When you hear the term "cornering the market," what comes to mind? Most people think of a business or individual who has managed to monopolize a particular industry or sector. This is not an easy task, but it can be done with enough planning and determination.
In this article, we will explore what cornering the market means, how it works, and why it's a risk for free markets. We'll also take a look at some famous examples of when this has occurred in the past.
What is cornering the market?
The definition of cornering the market is when an investor or group of investors buy up so much of a particular asset that they control the price. This can be done with stocks, bonds, commodities, or any other types of assets.
For example, if a group of investors wanted to corner the market on gold, they would buy up as much of the precious metal as possible. This would give them a monopoly on the gold supply and allow them to control the price.
By doing this, they would be able to sell gold at a higher price than what it is worth and make a profit. The reason why they can charge a higher price is that there is no one else who can sell gold at that moment. This creates a situation where the buyers have to pay whatever price the seller is asking.
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.
Origins of the term cornering the market
The term cornering the market comes from the early days of trading when all transactions were done in person on the floor of the exchange. To corner the market, investors would literally corner the sellers by standing around them so that no one else could get to them.
This would give the investor or group of investors a chance to buy up all of the assets before anyone else had a chance to. Nowadays, cornering the market can be done without physically standing on the floor of an exchange, as pit trading belongs now in the past.
It can be done through online trading platforms or by working with a broker. When someone is stuck in a corner, they are limited in their options of mobility, just as the sellers are limited in their options to move or sell their assets. This is how the name cornering the market came to be.
How cornering the market works
To corner the market, investors need to buy up a large enough share of a particular asset so that they can manipulate the price. The aim is to drive the price of the asset up so that they can then sell it at a profit.
To do this, they need to create artificial scarcity by buying up as much of the asset as possible. Once they have a controlling share, they can then start to drive up the price by selling small amounts at a time. This will cause demand to outstrip supply and the price will start to rise.
It's important to remember that cornering the market is a risky strategy and can often lead to losses if not done correctly, additionally, it is illegal, and every attempt at cornering a market in the past has resulted in large losses for those who orchestrated the market corner.
You may be able to control the supply side of the equation, but demand is much harder to predict. However, 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 the demand for an asset tends to be relatively stable, but if the supply drastically diminishes, then buyers will have to pay a higher price to acquire that asset.
Why cornering a market is a risk for free markets
The reason this is a risk for free markets is that it can lead to crony capitalism. This is when businesses use their power and influence to get preferential treatment from the government. This can lead to higher prices, less competition, and fewer choices for consumers.
While there are some benefits to cornering a market, such as increased efficiency and lower costs, these benefits come at the expense of competition and consumer choice. This is why policymakers need to be aware of the risks of crony capitalism when considering policies that could allow businesses to corner a market.
Policymakers should also be aware that businesses may try to game the system by using their power and influence to get unfair advantages.
This can lead to corruption and cronyism. To prevent this, policymakers should create rules and regulations that level the playing field to allow for free markets to thrive. When investors corner the market it means they buy up all or nearly all of the shares in a particular company.
This gives them a controlling interest and allows them to manipulate the market which is also a threat to free markets.
The reason why investors that do this harm the market is that it removes liquidity. When there are only a few people that own all the shares, it makes it difficult for others to trade. Without liquidity, the market can't function properly.
This can cause panic and doubt among other investors, and eventually, the company goes bankrupt. When an investor, consumer, or business is stuck in a corner, their freedom to maneuver is diminished.
This is why it's important to have a well-regulated market. Otherwise, investors will continue to use this tactic to get what they want, even if it's at the expense of other innocent market participants.
Is cornering the market illegal?
Cornering the market is illegal if it's done to manipulate prices. This is because it's considered a form of market manipulation, which is against the law in most countries.
However, there are some cases where investors have been able to successfully corner the market without breaking any laws. For example, Carl Icahn was able to take over a struggling company called Texaco in the 1980s. He did this by buying up all the shares that were available for sale.
While this may have seemed like market manipulation, Icahn didn't actually do anything illegal. This is because he didn't make any false or misleading statements to other investors. He also didn't withhold any information that would've been important for them to know.
In other words, Icahn didn't do anything that would've artificially influenced the price. He simply took advantage of the fact that Texaco was in financial trouble and no one else was interested in buying the company.
Carl Icahn is known for this gritty aggressive strategy. He shapes up companies by buying a controlling interest, and then he uses this leverage to make changes that improve the company's profitability. While this may not be illegal, he creates situations where managers are backed into a corner. This pressures them to perform better or make decisions that favor investors.
While cornering the market is legal in some cases, it's still not a good idea. This is because it can harm the market and it can also be very risky. For example, if an investor buys up all the shares of a company and then the company goes bankrupt, the investor will lose all their money.
So, while cornering the market may sometimes be legal, it's not something that should be done lightly. Investors should only attempt this tactic if they're willing to accept both the legal risks and the financial risks that come with it.
Why cornering the market is illegal
Cornering the market is illegal because it's a form of market manipulation. This is when investors use their power and influence to get an unfair advantage. This can lead to corruption and cronyism.
When investors corner the market, they're creating an artificial shortage. This drives up prices and hurts consumers. It can also lead to black markets and hoarding.
Cornering the market is often done by large institutions and businesses. They have the resources to buy up all the shares or products.
This gives them a monopoly and allows them to control the price. It's important to have laws and regulations against market manipulation. This helps to create a level playing field for all investors.
Cornering the market example
Hunt Brothers
The Hunt brothers were able to corner the silver market in the 1970s. 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.
The price of silver went up by nearly ten-fold within just one year due to the lack of supply. It was estimated that these two brothers held one-third of the total supply of silver.
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.
The value when bought was in the billions and they were able to control the market by using margin/loans to fund this endeavor. When the silver price dropped, they could not meet their margin call and they were forced to sell their silver.
This caused the price of silver to drop sharply and it bankrupted many small investors who were holding silver. The Hunt brothers had to pay civil charges of conspiracy to corner the market in silver. They also experienced a loss of over a billion dollars after the incident and ultimately filed for bankruptcy.
De Beers
The diamond industry is another example of market manipulation. The De Beers company has been able to control the diamond supply for many years. This has allowed them to keep prices high and maintain their monopoly. The difference is that this is done by a business and not investors. However, the concept is the same.
The company has been able to survive because they're the only ones with access to the diamond mines. They've been able to keep prices high by limiting the supply. It may surprise you to learn that diamonds aren't that rare.
Nor should their price reflect that they're rare. The reason diamonds are so expensive is because of the De Beers company and their monopoly.
So next time you are cornered into buying an expensive engagement ring, remember that it's not the diamond that's expensive. It's the company that's been artificially inflating the price.
Yasuo Hamanaka
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 and was sentenced to jail.
Conclusion
While cornering the market may seem like a great way to make money, it's actually very risky, not to mention, that it's also illegal. It's important to be aware of the dangers of market manipulation as a free-market participant. Make sure you learn from the examples above and don't get caught up in a scheme.
