Margin Calls Trigger AI Chip Stock Sell-off

A substantial margin unwind has led to a significant correction in AI stock prices, presenting a potential buying opportunity for long-term investors. In May, margin debt reached a record $1.42 trillion, a 53.7% increase year-over-year, contributing to the market's volatility. This led to an inevitable, larger correction when prices began to fall.

SK Hynix, a leading memory chip manufacturer crucial for AI infrastructure, serves as a prime example of this market event. The South Korean company experienced a sharp decline of over 20% within a two-day period in July. This dip, however, is seen as a compelling opportunity for investors, particularly as the margin unwind concludes.

The situation in South Korea was intensified by 12 million retail traders receiving margin calls, representing over 3% of the adult population. SK Hynix, as the country's most valuable company and a significant player in the AI sector, faces heightened exposure to this margin pressure, creating a feedback loop of further calls and deeper corrections.

Leveraged exchange-traded funds (ETFs) have further exacerbated the margin unwind. These ETFs, designed to maintain fixed ratios, are compelled to sell holdings when a stock's value decreases. The proliferation of leveraged ETFs, especially among traders with margin accounts, has intensified market swings, prompting regulatory concern. One official described these ETFs as a "gambling operation" that increases market volatility.