Cornering the market is a common expression used in financial markets. The idea is that a particular investor or speculator would try to manipulate a specific market by taking a large position. This allows for the price to be more susceptible to the intentions of this market participant.
An attempt at cornering the market intends to manipulate the price of a particular asset to its advantage. However, the term may also be applied to companies that have a large market share, and hold a monopolistic position.
Cornering the market is only possible if the speculator has control over a large percentage of the asset. If so he will be able to establish a new price equilibrium by amassing a large percentage of the supply for a particular asset.
How does cornering the market work?
A speculator cornering the market
In order to be able to corner the market, it is necessary to control a vast amount of a particular asset. Cornering the market is only possible when the supply for a particular asset is restrained. The lack of supply allows the speculator that has been hoarding this asset to sell it on the open market at a higher price. Usually cornering the market involves a manipulation of the prices, by controlling the supply.
If the supply of a particular asset is lower due to a market participant hoarding that asset, prices will naturally tend to rise. This happens because although the demand for an asset tends to be relatively stable, if the supply drastically diminishes, then buyers will have to pay a higher price to acquire that asset.
A company cornering the market
For a company to corner the market it needs to have a monopolistic position in any market. This means that the dominant position it has allows them to easily manipulate the price of its goods and services. For a company to establish such a dominant market position it needs a moat or several moats.
Companies are regulated by antitrust laws. In order to prevent consumers from being exploited by any company that holds a monopolistic position. These laws ensure that there is fair competition between all of the companies involved in a particular market.
Examples of cornering the market
Hunt brothers cornering the silver market
During the late 1970s, Nelson Hunt and William Hunt, commonly described as the Hunt brothers became increasingly concerned over the possible increase in inflation. Following President Nixon’s move to decouple the dollar from gold. During the late 1970s and early 1980s, the Hunt brothers proceeded to accumulate more than half of all of the available silver. Effectively cornering the silver market.
During that period silver skyrocketed from the single digits to close to $50/oz. The price would eventually collapse as new rules applicable to exchanges were put in place to prevent the Hunt brothers from cornering the market. The government became aware of the situation and in conjunction with exchanges decided to limit long contracts on silver. Without any demand, the collapse would eventually culminate in what is now known as Silver Thursday.
Since a large percentage of their silver hoarding was done through futures contracts on margin, the Hunt brothers soon started getting margin calls.
Yasuo Hamanaka cornering the cooper market
Yasuo Hamanaka is one of the most infamous rogue traders. During the 1990s, Yasuo Hamanaka attempted several times to corner the copper market. As the chief cooper trader for Sumitomo, a renowned Japanese trading house
Sumitomo would end up losing $2.6B, following the collapse of the copper prices in 1995. Yasuo Hamanaka would later be given two names following the copper debacle. Mr.Copper, due to his ability to trade copper futures and options, and Mr. 5%, because he ultimately controlled 5% of the global copper supply. Mr. Copper would eventually face charges of fraud, was sentenced to jail.
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