Cornering The Market
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In
finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...
, cornering the market consists of obtaining sufficient control of a particular
stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...
,
commodity In economics, a commodity is an economic goods, good, usually a resource, that specifically has full or substantial fungibility: that is, the Market (economics), market treats instances of the good as equivalent or nearly so with no regard to w ...
, or other
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...
in an attempt to manipulate the market price. Companies that have cornered their markets have usually done so in an attempt to gain greater leeway in their decisions; for example, they may desire to charge higher prices for their products without fears of losing too much business. The cornerer hopes to gain control of enough of the
supply Supply or supplies may refer to: *The amount of a resource that is available **Supply (economics), the amount of a product which is available to customers **Materiel, the goods and equipment for a military unit to fulfill its mission *Supply, as ...
of the commodity to be able to set the price for it.


Strategy and risks

Cornering a market can be attempted through several mechanisms. The most direct strategy is to buy a large percentage of the available commodity offered for sale in some
spot market The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is due at a later date. In a spot market, s ...
and
hoard A hoard or "wealth deposit" is an archaeological term for a collection of valuable objects or artifacts, sometimes purposely buried in the ground, in which case it is sometimes also known as a cache. This would usually be with the intention of ...
it. With the advent of futures trading, a cornerer may buy a large number of
futures contract In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item tr ...
s on a commodity and then sell them at a profit after inflating the price. Although there have been many attempts to corner markets by massive purchases in everything from tin to
cattle Cattle (''Bos taurus'') are large, domesticated, bovid ungulates widely kept as livestock. They are prominent modern members of the subfamily Bovinae and the most widespread species of the genus '' Bos''. Mature female cattle are calle ...
, to date very few of these attempts have ever succeeded; instead, most of these attempted corners have tended to break themselves spontaneously. Indeed, as long ago as 1923, Edwin Lefèvre wrote, "very few of the great corners were profitable to the engineers of them." A company attempting to corner a market is vulnerable due to the size of its position, which makes it highly susceptible to
market risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the m ...
. By its nature, cornering a market requires a company to purchase commodities or their derivatives at artificial prices; this effectively creates a situation where other investors attempt to profit off of these machinations through
arbitrage Arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more marketsstriking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which th ...
. This has a chilling effect on the cornering attempt, since these investors usually take positions opposed to the cornerer. Furthermore, if the price starts to move against the cornerer, any attempt by the cornerer to sell would likely cause the price to drop substantially, subjecting the cornerer to catastrophic risk. In nearly all cases, the company simply runs out of money and disbands before getting close to controlling prices. In the few cases where companies have purchased a dominant position in a market, governments and exchanges have intervened. Cornering a market is often considered unethical by the general public and has highly undesirable effects on the economy.


Historical examples


Thales of Miletus (c. 6th century BC)

According to
Aristotle Aristotle (; 384–322 BC) was an Ancient Greek philosophy, Ancient Greek philosopher and polymath. His writings cover a broad range of subjects spanning the natural sciences, philosophy, linguistics, economics, politics, psychology, a ...
in '' The Politics'' (Book I Section 1259a),
Thales of Miletus Thales of Miletus ( ; ; ) was an Ancient Greek pre-Socratic philosopher from Miletus in Ionia, Asia Minor. Thales was one of the Seven Sages, founding figures of Ancient Greece. Beginning in eighteenth-century historiography, many came to ...
once cornered the market in olive-oil presses:
Thales, so the story goes, because of his poverty was taunted with the uselessness of philosophy; but from his knowledge of astronomy he had observed while it was still winter that there was going to be a large crop of olives, so he raised a small sum of money and paid round deposits for the whole of the olive-presses in Miletus and Chios, which he hired at a low rent as nobody was running him up; and when the season arrived, there was a sudden demand for a number of presses at the same time, and by letting them out on what terms he liked he realized a large sum of money, so proving that it is easy for philosophers to be rich if they choose.


19th century: Classic examples by Edwin Lefèvre

Journalist Edwin Lefèvre lists several examples of corners from the mid-19th century. He distinguishes corners as the result of manipulations from corners as the result of competitive buying.


James Fisk, Jay Gould and the Black Friday (1869)

The 1869 Black Friday financial panic in the United States was caused by the efforts of
Jay Gould Jason Gould (; May 27, 1836 – December 2, 1892) was an American railroad magnate and financial speculator who founded the Gould family, Gould business dynasty. He is generally identified as one of the Robber baron (industrialist), robber bar ...
and James Fisk to corner the gold market on the New York Gold Exchange. When the government gold hit the market, the premium plummeted within minutes and many investors were ruined. Fisk and Gould escaped significant financial harm.


Lefèvre thoughts on corners of the old days

In chapter 19 of his book, Edwin Lefèvre tries to summarize the rationale for the corners of the 19th century.


20th century: The Northern Pacific Railway

The corner of The
Northern Pacific Railway The Northern Pacific Railway was an important American transcontinental railroad that operated across the northern tier of the Western United States, from Minnesota to the Pacific Northwest between 1864 and 1970. It was approved and chartered b ...
on May 9, 1901, is a well documented case of competitive buying, resulting in a panic. The 2009 Annotated Edition of ''
Reminiscences of a Stock Operator ''Reminiscences of a Stock Operator'' is a 1923 roman à clef by American author Edwin Lefèvre. It is told in the first person by a character, in the book called Larry Livingston, inspired by the life of stock trader Jesse Livermore up to that p ...
'' contains Lefèvre's original account in chapter 3 as well as modern annotations explaining the actual locations and personalities on the page margins.


1900s: The United Copper Company

In October of 1907, a failed attempt by F. Augustus Heinze to corner The United Copper Company led to the panic of 1907. A 50% fall in the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It is the List of stock exchanges, largest stock excha ...
of the previous year was directly related to the event.


1920s: The Stutz Motor Company

Called "a forerunner of the Livermore and Cutten operations of a few years later" by historian Robert Sobel, the March 1920 corner of The Stutz Motor Company is an example of a manipulated corner ruining everyone involved, especially its originator Allan Ryan.


1950s: The onion market

In the late 1950s,
United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
onion An onion (''Allium cepa'' , from Latin ), also known as the bulb onion or common onion, is a vegetable that is the most widely cultivated species of the genus '' Allium''. The shallot is a botanical variety of the onion which was classifie ...
farmer A farmer is a person engaged in agriculture, raising living organisms for food or raw materials. The term usually applies to people who do some combination of raising field crops, orchards, vineyards, poultry, or other livestock. A farmer ...
s alleged that Sam Seigel and Vincent Kosuga,
Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is an American derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board ...
traders, were attempting to corner the market on onions. Their complaints resulted in the passage of the
Onion Futures Act The Onion Futures Act is a United States law banning the trading of futures contracts on onions as well as "motion picture box office receipts". In 1955, two onion traders, Sam Siegel and Vincent Kosuga, Cornering the market, cornered the onion ...
, which banned trading in onion futures in the United States and remains in effect .


1970s: The Hunt brothers and the silver market

Brothers Nelson Bunker Hunt and William Herbert Hunt attempted to corner the world
silver Silver is a chemical element; it has Symbol (chemistry), symbol Ag () and atomic number 47. A soft, whitish-gray, lustrous transition metal, it exhibits the highest electrical conductivity, thermal conductivity, and reflectivity of any metal. ...
markets in the late 1970s and early 1980s, at one stage holding the rights to more than half of the world's deliverable silver. During the Hunts' accumulation of the precious metal, silver prices rose from $11 an ounce in September 1979 to nearly $50 an ounce in January 1980. Silver prices ultimately collapsed to below $11 an ounce two months later, much of the fall occurring on a single day now known as Silver Thursday, due to changes made to exchange rules regarding the purchase of commodities on margin.


1990s: Hamanaka and the copper market

Rogue trader Yasuo Hamanaka,
Sumitomo Corporation is one of the largest worldwide '' sōgō shōsha'' general trading companies, and is a diversified corporation. The company was incorporated in 1919 and is a member company of the Sumitomo Group. It is listed on three Japanese stock exchange ...
's chief copper trader, attempted to corner the international copper market over a ten-year period leading up to 1996. As his scheme collapsed, Sumitomo was left with large positions in the copper market, ultimately losing US$2.6 billion. Hamanaka confessed in June 1996, and pleaded guilty to criminal charges stemming from his trading activity in 1997. A Tokyo court sentenced him to eight years in prison.


2008: Porsche and shares in Volkswagen

During the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
,
Porsche Dr. Ing. h.c. F. Porsche AG, usually shortened to Porsche (; see below), is a German automobile manufacturer specializing in luxury, high-performance sports cars, SUVs and sedans, headquartered in Stuttgart, Baden-Württemberg, Germany. Th ...
cornered the market in shares of
Volkswagen Volkswagen (VW; )English: , . is a German automotive industry, automobile manufacturer based in Wolfsburg, Lower Saxony, Germany. Established in 1937 by German Labour Front, The German Labour Front, it was revitalized into the global brand it ...
, which briefly saw Volkswagen become the world's most valuable company. Porsche claimed that its actions were intended to gain control of Volkswagen rather than to manipulate the market: in this case, while cornering the market in Volkswagen shares, Porsche contracted with naked shorts—resulting in a short squeeze on them. It was ultimately unsuccessful, leading to the resignation of Porsche's chief executive and financial director and to the merger of Porsche into Volkswagen. One of the wealthiest men in Germany's industry, Adolf Merckle, died by suicide after shorting Volkswagen shares.


2010: Armajaro and the European cocoa market

On July 17, 2010, Armajaro purchased 240,100 tonnes of cocoa, the largest single cocoa trade in 14 years. The buyout caused cocoa prices to rise to their highest level since 1977. The purchase was valued at £658 million and accounted for 7 percent of annual global cocoa production. Anthony Ward, co-founder and manager of Armajaro, was dubbed "Chocfinger" by fellow traders for his exploits. The nickname is a reference to both the Bond villain Goldfinger and a British confection.


References

{{DEFAULTSORT:Cornering The Market Business terms Commodity markets Consumer protection Financial markets Market failure Market structure Metallism Scarcity Securities (finance) Anti-competitive practices