Cornering the market

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In finance, to corner the market is to purchase enough of a particular stock, commodity, or other asset to allow the price to be manipulated, by analogy to the general business jargon where a company described as having "cornered the market" has a very high market share. The cornerer hopes to gain control of enough of the supply of the commodity to be able to set the price for it.

This can be done through several mechanisms. The most direct strategy is to simply buy up 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 in everything from tin to cattle, to date very few of these attempts have ever succeeded.[citation needed] The party attempting to corner a market can become very vulnerable due to the size of their position, especially if their attempt becomes widely known. If the rest of the market senses weakness, it may resist any attempt to artificially drive the market any further by actively taking opposing positions. When the price starts to move against the cornerer, they are in a very difficult position, as it is likely to be impossible to exit much of their position without catastrophically moving prices against themselves. In such a situation, many other parties will be able to profit from the cornerer's need to unwind their position.

An attempt to corner the market on orange juice futures plays a key role in the 1983 movie Trading Places. The two protagonists (played by Eddie Murphy and Dan Aykroyd) eventually foil their rivals' plan by short-selling the futures, causing hundreds of millions of dollars in losses for the latter.

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[edit] Historical examples

[edit] 1950s: The onion market

In the late 1950s, United States onion farmers alleged that 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 2009.

[edit] 1970s: The Hunt brothers and the silver market

Brothers Nelson Bunker Hunt and 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.[1] During Hunt's accumulation of the precious metal silver prices rose from $11 an ounce in September 1979 to nearly $50 an ounce in January 1980.[2] Silver prices ultimately collapsed to below $11 an ounce two months later,[2] much of the fall on a single day now known as Silver Thursday.[3]

[edit] 1990s: Hamanaka and the copper market

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.[4] At one point during this "Sumitomo copper affair," Hamanaka is believed to have controlled approximately 5% of the world copper market.[4] As his scheme collapsed, Sumitomo was left with large positions in the copper market, ultimately losing US$2.6 billion.[5] In 1997 Hamanaka pleaded guilty to criminal charges stemming from his trading activity and was sentenced to an eight year prison sentence.[5]

[edit] 2006: BP and the propane market

On June 28, 2006, the Commodity Futures Trading Commission filed papers indicating its belief that BP traders illegally cornered the U.S. propane market.[6] The CFTC and the Department of Justice later agreed to allow BP to pay a fine of more than $300 million in return for dropping the civil suit and the criminal investigation.[7]

[edit] 2008: Porsche and shares in Volkswagen

During the Financial crisis of 2007-2009, Porsche cornered the market in shares of Volkswagen, gaining an estimated 6-12 billion Euros. Porsche claimed that its actions were intended to gain control of Volkswagen (which they did accomplish) rather than to manipulate the market; in this case, while cornering the market in Volkswagen shares, Porsche contracted with naked shorts - enabling it to perform a short squeeze on them. [8]

[edit] References

  1. ^ Gwynne, S. C. (September 2001). "Bunker HUNT". Texas Monthly (Austin, Texas, United States: Emmis Communications Corporation) 29 (9): p78. 
  2. ^ a b Eichenwald, Kurt (1989-12-21). "2 Hunts Fined And Banned From Trades". New York Times. http://query.nytimes.com/gst/fullpage.html?res=950DE0DD103FF932A15751C1A96F948260. Retrieved on 2008-06-29. 
  3. ^ "Bunker's Busted Silver Bubble", Time Magazine (Time Inc.), 1980-05-12, http://www.time.com/time/magazine/article/0,9171,920875-2,00.html, retrieved on 2008-06-29 
  4. ^ a b Gettler, Leon (2008-02-02), "Wake-up calls on rogue traders keep ringing, but who's answering the phone?", The Age, http://business.theage.com.au/wakeup-calls-on-rogue-traders-keep-ringing-but-whos-answering-the-phone-20080201-1plq.html, retrieved on 2008-06-29 
  5. ^ a b Petersen, Melody (1999-05-21), "Merrill Charged With 2d Firm In Copper Case", New York Times, http://query.nytimes.com/gst/fullpage.html?res=9E00E0DC1F3EF932A15756C0A96F958260&sec=&spon=&pagewanted=all, retrieved on 2008-06-29 
  6. ^ [1]
  7. ^ [2]
  8. ^ "Squeezy money", Economist, 2008-10-30, http://www.economist.com/finance/displaystory.cfm?story_id=12523898, retrieved on 2008-11-01 , "A Clever Move by Porsche on VW’s Stock", New York Times; "Porsche crashes into controversy in the ultimate 'short squeeze'", The Telegraph
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