New deposit rules for single-stock leveraged products have dramatically reduced retail trading, but the Kospi remains vulnerable to sharp price swings as foreign high-frequency trading around major stocks such as Samsung Electronics and SK hynix highlights the limits of regulations aimed primarily at individual investors.

Single-stock leveraged products are derivatives that multiply exposure to individual equities, allowing amplified gains or losses without directly owning shares. They have become a popular speculative vehicle among Korean retail investors in recent years. Trading value in the five largest such products by market capitalization plunged 74 percent on Friday, the first day the new rules took effect, according to the Korea Exchange. Retail investors sold a net 1 trillion won ($700 million) worth of the products as stricter deposit requirements and repurchase restrictions dampened activity. Financial investment firms acting as liquidity providers absorbed approximately 900 billion won of that selling.

The slowdown also extended to foreign investors, even though they are exempt from the deposit requirements. Their share of total trading value dropped to around 30 percent from about 38 percent. Analysts attributed the decline to the retreat of retail speculators, which reduced arbitrage opportunities for foreign traders who have typically used leveraged products for rapid turnover rather than directional bets on underlying stocks.

According to Shinhan Investment, foreign investors traded an average of 5.1 trillion won per day in single-stock leveraged products in July, accounting for 43 percent of the market's total trading value. However, their net purchases amounted to only about one-tenth of retail investors' buying, indicating that most of their activity consisted of short-term round trips rather than longer-term positions.

This pattern has focused attention on the expanding role of foreign high-frequency trading (HFT) firms. HFT relies on algorithms to identify and exploit price gaps within fractions of a second, with orders typically routed directly to exchanges through brokers' direct market access systems.

HFT activity has grown rapidly in South Korea — one of Asia's largest equity markets by capitalization — since the COVID-19 pandemic. A Korean Securities Association paper published in March found that 2,490 HFT accounts were registered at the end of 2025. These accounts accounted for 55 percent of ETF trading value, and more than 90 percent were linked to foreign investors.

The market impact of such activity became especially visible during the previous week's rebound. Non-arbitrage program trading reached 5.1 trillion won in a single session, while foreign investors bought a net 7.28 trillion won worth of Kospi shares. Samsung Electronics and SK hynix together accounted for 5.77 trillion won, or 79 percent, of those net purchases. The two semiconductor companies rank among the Kospi's largest components, meaning concentrated flows into their shares can disproportionately move the broader index. The buying helped fuel the rally, sending SK hynix to its daily price limit and driving Samsung up 26 percent — its largest one-day gain on record.

"Short covering and deleveraging coincided with the unwinding of leveraged positions," an asset management official said. "Mechanical foreign buying linked to portfolio rebalancing also increased sharply."

Market participants acknowledge that HFT can narrow bid-ask spreads, enhance liquidity, and make price discovery more efficient. However, concerns persist that algorithmic trading can intensify price swings when markets are already under stress. A Korean Securities Association study published two years ago warned that HFT could amplify volatility and disrupt orderly trading, calling for closer regulatory oversight.

The practice has faced heightened global scrutiny since the 2010 US flash crash, when major stock indexes briefly collapsed before rapidly recovering. Regulators in developed markets have since introduced targeted measures — including order-to-trade ratio limits under Europe's MiFID II framework and upgraded circuit breakers in the US — that specifically address algorithmic and high-speed trading behavior. Some market participants note that such rules have pushed more HFT activity toward Asian markets where comparable restrictions may not yet exist.

Korean financial authorities are now reviewing how foreign HFT firms operate through domestic brokerages. The Korea Exchange has also begun assessing the practice's market impact and possible regulatory responses. The exchange already has safeguards in place, including mandatory registration for high-speed algorithmic traders and a kill switch that enables mass order cancellations in an emergency.

The Financial Services Commission is separately considering measures to discourage excessive trading in single-stock leveraged products by raising transaction costs for the most active participants. One option under review is imposing higher fees on traders who submit unusually large numbers of orders — an approach broadly similar to the order-to-trade ratio limits adopted in Europe. The measure would aim to curb excessive activity without explicitly singling out foreign investors.

"HFT is largely the domain of foreign firms rather than retail investors or domestic asset managers," an industry official said. "Some foreign traders appear to flood the market with orders that are not intended to be executed, creating temporary price distortions and arbitrage opportunities."

"Raising fees on excessive order submissions could help curb the activity without explicitly targeting foreign investors," the official added.