The Korean butterfly

The South Korean market has had an incredible run this year. With a high level of concentration and leverage, it has gone up 95% YTD. But the returns have not occurred in a straight line. 5 times during the year, the market has been halted due to excessive volatility, and you can see that in the top chart below. Big swings have been the norm. What’s happen in now os that because of those swings, the probability of a short circuit or malfunction goes up abruptly. The bottom chart shows you the monetary value of defaulted trades: those operations where one counterparty is not able to deliver either the money or the securities that is obliged to tender. That’s not atypical in bubbly or frothy markets, and we’re starting to see that. Even though the Korean market is small to be a real cause of concern by itself for the world, we need to pay attention to the unfolding of this dynamic becase it can be the trigger of a much bigger movement that affects bigger markets (butterfly effect).

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