There are many discussions about single-stock leverage, and from what I've heard coming up in the community so far
The volatility increases, so the downside swings become larger
The issue that trading volume is larger than spot (In the US case, trading is within an average of 6-10% compared to spot)
The issue that spot quote spreads become wider as leverage is used
These seem to be the main points.
I'm not opposed to single-stock leverage itself. In fact, it exists in other countries' markets, and I don't think it's unsuitable for our country.
Nevertheless, one of the reasons I see leverage as dangerous is because as market volatility has increased recently, abnormal phenomena are appearing in the market.
Looking at the recent KOSPI pattern, it rises at the market opening, then switches to a decline at some point, and ends up closing negative or flat by market close in many cases.
When the sideways trading range widens like this, of course the leverage principal melts away. That's why the stop-loss line is really important. If it doesn't seem to be working, you need to cut your losses quickly to prevent greater damage. (Looking at institutional buying/selling patterns lately, there's a pattern of buying/selling in a way that encourages retail investors to chase. Of course, there's probably no such intention, but watching the early-session rise and late-session decline pattern and seeing institutional buying/selling patterns, I think leverage investing would really be dangerous.)
There are probably people who, seeing losses here, are maintaining or buying more leverage trying to recover their principal faster,
but the problem is that based on SK Hynix, which is the most bought lately, if you purchased leverage at the high point of 2.5 million won on Monday this week, due to sideways movement throughout this week, you would need SK Hynix to reach 2.7 million won to break even on your leverage investment.
Then you might say, can't SK Hynix reach 2.7 million and recover your principal and even make more profit?
The problem is that there's a pension fund rebalancing sledgehammer, so the moment KOSPI exceeds 8,000, there's rebalancing pressure and selling occurs. When this happens, it reverses to a decline again. Considering that when SK Hynix was at 2.5 million on Monday, KOSPI was around 8,200, you face quite a dilemma.
Since KOSPI 8,000 is not only a pension fund rebalancing sledgehammer, but if it goes higher to 8,500, there's also foreign investor rebalancing sledgehammer, I think leverage needs to be approached very carefully for the time being.
You might think that with SK Hynix ADR listing, it could reach 2.7 million next week immediately... Of course, it could happen, but keep in mind that markets don't easily give you easy profits as predicted, and I recommend investing in a way that reduces risk.
As a separate matter, I personally think that if leverage were delisted, it could actually cause bigger problems, so maintaining it and implementing restrictions by raising standards would be most effective.
If delisted, spot & futures selling pressure would temporarily occur, and in the case of inverse products, temporary buy-back pressure on short-selling short positions would occur. If this hits once as a market shock, the aftermath lasts long, so it can't be delisted.
And from the perspective of shareholders holding planned leverage/inverse products, they can't hold until their desired point and are forcibly liquidated, creating fairness issues.
Rather than just saying single-stock leverage is dangerous and should be eliminated, I think market participants have no choice but to learn through experience when to do it and how to do it. For the market to mature, ultimately participants have no choice but to mature over time.
