Mandatory “5-day simulated trading”! Korea Introduces Various Measures to “Cool Down” Leveraged ETF Trading

South Korean regulators are suppressing the once market-shaking leveraged ETF craze through a series of cumbersome entry barriers. The mandatory requirement for simulated trading has become the "final straw" that breaks retail investors' willingness to participate, with trading volumes of related products having plummeted more than 90% from their peaks.

According to a Bloomberg report on August 29, the combined trading volume of single-stock leveraged ETFs linked to Samsung Electronics and SK Hynix fell to just 4% of its June peak in August, and is set to record its first-ever monthly net outflow since listing. As of August 27, the combined assets under management of relevant ETFs shrank from a peak of $11.4 billion at the end of June to $5 billion, with a monthly net outflow of about $1 billion in August.

The latest tightening move by regulators is the mandatory simulated trading rule effective from August 19—investors must download a dedicated software only supported on Windows PCs, complete at least one hour of virtual trading practice per day, and persist for five consecutive days to qualify for trading. Several Korean retail investors have said this barrier is "too troublesome," and has directly extinguished their interest. Bloomberg Intelligence analyst Rebecca Sin stated, "As regulators continue to tighten rules, capital outflows may continue in the near term. Korean authorities have shifted from supporting such products to actively suppressing them."

It is worth noting that cooling measures by the regulators have already shown initial results. The Kospi Volatility Index has declined from a peak of 97 at the end of June to around 50, a four-month low, and market stability has significantly improved.

From "Traffic Driver" to "Political Hot Potato"

These single-stock leveraged ETFs were first introduced in May this year, originally intended to attract retail capital back to the local market. However, the products quickly led to market disorder after their launch—at their most popular, the combined trading volume of the two main stocks, Samsung Electronics, SK Hynix, and their leveraged ETF products once made up over 80% of the entire $4.3 trillion Korean stock market’s total trading volume and triggered sharp price swings.

The two chip giants are key nodes in the global AI supply chain. The related leveraged products promised twice the daily gains or losses of the underlying stocks, quickly drawing in a large number of retail investors. However, as multiple rounds of technology stock sell-offs hit globally—mainly due to concerns over the huge capital expenditures in AI and its commercialization prospects—the net asset values of these ETFs shrank substantially, and the products shifted from market favorites to regulatory risk concerns.

Regulatory "Combination Punch": From Higher Margin Requirements to Mandatory Simulated Trading

Facing market chaos, South Korean regulators have rolled out a series of tightening measures since July. Early measures included raising the minimum margin threshold, requiring investors to hold at least 30 million won (about $22,000) in cash to participate in trading.

The latest and considered most intimidating step is the mandatory five-day simulated trading course. This system provides investors with 100 million won (about $73,000) in virtual funds, allowing them to experience firsthand the risks of leveraged trading, especially the so-called "volatility decay" effect—meaning that holding leveraged products over time in volatile markets will result in continuous erosion of returns.

However, the operational barriers of the system have deterred many retail investors. The program can only be downloaded on PCs, not supported on mobile devices, and the Korea Exchange has said there are no plans to develop a mobile platform.

Retail Investors: Barriers Too High, Simply Give Up

According to reports, the real experiences of several retail investors offer an intuitive glimpse of the actual impact of this policy.

Kim Jung-hoon, a 41-year-old retail investor living in Gyeonggi Province on the outskirts of Seoul, said his first reaction upon hearing about the mandatory simulated trading requirement was, "I won’t try it, it’s just too troublesome."

"I’d have to spend so much time each day, and it can only be installed on a PC. I can’t install external software on my work computer, nor is it realistic to bring an extra laptop to work."

Another retail investor, surnamed Lee, said he met all the other prerequisites, including the minimum cash deposit of 30 million won, but was stuck at the simulated trading step.

"You have to download the program, there’s a minimum time requirement, and you have to re-register a new account. So I just stopped, and shut it off immediately."

A 39-year-old retail investor, Park Ki-duck, attributed his exit to the cooling AI trend itself.

"When the AI and memory chip sectors aren’t performing well, I’m not going through all these regulatory hurdles. If market conditions were better and I was sure I could profit, then I’d be willing to jump through these hoops."

Market Cooling, but Side Effects Remain

Regulatory tightening has to some extent achieved the goal of stabilizing the market. The Kospi Volatility Index has fallen sharply from a peak of 97 at the end of June to around 50, a four-month low. The Korean stock market’s benchmark index has risen 61% so far this year but is still about 25% below its all-time high from two months ago.

However, the rapid shrinking of trading volumes has left investors who are still holding related products and hoping to exit at higher prices facing a dilemma. The sharp drop in liquidity means higher exit costs, and some investors may be forced to hold for longer than planned.

Bloomberg Intelligence analyst Rebecca Sin observed, "Regulators’ attitudes have fundamentally changed—from previous support to active suppression, and capital outflow pressures are unlikely to dissipate in the short term." With waning AI trading enthusiasm and rising regulatory barriers, this once wildly popular wave of leveraged ETFs is experiencing a rapid retreat.