As leveraged ETFs trigger turmoil in tech stocks, Wall Street's intraday momentum trading is reaping huge profits from "the volatility itself."

When the daily fluctuations of the AI semiconductor sector exceed 10% and the South Korean KOSPI index triggers circuit breakers eight times within a month, a once-marginalized trading strategy is experiencing explosive growth on Wall Streetintraday momentum trading. Against the backdrop of the explosive expansion of leveraged ETFs, these financial products, which undergo daily mechanical rebalancing, have become a significant driver of market volatility and have created unprecedented profit opportunities for quantitative strategies adept at capturing short-term trends. The daily mechanical rebalancing mechanism significantly amplifies market fluctuations, thus creating new profit avenues for Wall Street's intraday momentum trading strategies. From JPMorgan to France's Industrial Bank, top institutions on Wall Street are systematically capturing this "structural dividend." Meanwhile, the urgent measures taken by Korean regulators and the painful losses of retail investors exceeding 20 trillion won reveal another side of this feast. Leveraged ETFs as "procyclical amplifiers": $150 billion in mechanical sell-offs The core mechanism of leveraged ETFs dictates their inherent procyclical nature. To maintain a set leverage ratio, these funds must buy more when the market rises and are forced to sell when it falls. This "reset" operation performed before market close makes tech stocks susceptible to amplified buying or selling pressure towards the end of trading, skewing intraday movement towards "momentum acceleration" rather than a natural balance of supply and demand. Calculations by JPMorgan's strategy team reveal the staggering scale of this mechanism: from early June to July 29, U.S. leveraged ETFs net sold approximately $150 billion of stock exposure through daily rebalancing, with total assets declining by about $70 billion from the peak in June. This passive sell-off coincided with a severe correction in tech stocks, creating a death spiral of "decline forced liquidation of leveraged ETFs accelerated drop." Analysis indicates that leveraged ETFs inherently possess a "short gamma" propertybuying when prices rise and being forced to sell when they fall. This procyclical trading behavior creates a momentum effect in the direction of the market, thereby amplifying price fluctuations. Every 1% fluctuation in price triggers approximately $9 billion in mechanical trading. In South Korea, the impact of this mechanism has been especially severe. The leveraged ETF tracking SK Hynix has plummeted over 80% since its June peak, while the related products tracking Samsung Electronics have also seen declines exceeding 70%. The mechanical sell-off of leveraged ETFs has created a vicious cycle of "decline and liquidation." During the recent month of sharp declines, Korean retail investors recorded actual total losses from leveraged tradingincluding leveraged ETF net value drawdowns, options margin losses, and outstanding debts to brokersamounting to about 2.15 trillion won. The leveraged ETF tracking SK Hynix dropped by 33.8%, while its underlying stock only fell by 6.8%the leverage amplified not just returns but also the speed of destruction. Divergence among individual stocks: Nvidia's "gamma buffer" versus Micron's "negative gamma trap" However, the performance of intraday momentum strategies varies significantly across different individual stocks, with the gamma structure of the options market playing a key differentiating role. For Nvidia, ongoing selling of call options since 2023 has created a positive gamma buffer that effectively offsets the short gamma effect brought by leveraged ETFs. As of July 27, Nvidia's net gamma exposure was approximately -$8.288 million, at a relatively controllable level. Conversely, Micron's situation is entirely different. Over the past month, Micron has experienced bearish activity fueled by buying of puts against call options sold, leading to a net negative gamma position for the traders. On July 25, Micron fell below the gamma flip point and entered the negative gamma zone. This negative gamma structure means market makers will hedge in the direction of the trend rather than against it, further amplifying price fluctuations. This explains why momentum strategy results can vary significantly even within the same industry. Jitesh Kumar, a derivatives strategist at France's Industrial Bank, stated: "After weeks of de-risking, the positions are now clearer, and investors are returning to this theme through leveraged tools. These products are part of the mechanism themselvestheir end-of-day rebalancing operation aligns with that day's trends, thus sustaining rather than weakening the intraday trends captured by the strategy." The explosion of intraday momentum strategies: the semiconductor sector as the main battlefield for "structural volatility" The mechanical rebalancing of leveraged ETFs has created a predictable trading environment for Wall Street quants. JPMorgan's strategy team has written a paper studying trading strategies based on five-minute price intervals: a basic intraday momentum strategy follows strict rules: buy when the price exceeds the previous day's closing price by 1%, sell when it falls below the previous day's closing price, and close out positions by the end of the trading day. Florian Ielpo, head of macro at Lombard Odier Investment Managers, pointed out: "Intraday momentum trading profits in big markets, whether rising or falling; but it usually incurs losses on quieter days. In July, the volatility and poor performance of tech stocks presented an opportunity for this trading approach to showcase its value." Data from Premialab outlines the astonishing returns of this strategy: Pierre Trecourt, co-founder of Premialab, stated that the semiconductor sector has become the hottest area for intraday momentum strategies, with the number of effective strategies targeting this industry more than doubling since their launch in 2024; since the end of 2021, the number of such strategies across the entire U.S. tech sector has also increased by about 80%. JPMorgan strategist Yangyang Hou pointed out that this strategy performs best in highly volatile stocks and trading days, stating that the current market's high volatility evokes memories of the tech revolution era of 1998/99, which caused unprecedented profit uncertainty and record volatility in individual stocks. The painful lessons of Korea's "leverage experiment": from financial innovation to regulatory storm South Korea is at the epicenter of this leveraged ETF storm. On May 27 this year, to enhance the attractiveness of the domestic capital market and guide capital back in, South Korea officially launched a single-stock 2x leveraged ETF tracking Samsung Electronics and SK Hynix. Following its introduction, the product swiftly attracted retail investor capital, with KB Financial Group data showing that net buying by Korean retail investors reached 14 trillion won (approximately $9.7 billion) shortly after the product's listing. However, once the market turned, the destructive power of leverage was fully unleashed. After the KOSPI index peaked on June 19, the semiconductor sector began to correct. As of July 30, the KOSPI index had dropped 38.63% from its high on June 22, erasing 287.778 trillion won in market value, exceeding South Korea's annual GDP. For the first time in history, the Korean stock market triggered an 8% primary circuit breaker on July 28 and 29 consecutively. Korean regulators were forced to urgently apply the brakes: starting July 31, the minimum margin requirement was raised from 10 million won to 30 million won in cash, and advertising for leveraged products was restricted. The affected 16 ETF products saw their daily trading volume plummet from 10-12 trillion won (peaking at 15-20 trillion won) to around 1 trillion won by early August, a drop of about 90%. The trading volume of the leveraged ETF tracking SK Hynix fell to its lowest level since June 4. This incident has escalated from market turmoil to political accountability. The South Korean presidential office has responded to calls for accountability surrounding the launch of single-stock leveraged ETFs, and Lee Nam-woo, chairman of the Korea Corporate Governance Forum, has warned of the strong cyclical risks in the memory chip industry. However, South Korean retail investors have not reduced their risk appetite as a result; in July, net purchases of U.S. stocks reached $4.67 billion, setting a new high for the year, with nearly $2.5 billion net buying of the triple leveraged ETF SOXL for U.S. semiconductors in a single month. Market outlook under a double-edged sword: volatility will not disappear, but will shift Although some leveraged ETF assets have fallen from historical highs in July, temporarily alleviating some of the severe volatility brought about by rebalancing, interest in intraday trend trading has not waned. Jitesh Kumar, derivatives strategist at France's Industrial Bank, noted: "After weeks of de-risking, the positions are now clearer, and investors are returning to this theme through leveraged tools. These products are part of the mechanism themselves, and their end-of-day rebalancing operations align with that day's trend, maintaining rather than weakening the intraday trends that the strategy captures." Goldman Sachs has previously pointed out that the recently launched "single-stock leveraged ETFs" are key drivers for amplifying in-day volatility. The 2x leveraged ETF for SK Hynix has skyrocketed to $130 billion in size within nine months, evolving from a singular trading tool to a critical force influencing stock volatility in South Korea and globally. Analysts warn that the flourishing of leveraged ETFs is a double-edged sword. While they provide investors with tools to profit from dramatic volatility in tech stocks, their inherent structural flaws and procyclical mechanisms are exacerbating market fragility. Once market sentiment shifts, such passive, mechanical trading behaviors may easily trigger a chain reaction, amplifying downward pressure on the market. Frank Benzimra, head of Asia equity strategy at France's Industrial Bank, clearly stated on July 29: "The stock market is undoubtedly in an extremely crowded state and is currently undergoing a process of liquidation." The rise of leveraged ETFs has not created new market volatilityit has simply released potential structural volatility in a more intense and mechanical manner. For traders able to navigate this force, it represents unprecedented opportunities; for long-term investors and retail investors passively enduring its impacts, it remains an ongoing risk education lesson.