The South Korean stock market experienced its second trading halt this week as a sharp decline in chip shares dragged down the benchmark Kospi index, underscoring the market's heightened sensitivity to fluctuations in global artificial intelligence (AI) investment sentiment.

Following a 20-minute trading suspension by the Korea Exchange, the Kospi index extended its losses, at one point plunging as much as 9%. Shares of Samsung Electronics Co Ltd and SK Hynix Inc each tumbled more than 10% intraday. Foreign investors net sold approximately 5 trillion won (around $3.2 billion) worth of Kospi constituents. At the time of writing, the Kospi had pared losses to 6.63%, with Samsung down over 7% and SK Hynix falling nearly 9%.

Friday's sell-off contrasted sharply with Thursday's rally, which was fueled by strong earnings and an optimistic outlook from Micron Technology Inc (MU) and news of SK Hynix's planned US listing, boosting confidence in the sustainability of the AI trade. However, sentiment quickly soured as traders digested a series of developments: price increases from Apple Inc (AAPL) due to memory chip shortages, announcements of massive investment plans by domestic Korean chipmakers, and concerns over a potential delay in OpenAI's initial public offering (IPO).

"This volatility is likely driven by the rumor of OpenAI's IPO delay and news of Apple's price increase," said Homin Lee, a strategist at a Singapore-based bank. He noted these factors have intensified discussions about whether memory chip bottlenecks are nearing their limits, adding that market volatility is expected to persist, fueled by various leveraged trades.

Price Increases from Major Tech Firms

On June 25th, Apple announced price increases for its Mac, iPad, and home device lineups, citing cost pressures from unprecedented shortages of memory chips and storage driven by the expansion of AI data centers. An Apple spokesperson stated that the "rapid expansion of AI data centers has caused an extraordinary surge in demand for memory and storage," and the company had "never seen component prices rise so fast and so much." The spokesperson added that Apple had previously absorbed cost increases for consumers but "has now reached a point where it must begin raising prices."

A few hours after Apple's announcement, Microsoft Corp (MSFT) issued a notice stating that consumers will have to pay higher prices for Xbox consoles in the future due to persistently rising costs of key components. Microsoft pointed to significant increases in storage and memory costs as the primary driver, stating that "prices for console storage and memory have risen more than 2.5 times, and we expect them to double again by the fall of 2027."

Since the second half of 2025, the global memory chip industry has experienced a rare broad-based price surge, with supply for DRAM, such as LPDDR used in smartphones, remaining persistently tight. Market research firm Counterpoint estimates that LPDDR4/5 prices in Q2 2026 are expected to be approximately double those of Q4 2025.

The price hikes from Apple and Microsoft signify that upstream cost increases have exceeded the absorption capacity of even the largest companies, and AI-related costs are beginning to flow downstream to consumers. This raises the market question: if consumers are unwilling to bear these AI costs, how long can upstream profits be sustained?

The moves by Apple and Microsoft signal that enhanced industry pricing power may come at the expense of future demand, prompting a broad-based repricing of AI-related semiconductor stocks.

"The memory chip story still has legs, but the positive factors have become more selective, while the negative ones cover a broader market," said Charu Chanana, chief investment strategist at Saxo Markets. "The risk is that today's stronger memory chip cycle could weigh on tomorrow's broader AI story, and the market is starting to price that in."

Additionally, news that South Korea's two major memory chipmakers are preparing for massive AI investments also dampened investor sentiment. These two stocks together account for nearly 60% of the weighting on the Kospi index. Reports indicate Samsung and SK Hynix plan to announce new investment plans potentially worth hundreds of billions of dollars as early as next Monday. Samsung is expected to unveil a 1,000 trillion won (approximately $646 billion) investment plan over the next decade, which would be the largest corporate investment plan in South Korea's history.

"We suspect the upcoming capex announcements from major Korean memory makers are a key driver for the stock declines," said Homin Lee. "If anything, capacity expansion is essential for their continued dominance and long-term stability requirements."

Leveraged Products and Retail Frenzy Amplify Volatility

The Kospi has triggered its circuit breaker multiple times this year. The South Korean stock market in 2024 resembles not an ordinary market but a high-leverage machine modified by AI trading, with increased retail participation further intensifying volatility.

Single-stock leveraged exchange-traded funds (ETFs) tracking Samsung and SK Hynix use derivatives and swap contracts to provide leveraged exposure, offering investors the potential for returns far exceeding the underlying asset's performance. While these ETFs can amplify investment returns, they can also exacerbate stock market volatility.

Given the rapid growth of these leveraged products and their increasingly prominent role in amplifying Korean market swings, their rebalancing mechanisms are under close scrutiny. Because these funds must rebalance daily to maintain a fixed leverage multiple, they are mechanically forced to buy on market up days and sell on down days.

Tuesday's market action exemplified this phenomenon. Shares of SK Hynix and Samsung both fell over 12%, driving the Kospi to its worst sell-off since the outbreak of the Middle East war.

"Selling pressure came from the mechanical rebalancing of these products to reset their daily 2x leverage exposure," said a Bloomberg Intelligence ETF analyst. "This mechanism further amplified the market move when the very stocks that make up half the index were falling."

A report from Goldman Sachs' sales trading desk similarly noted that hedging demand from leveraged ETFs likely contributed to Tuesday's sharp declines in SK Hynix and Samsung shares. "We have previously noted that the daily mechanical rebalancing needs of these leveraged products create a momentum loop. When the ETF's net asset value falls, the ETF needs to sell its underlying holdings, reinforcing the downtrend," the report stated.

In response, South Korean regulators have announced they are studying measures to curb risks associated with these leveraged ETFs. The head of the Financial Supervisory Service stated at a press conference that authorities are considering enhanced monitoring of trading patterns and researching other market stabilization measures to limit the potential impact of severe volatility from these ETFs.

Furthermore, a frenzy of retail investor inflows has been a significant factor driving the Korean market's rise this year while simultaneously increasing volatility. The number of stock trading accounts in South Korea has increased by over 10 million this year, with a surge in accounts opened by minors. Data compiled by Toss Securities shows new account openings by individuals under 18 in Q1 surged nearly tenfold compared to the same period last year.

A mindset of "better to crash completely than miss this bull market" has emerged among Korean retail investors. The market's volatility has led some analysts to compare intraday swings to the frenzy seen in "meme stocks." The Kospi 200 Volatility Index, a gauge reflecting Kospi 200 index option prices, hit new highs over the past two days and is currently about five times the level of the US CBOE Volatility Index (VIX).

"Violent volatility without a clear direction is very painful to trade," said Daniel Tan, a fund manager at Grasshopper Asset Management. "We are watching to see where the market consolidates before potentially adding back to tech positions."

The intense volatility has also spurred demand for risk-hedging instruments. This week, a surge in block trades after market hours, including one involving nearly 500,000 contracts with a notional value exceeding 1.5 trillion won, pushed open interest in Samsung Electronics options to a record high. Open interest for SK Hynix is also near record levels, while open interest for the US-listed iShares MSCI South Korea ETF hit a record high ahead of last week's monthly expiration.