Kospi Hit by Third Straight Sidecar as Wild Swings Deepen Volatility Shock

Three straight sessions of plunge, surge and plunge leave investors in panic

Korea’s ‘fear gauge’ hits a record high, sounding a warning on stock-market volatility

South Korea’s stock market is going through its most volatile stretch since the 2008 global financial crisis. Brokerages still expect further gains in the second half, supported by improving earnings in artificial intelligence and semiconductors and ample liquidity. But volatility is intensifying. As buying driven by bull-market expectations collides with panic selling, the Kospi has entered an unprecedented whipsaw market.

The Korea Exchange said the Kospi fell 4.52% to close at 7,730.82 on June 10. Institutions were net sellers of 2.2673 trillion won ($1.64 billion) and foreigners sold a net 2.7717 trillion won ($2.01 billion). Retail investors were the only net buyers, purchasing 4.8612 trillion won ($3.52 billion) worth of shares and helping support the index. The Kospi opened in the 7,900 range, widened its losses during the session and briefly retreated to the 7,500 range in the afternoon. A sell-side sidecar, which temporarily suspends sell quotes in program trading, was triggered at about 1:16 p.m. after the Kospi 200 dropped more than 5%.

That brought the number of sidecars triggered in the KOSPI market this year to 24 as of June 10, split evenly between 12 buy-side and 12 sell-side triggers. The total is already close to the 26 recorded in all of 2008 during the global financial crisis. That means a sidecar has been activated roughly once every four to five trading days on average.

Circuit breakers have also been unusually frequent. They were triggered in the KOSPI market three times this year, on March 4, March 9 and June 8. A circuit breaker temporarily halts trading across the entire market during a steep selloff and is viewed as a stronger warning signal than a sidecar, which only restricts program-trading quotes.

After each of those three circuit breakers, the Kospi rebounded in the next trading session. The index plunged more than 12% on March 4, then rebounded about 9% the following trading day. But it slumped again a few days later, on March 9, triggering a second circuit breaker.

The same pattern has repeated this month. On June 8, the Kospi tumbled more than 8% as a drop in U.S. semiconductor shares, pressure from higher rates and foreign selling hit at once. The year’s third circuit breaker was triggered, and a circuit breaker was also activated in the Kosdaq market. On June 9, the Kospi rebounded more than 8%, reclaiming the 8,000 level and prompting a buy-side sidecar. A sell-side sidecar was triggered again on June 10.

The options market has yet to settle. The VKOSPI, the KOSPI 200 volatility index often referred to as Korea’s version of a fear gauge because it measures expected volatility implied by option prices, surged to 91.23 the previous day. It was the first time the VKOSPI had closed above 90 since the index was officially launched in 2009.

That surpassed this year’s previous peak of 83.58 on March 5, set just after war with Iran broke out following attacks by the U.S. and Israel. It also exceeded the 89.30 reached during the 2008 global financial crisis and levels around 60 during the 2020 Covid-19 pandemic shock.

Like the VIX on Wall Street, the VKOSPI is a gauge of anxiety in South Korea’s stock market. Based on KOSPI 200 option prices, it measures implied volatility, or how much investors expect the index to swing over the next 30 days. The higher the reading, the harder it becomes to predict the market’s direction and the more severe the panic among market participants. Even on June 10, the VKOSPI closed at an elevated 88.35.

Brokerages broadly still favor further gains in the Kospi in the second half. Improved earnings in semiconductors and the AI value chain, expanded shareholder returns, inflows from household funds and a narrowing Korea discount are cited as reasons for a re-rating. Still, the repeated triggering of circuit breakers and sidecars shows the path higher may not be smooth.

Interest rates, inflation, the exchange rate, foreign investor flows and confirmation of the semiconductor profit cycle will be key variables for the index’s direction. South Korean stocks could continue to post sharp short-term swings depending on U.S. consumer price data, Treasury yields, international oil prices and moves in U.S. technology and semiconductor shares.

“The fact that the market swung by more than 8% over the past two trading days is unusual,” Han Ji-young, an analyst at Kiwoom Securities, said. It is rare in the history of South Korea’s stock market for realized volatility to fully outpace expected future volatility, he added.

Even the derivatives market that calculates and trades the VKOSPI had already priced in extreme volatility, Han said. Yet recent index moves have become so disorderly that actual stock-price volatility is still outrunning those expectations.

SpaceX, which is set to list on the Nasdaq on June 12, is also emerging as a variable. Demand for funds tied to the initial public offering, expected to be the largest on record, could weigh on stock prices, according to the analysis. Industry participants estimate SpaceX’s valuation at about $2 trillion.

“If the SpaceX listing becomes imminent, it could act as a black hole for global liquidity,” Lee Kyung-min, an analyst at Daishin Securities, said. That could accelerate fund outflows from the Kospi, which has sharply outperformed global equity markets.

Kang Kyung-ju, Hankyung.com reporter qurasoha@hankyung.com