Policy failure is behind roller coaster market

The Kospi briefly fell below the 6,000 mark during intraday trading Tuesday before closing down 10.84 percent, while the Kosdaq lost 7.72 percent. It was the benchmark index's second-steepest decline this year after the market turmoil triggered by the outbreak of the Iran war on March 4. Investor sentiment deteriorated after reports that credit default swap premiums on major U.S. technology companies had climbed to record levels, while news of CXMT's stock listing and progress in developing domestic semiconductor equipment dealt another blow to chipmakers.

The plunge triggered both a sell-side sidecar, which temporarily suspends program sell orders, and a circuit breaker that halted trading across the Kospi and Kosdaq markets for 20 minutes. As sidecars have become increasingly common, questions are growing over whether the mechanism still serves its intended purpose.

The Kospi has recorded 42 sidecar activations this year, the highest annual total on record and well above the 26 recorded during the 2008 global financial crisis. Between July 10 and July 24 alone, either the Kospi or the Kosdaq triggered a sidecar every trading day for 10 consecutive sessions. Such conditions cannot be considered normal. Because orders accumulate during the five-minute suspension and flood the market when trading resumes, the system may even amplify volatility instead of containing it.

The sidecar mechanism was first introduced in the United States after the 1987 Black Monday crash but was later abolished in 1999 because its effectiveness in slowing market declines proved limited. Japan and Hong Kong do not operate similar systems. Korea, which adopted sidecars in 1996, should also reassess whether the measure remains appropriate.

Korea's stock market has become a roller coaster because of its heavy concentration in semiconductor shares, the high participation of retail investors and the added volatility created by single-stock leveraged exchange-traded funds (ETF). Financial authorities have moved forward to Friday the implementation of tougher requirements, including higher minimum deposits, to curb demand for these products. Financial Services Commission Chairman Lee Eog-weon also said Tuesday that additional measures, such as individual investment limits, are under review.

Approving single-stock leveraged ETFs with insufficient scrutiny, largely in pursuit of exchange rate stability, was a clear policy mistake that encouraged excessive speculation in the stock market. The immediate priority is ensuring that tighter safeguards work as intended and help restore confidence. Once market conditions stabilize, however, policymakers should also conduct a thorough review of how the decision was made. Identifying responsibility and preserving a clear record of this policy failure would provide an important lesson for future financial authorities and help prevent similar mistakes from being repeated.