Cornering the Market
Gaining a majority stake in a single commodity or asset with which the shareholder can manipulate the market in their favor
What Does "Cornering the Market" Mean?
The term "cornering the market" refers to gaining a majority stake in a single commodity or asset with which the shareholder can manipulate the market in their favor.
Cornering the market causes the commodity or security to lose its ability to attract new buyers and sellers. In a scenario where a few people control the price of the product because the bulk of its control comes from one or more people.
To implement this strategy of cornering or gaining control of the market, one needs to have a large amount of wealth to acquire 70% or even more of the shares or securities in the market.
Consider a market where commodities sell at $10 a share and the total number of outstanding shares is 200,000.
To manipulate pricing or corner the market, a person must purchase at least 70% of the whole market, that is 140,000 shares, which will cost capital of around $1,400,000, and which itself is a huge investment.
Companies who have cornered their markets frequently did so to gain adequate flexibility in their decisions; for example, they may want to charge higher prices for their products without the fear of losing in other areas of the business. The corner seeks to take control of enough of the commodity's supply to be able to set its price.
Key Takeaways
- Cornering the market is a strategy companies and investors use to control the market prices of commodities and stocks by getting the majority stake in the security.
- Cornering the market involves huge capital to work this out, as it requires having more than 70% of the stocks or commodities in the market for manipulation.
- Cornering the market is a legal strategy when practiced as per the law and with full transparency.
- Any investor using other techniques to manipulate the market will face hefty penalties from the Securities and Exchange Commission (SEC).
- Cornering the market also damages people’s sentiments, causing the market manipulators to control the price for their profits, which comes at the expense of the profit of small investors.
How Does Market Cornering Work?
There are several legal methods for cornering markets. One simple option is to acquire and hoard the majority of market share to manipulate its pricing, but this would cost a tremendous amount of cash; in the case of futures trading, cornering is much easier than in other markets.
In such a circumstance, the buyer purchases a large number of future contracts of a specific commodity, increasing prices owing to limited supply and making the desired profit.
The corporation seeks to corner the market whenever possible since it offers them a competitive advantage over others in the same sector and allows them to generate large amounts of profit by manipulating the underlying asset’s prices.
The concept of cornering the market is dependent on the commodity's limited supply and demand. The right to manipulate prices arises only when the commodity has a limited supply and higher demand.
If the supply is infinite, this concept will not be useful as the overall market share will continue to increase, making it difficult for anyone to control the market regarding security prices.
However, if the supply is finite and the demand increases, this concept will effectively work for cornering.
Cornering the market operates like the stock market notion of bulls and bears. Bulls are those who want stock prices to rise to new daily highs. Bulls will put money into the market and buy stocks and hold them until their bullish sentiments become true, and then they will sell to make large capital gains.
The difference between bulls and corners is in their ultimate goal. Corners want to control the market by acquiring the majority of commodity shares; they want to be price makers, whereas bulls want to be price takers.
Hunt Brothers Cornering the Silver Market
The Hunt brothers cornering the silver market is one of the most well-known examples of market cornering.
In the early 1970s, the Hunt Brothers, Bunker, and Herbert Hunt attempted to corner the market by stockpiling silver.
They began accumulating futures contracts in 1974. These contracts granted them the right to acquire silver at specific rates on a predetermined future date.
People in the United States used to trade on these future contracts at the time, but the Hunt brothers were of a different mind. Instead of trading the contract before it expired, they held it until the maturity date hit and accepted the physical delivery of silver at a fixed rate.
At that time, Americans were not permitted to store gold in their homes for an extended time, so the Hunt brothers relied on a less valued metal, silver, which could assist people in battling inflation.
Their bullishness on silver affected wealthy Saudi oil Sheiks as well. They created a partnership called IMIC (International Metals Investment Company) to acquire silver futures.
Their rising involvement in the silver market was not unnoticed. The Hunt brothers were questioned by the CFTC (Commodity Futures Trading Commission) about their overall silver ownership in 1976.
Silver prices rose from $6 an ounce in 1979 to $50 an ounce in 1980 due to their stockpiling and manipulation. It was the highest silver price ever reported at the time.
By the end of 1979, they had collectively bought 60% of the silver in the COMEX (Commodity Exchange) storage. COMEX reacted in January 1980 by introducing a new regulation, Silver Rule 7.
Silver Rule 7 prohibited additional purchases of silver but permitted sales. Furthermore, additional limits on the purchase of commodities on margin were imposed, resulting in a sharp drop in the price of silver.
The Hunt Brothers were in a difficult situation since their purchases had been funded with large amounts of debt. They could no longer acquire additional silver, but had they sold their silver, they would have suffered significant losses.
The decline in silver prices resulted in a $100 million margin call. The Hunts were forced to incur a $2 billion paper loss because they could not make the margin call.
Legal Market Cornering
Cornering the market doesn't always have to be unlawful because it gives the company or firm the right to do it to gain a competitive advantage. In a free market, creating a competitive edge is completely lawful.
Companies with excess financial resources can use legal measures to practice market cornering to generate profit.
For instance, if an investor or group of investors wish to control the market share price of ABC Corporation listed on NASDAQ, they must purchase the largest possible proportion of ABC’s shares to do so.
While doing this, they will go on a buying binge and invest a lot of money in it, raising the market price of the shares and encouraging other people to invest as well to increase the market price further.
When the prices are inflated and the overall demand is high, they tend to corner the market by booking a handsome amount of profits.
The Corner maker now short-sells his position since the shares restart trading and return to the market; business as usual will prevail, resulting in a decline in prices.
Companies should only engage in cornering the market to a certain level if there is a legal means to it.
The main reason for this is that once short selling begins, all equities will tend to decline, making it more difficult for new investors to recover from a loss.
Therefore, if that happens, it should do so by the law and be as precise as possible.
Illegal Market Cornering
As we mentioned earlier, there are legal ways to corner the market; therefore, if there is an unlawful act, there must also be an illegal technique.
By illegally cornering a market, a person hopes to keep it undesirable to new consumers and sellers, preventing the possibility of competition and violating the essential principles needed for the survival of a market.
It is unlawful if an investor manipulates the market's supply of security to alter its price, which will drive baseless traders' sentiments.
Additionally, the Securities and Exchange Commission (SEC) of the United States keeps its eyes out for unethical trading activities in the bond, foreign exchange, and stock markets.
The Commodity Futures Trading Commission (CFTC) keeps an eye on any potential cornering of the commodity markets concurrently.
Markets are supposed to be equitable, giving businesses an equal chance to compete and develop. Cornering, however, goes against the fundamental principles of free commerce.
Individual investors corner the market by limiting the supply of securities or commodities for their benefit.
The most typical trading misconduct is hoarding. The hoarder invests heavily in an asset or commodity by buying it in large quantities. As a result, the market experiences an artificial shortage, which causes a sharp spike in commodity prices.
Illegal Market Cornering
Here is an example where a company tried to corner the market through Illegal means: Anthony Ward, often known as "Chocfinger," is a well-known case of market cornering. Anthony co-founded the hedge fund Armajaro Holdings. On July 17, 2010, he purchased 240,000 tonnes of cocoa beans.
His entire investment, worth £650 million, caused cocoa bean prices to soar, setting a record high for the previous 14 years. Farmers perceived this fraud for high demand as a positive signal and therefore invested heavily in increasing their output.
Anthony Ward meanwhile started selling the collected amounts of cocoa beans. Instantly, cocoa prices collapsed, leaving growers with enormous losses.
Effects of Cornering the Market
Even though market cornering proved to be a profit-making practice, there are numerous challenges a corporation must face when cornering the market.
Some of the challenges are discussed below.
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It is quite challenging since the corners are under pressure from the size of the firm due to the enormous prevalence of the cornering the market method in the commodities dealing market.
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Cornering refers to a situation where one investor attempts to control or manipulate the entire stock prices, which is viewed as an illegal act in most cases.
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It takes a lot of strength to maintain this position in the industry. Many businesses fail because they lack the necessary infrastructure to hold the cornering until the desired moment.
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Cornering is extremely expensive; only affluent people or businesses can pull it off.
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Businesses involved in cornering are under additional competitive pressure to survive and remain relevant in the marketplace.
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Even with a sizable investment, the investor could not wind up with a control-gaining share in the security.
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The government frequently intervenes in disputes to stop attempts of market cornering.
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