New Delhi, Aug. 5 -- South Korea's benchmark Kospi index has witnessed extreme volatility this year. The index hit an all-time high in June before tumbling around 40% over the next six weeks.

Circuit breakers were triggered four times in July alone. A circuit breaker is an exchange-mandated trading halt that kicks in when an index falls sharply, interrupting panic selling and giving market participants time to reassess. On the Korea Exchange, an 8% drop halts all trading for 20 minutes.

The concentration was amplified by leverage. Leveraged exchange-traded funds (ETFs) use derivatives and borrowing to deliver a multiple of the daily return of an underlying stock or index. In late May, Korean asset managers listed 16 leveraged ETFs track...