Middle East Tensions Escalate Triggering Huge Shakeup in Korean Stocks: Kospi Plummets Nearly 20% Over Two Days as Short Selling Surges

Caixin March 4 News (Editor: Zhou Ziyi) According to the latest data from the Korea Exchange (KRX), on Tuesday (March 3), the first trading day after the U.S. and Israel launched attacks on Iran (markets closed on Monday), the short selling volume in the Korean stock market reached 2.46 trillion KRW (approximately $16.6 billion), an increase of 518 billion KRW (about $3.5 billion) from the previous trading day.

As the Middle East situation continues to worsen, market risk aversion has intensified. As of Wednesday (March 4), the Korea Composite Stock Price Index (KOSPI) fell 11.04% to 5,152.48 points, triggering the circuit breaker mechanism at one point during the day. The previous day’s decline also exceeded 7%. This is the largest two-day decline since the 2008 global financial crisis.

Short selling is an investment strategy where investors borrow securities to sell them first, then buy back the stocks at a lower price to repay the loan. Short sellers profit from falling stock prices. On Tuesday, the short selling volume showed a clear upward trend compared to the average daily volume of 1.9 trillion KRW in 2025.

Future volatility is expected to increase

Over the past year, driven by the artificial intelligence boom, the Korean stock market performed strongly. At its peak, the KOSPI index rose nearly 50%, making it one of the best-performing major stock markets globally. The surge in storage chip demand significantly boosted the stock prices of Samsung Electronics and SK Hynix.

However, recent Middle East conflicts have pushed oil prices higher. As the eighth-largest oil consumer globally, South Korea faces rising energy costs, which may increase import pressure and lead investors to reassess risk assets.

Analysts say that market expectations are for increased volatility in the Korean stock market moving forward, and the won exchange rate will also decline sharply (the won once fell to its lowest point since 2009). These factors have fueled demand for short selling.

Daxin Securities analyst Lee Kyoung-min stated, “Given the continuous sharp rise of the Korea Composite Stock Price Index in January and February, the market is now in a phase where policies need to be temporarily relaxed to prevent overheating.”

An Hyungjin, CEO of Seoul Asset Management’s Billionfold Asset Management, commented, “Market volatility is too extreme; now it’s almost impossible to predict the trend, and traditional analysis is also ineffective. Retail investors are hesitant, and buying has noticeably decreased.”

Notably, retail investors previously used margin financing to buy stocks heavily. Data shows that the margin balance reached a record high before the market correction. However, with the sharp decline in stock prices now, these leveraged positions face risks of margin calls or forced liquidation.

Kim Dojoon, CEO and Investment Director of Seoul Zian Investment Management, pointed out that many investors are only using 30% to 40% margin to buy stocks. If stock prices continue to fall, more forced liquidations could be triggered.