation Ratio to Outstanding Debt at 11.0%

[Asia Economy Reporter Oh Ju-yeon] Office worker A, a stock market beginner, borrowed money from a securities firm and started margin trading as the KOSPI surpassed the 2400 level. However, when the index, which had reached 2240, suddenly dropped to the 2270 level, A has been unable to sleep due to anxiety. A said, "Among my acquaintances, some are borrowing money from others due to margin call warnings, which worries me," adding, "I plan to reduce my holdings if the index rises."

The daily scale of forced liquidation has exceeded 30 billion KRW. This is the highest in nine years. It has even surpassed the levels seen during the stock market crash amid the COVID-19 pandemic in March. As 'debt investing'?borrowing money to invest in stocks?increases, individual investors exposed to forced liquidation risks are emerging as a potential trigger for market instability.

According to the Korea Financial Investment Association on the 25th, the scale of stock forced liquidation on the 23rd reached 30.272 billion KRW, marking the highest level in nine years. Analyzing daily forced liquidation data from March 2, 2010, to September 23 of this year, it was the first time since August 9, 2011 (31.135 billion KRW) that forced liquidation exceeded 30 billion KRW in a single day.

An official from the Financial Investment Association stated, "Forced liquidation volumes tend to increase whenever the stock market plunges," and added, "This time, the KOSPI showed strength after surpassing 2400 but then declined consecutively, leading to an increase in forced liquidation."

Forced liquidation occurs when an investor fails to deposit additional settlement funds for stocks purchased on credit (margin trading), prompting the securities firm to forcibly sell the stocks to recover the funds. Investors subjected to forced liquidation inevitably suffer significant losses overnight.

The average daily forced liquidation volume by month reached the highest level in ten years. From the 1st to the 21st of this month, the average daily forced liquidation amount was 17.565 billion KRW, the highest since May 2009 (14.3 billion KRW). The increase in average daily forced liquidation volume reflects the growing scale of forced liquidations occurring almost daily amid recent sharp stock market declines.

When ranked by the largest forced liquidation volumes, there have been a total of 24 days in the past ten years where daily forced liquidation exceeded 20 billion KRW, with 17 of those occurring this year. As margin loan balances surpassed 17 trillion KRW and debt investing reached record highs, the scale of forced liquidations has also increased whenever the market wobbles. However, it is unusual for daily forced liquidation amounts to exceed 30 billion KRW, as this has not happened in nine years.

The ratio of forced liquidation to outstanding margin debt has also increased. On the 23rd, the forced liquidation ratio relative to margin debt was 11.0%, marking the fourth highest in ten years. This ratio tends to rise sharply during times of severe market shocks, such as March 27, 2015 (22.6%), October 25, 2018 (11.7%), and January 6, 2014 (11.3%).

While concerns about debt investing have been continuously raised in the securities industry, investors have overlooked these warnings, intoxicated by profits during the bullish market. An industry insider noted, "Not only securities firms but also savings banks provide stock margin loans, but their requirements are stricter than those of securities firms, making them more vulnerable to forced liquidation," and advised, "Credit should only be used within a controllable range."