Cornering the market

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In finance, cornering the market consists of obtaining sufficient control of a particular stock, commodity, or other asset in an attempt to manipulate the market price. One definition of cornering a market is "having the greatest market share in a particular industry without having a monopoly".

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 of the commodity to be able to set the price for it.

Strategy and risksEdit

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 and hoard it. With the advent of futures trading, a cornerer may buy a large number of futures contracts 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, 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."[1]

A company attempting to corner a market is vulnerable due to the size of its position, which makes it highly susceptible to market risk. 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. 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.[2]

Historical examplesEdit

Thales of Miletus (c. 6th century BC)Edit

According to Aristotle in The Politics (Book I Section 1259a),[3] Thales of Miletus 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 LefèvreEdit

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)Edit

The 1869 Black Friday financial panic in the United States was caused by the efforts of Jay Gould 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 daysEdit

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

A wise old broker told me that all the big operators of the 60s and 70s had one ambition, and that was to work a corner. In many cases this was the offspring of vanity; in others, of the desire for revenge. [...] It was more than the prospective money profit that prompted the engineers of corners to do their damnedest. It was the vanity complex asserting itself among cold-bloodest operators.

20th century: The Northern Pacific RailwayEdit

The corner of The Northern Pacific Railway 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 contains Lefèvre's original account in chapter 3 as well as modern annotations explaining the actual locations and personalities on the page margins.

1920s: The Stutz Motor CompanyEdit

Called "a forerunner of the Livermore and Cutten operations of a few years later" by historian Robert Sobel,[citation needed] the March 1920 corner of The Stutz Motor Company is an example of a manipulated corner ruining everyone involved, especially its originator Allan Ryan.[4]

1950s: The onion marketEdit

In the late 1950s, United States onion farmers alleged that Sam Seigel and Vincent Kosuga, Chicago Mercantile Exchange traders, were attempting to corner the market on onions. Their complaints resulted in the passage of the Onion Futures Act, which banned trading in onion futures in the United States and remains in effect as of 2018.[5]

1970s: The Hunt brothers and the silver marketEdit

Brothers Nelson Bunker Hunt and William Herbert Hunt attempted to corner the world silver markets in the late 1970s and early 1980s, at one stage holding the rights to more than half of the world's deliverable silver.[6] 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.[7] Silver prices ultimately collapsed to below $11 an ounce two months later,[7] 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.[8]

1990s: Hamanaka and the copper marketEdit

Rogue trader Yasuo Hamanaka, Sumitomo Corporation's chief copper trader, attempted to corner the international copper market over a ten-year period leading up to 1996.[9] As his scheme collapsed, Sumitomo was left with large positions in the copper market, ultimately losing US$2.6 billion.[10] 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.[10][11]

2008: Porsche and shares in VolkswagenEdit

During the financial crisis of 2007-2010 Porsche cornered the market in shares of Volkswagen, which briefly saw Volkswagen become the world's most valuable company.[12] 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.[13] It was ultimately unsuccessful, leading to the resignation of Porsche's chief executive and financial director and to the merger of Porsche into Volkswagen.[14]

One of the wealthiest men in Germany's industry, Adolf Merckle, committed suicide after shorting Volkswagen shares.[15][16]

2010: Armajaro and the European cocoa marketEdit

On July 17, 2010, Armajaro purchased 240,100 tonnes of cocoa.[17] The buyout caused cocoa prices to rise to their highest level since 1977. The purchase was valued at £658 million and accounted for 7 per cent of annual global cocoa production.[18] The transaction, the largest single cocoa trade in 14 years, was carried out by Armajaro Holdings, a hedge fund co-founded and managed by Anthony Ward. Ward was dubbed "Chocfinger" by fellow traders for his exploits. The nickname is a reference to both the Bond villain Goldfinger and a British confection.[19]

ReferencesEdit

  1. ^ Lefèvre, Edwin (1923), Reminiscences of a Stock Operator, chapter 19.
  2. ^ "Cornering the Market - Definition, How It Works, Example".
  3. ^ Aristotle. Politics. Translated by H. Rackham. Retrieved 2011-01-11.
  4. ^ The New Yorker: A Corner in Stutz, 23 August 1969
  5. ^ Romer, Keith (22 October 2015). "The Great Onion Corner And The Futures Market". NPR. Retrieved 22 October 2015.
  6. ^ Gwynne, S. C. (September 2001). "Bunker HUNT". Texas Monthly. Vol. 29 no. 9. Austin, Texas, United States: Emmis Communications Corporation. p. 78.
  7. ^ a b Eichenwald, Kurt (1989-12-21). "2 Hunts Fined And Banned From Trades". The New York Times. Retrieved 2008-06-29.
  8. ^ "Bunker's Busted Silver Bubble". Time Magazine. Time Inc. 1980-05-12. Retrieved 2008-06-29.
  9. ^ Gettler, Leon (2008-02-02). "Wake-up calls on rogue traders keep ringing, but who's answering the phone?". The Age. Melbourne. Retrieved 2008-06-29.
  10. ^ a b Petersen, Melody (1999-05-21). "Merrill Charged With 2d Firm In Copper Case". New York Times. Retrieved 2008-06-29.
  11. ^ Jacque, Laurent L. (2010). Global Derivative Debacles: From Theory to Malpractice. Singapore: World Scientific. ISBN 978-981-283-770-7. Chapter 7: Sumitomo, pp. 97–101.
  12. ^ "Hedge funds make £18bn loss on VW". BBC. 2008-10-29.
  13. ^ "Squeezy money". Economist. 2008-10-30. Retrieved 2008-11-01.; "A Clever Move by Porsche on VW’s Stock", The New York Times; "Porsche crashes into controversy in the ultimate 'short squeeze'", The Daily Telegraph
  14. ^ "VW prepares to take over Porsche". BBC. 2009-07-23.
  15. ^ Boyes, Roger (2009-01-07). "Adolf Merckle, German tycoon who lost millions on VW shares, commits suicide". The Sunday Times. London.
  16. ^ "Der Tag, als die VW-Aktie 1.000 Euro kostete". Frankfurt: Tagesschau (German TV series). 2018-10-26.
  17. ^ Farchy, Jack (16 July 2010). "Hedge fund develops taste for chocolate assets". Financial Times. Retrieved 27 July 2010.
  18. ^ Sibun, Jonathan; Wallop, Harry (17 July 2010). "Mystery trader buys all Europe's cocoa". The Telegraph. Retrieved 27 July 2010.
  19. ^ Werdigier, Julia; Creswell, Julie (July 24, 2010). "Trader's Cocoa Binge Wraps Up Chocolate Market". The New York Times. Retrieved July 27, 2010.