Recently, the South Korean benchmark stock market index, the KOSPI, has experienced incredible turbulence. After nearly 30 years of stagnation, the index catapulted to epic heights off the backs of AI memory manufacturers Samsung and SK Hynix. Due to this meteoric rise, a familiar sense of FOMO, or “Fear of Missing Out,” emerged amongst retail traders. Those who foresaw this outcome were already reaping their rewards, but those on the outside looking in were desperate for a piece of the action. In response to this growing desire, South Korea decided to allow retail traders to access leveraged single-stock ETFs (“Exchange Traded Funds”) to encourage more investment and growth. Unlike traditional ETFs, which are made up of a relatively balanced piece of dozens or hundreds of stocks, single-stock ETFs consist of a single stock, in this case Samsung or SK Hynix, which are levered to provide three to five times the daily return of a single traditional stock of these companies.
While these opportunities provide tremendous upside for investors, the downside is just as great, as any loss in stock price is multiplied three to five times for investors of these leveraged ETFs. Large-scale investors often make use of leverage, but retail investors should be cautious, as the ability to almost instantly lose your entire portfolio is heavily increased. It should come as no surprise, then, that on June 13, 2026, over 1.2 million retail traders in South Korea, roughly 1 in 30 adults, received a margin call, meaning that their portfolio holdings had dropped too low and they either needed to put more money in or risk their bank forcefully selling on their behalf. For instance, Seoul resident Song Mi-kyung profited nearly $200,000 when the KOPSI rallied off of the back of Samsung and SK Hynix, but lost nearly all of her investment following the crash. In the aftermath, South Korean officials apologized for allowing single-stock leveraged ETFs to be traded by retail investors. The government has also started implementing policies to protect investors in the future. But should they? Is this a case where governments should step in to regulate their citizens’ behavior?
One of the classic ways to think about the ability to interfere with someone’s right to do x is via Mill’s Harm Principle from his work On Liberty. In this book, Mill claims that “the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.” Moreover, one cannot be compelled or forced to do something merely because it would be “better for him.” Mill’s principle, then, really breaks down into two further principles. First, power can be exercised over another if it is to prevent harm. Second, power cannot be exercised over another if it is merely for their own good.
When discussing something like investing, it is easy to believe that we should let people make their own decisions and live with the consequences, come what may. However, a government making a “paternalistic” regulation, or, a law that is in the best interest of the people despite restricting freedom to some extent, is not only sometimes justified but already something we live with. Notably, since 2018, about 30 US states have legalized gambling, but the New York Federal Reserve indicates that gambling, specifically sports betting, “can have dramatic implications for household financial stability.” Many would claim that restricting gambling, despite the loss of freedom, is justified insofar as (1) gambling is bad and (2) many cannot stop themselves from gambling and need an external force to get them to stop. We also see different examples of paternalistic laws in instances such as it being illegal to swim at a given beach with a history of dangerous waters without a lifeguard present or laws governing what kind of financial tools a retail trader is allowed to use.
These kinds of regulations have already been put in place in South Korea. Despite a continued desire from retail traders to trade these leveraged single-stock ETFs, certain measures have been put into place to protect investors from similar financial meltdowns. Namely, South Korean investors must now complete a week-long course before they can trade single-stock funds, which includes at least one hour of simulated trading every day for five days. Furthermore, the minimum cash deposit for trading accounts has been raised to Won30mn ($21,000), which may prevent those who cannot afford to lose a lot of money from trading these volatile funds.
Assuming we believe paternalistic regulation is warranted in some instances, is it justified in this instance? In his 1972 article “Paternalism,” Gerald Dworkin offers two principles to make sure that paternalistic legislation is kept to a minimum. First, there must be a “clear and heavy burden of proof” placed on the state to show the harmful effects to be avoided or benefits to be achieved. Second, if there is a way to accomplish the end without restricting liberty, society must adopt this in place of paternalistic legislation. To use our gambling case, we can point towards the potential consequences of unrestricted gambling, such as the fact that states in the US who have legalized gambling have seen a 60% rise in diagnoses of gambling disorder compared to states where it is still illegal and those diagnosed with gambling disorder are 15 times more likely to commit suicide. In such a case, then, it seems reasonable and justified to restrict individuals from gambling to some extent.
In the case of the KOSPI restrictions, there are clear harms that the government’s policy seeks to avoid. Some traders incurred heavy losses, like Lee Seung-ho who turned roughly $15,000 into $225,000 before losing all of it during the crash, and are already setting their sights on trading these volatile funds again once they rebuild capital. So, when we look at reasons to favor the South Korean restrictions, I think the first principle is easily cleared. That is to say, the financial damages done to the retail traders are clearly evident and easily pass even the highest burden of proof.
The second principle – avoiding paternalistic legislation where possible – is a bit more tricky. Some will argue that retail traders can learn from their mistakes without the government restricting trading. But rather than completely banning retail investors from trading single-stock leveraged ETFs, South Korea merely put roadblocks in place to make sure that traders are educated on the risks. The government asks traders to prove competence by working through training modules and engaging in paper trading. These policies are meant to ensure that traders know what they are doing, understand the potential consequences, and can be held accountable for their actions. Increasing the mandatory minimum cash holding, however, is perhaps more than just a roadblock. Raising that level three times the current amount represents a sizable hurdle that time alone will not clear. Nevertheless, insofar as traders will continue to hastily invest in these funds without these regulations, and there is no way to curb bad investment practices without some restriction of liberty, it seems reasonable and justified for the South Korea government to restrict the trading of single-stock leveraged ETFs in the interests of their citizens.
