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.
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.
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]
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.
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.
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.
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.
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.
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]
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 2022 [update] . [5]
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]
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]
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]
On July 17, 2010, Armajaro purchased 240,100 tonnes of cocoa, the largest single cocoa trade in 14 years. [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 percent of annual global cocoa production. [18]
Anthony Ward, co-founder and manager of Armajaro, 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]
Volkswagen is a German automobile manufacturer based in Wolfsburg, Lower Saxony, Germany. Established in 1937 by the German Labour Front under the Nazi Party, it was revitalized into the global brand it is today after World War II by British Army officer Ivan Hirst. The company is well known for its iconic Beetle and serves as the flagship marque of the Volkswagen Group, which became the world's largest automotive manufacturer by global sales in 2016 and 2017.
Volkswagen AG, known internationally as the Volkswagen Group, is a German public multinational conglomerate manufacturer of passenger and commercial vehicles, motorcycles, engines and turbomachinery. Headquartered in Wolfsburg, Lower Saxony, Germany, and since the late 2000s is a publicly-traded family business owned by Porsche SE, which in turn is half-owned but fully controlled by the Austrian-German Porsche and Piëch family. The company also offers related services, including financing, leasing, and fleet management. In 2016, it was the world's largest automaker by sales, and keeping this title in 2017, 2018, and 2019, selling 10.9 million vehicles and was the largest automaker by revenue in 2022. It has maintained the largest market share in Europe for over two decades. It ranked seventh in the 2020 Fortune Global 500 list of the world's largest companies. In 2023, Volkswagen Group ranked 29th in the Forbes Global 2000.
A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodities market for centuries for price risk management.
Normal backwardation, also sometimes called backwardation, is the market condition where the price of a commodity's forward or futures contract is trading below the expected spot price at contract maturity. The resulting futures or forward curve would typically be downward sloping, since contracts for further dates would typically trade at even lower prices. In practice, the expected future spot price is unknown, and the term "backwardation" may refer to "positive basis", which occurs when the current spot price exceeds the price of the future.
Contango is a situation in which the futures price of a commodity is higher than the expected spot price of the contract at maturity. In a contango situation, arbitrageurs or speculators are "willing to pay more [now] for a commodity [to be received] at some point in the future than the actual expected price of the commodity [at that future point]. This may be due to people's desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today." On the other side of the trade, hedgers are happy to sell futures contracts and accept the higher-than-expected returns. A contango market is also known as a normal market or carrying-cost market.
In finance, speculation is the purchase of an asset with the hope that it will become more valuable shortly. It can also refer to short sales in which the speculator hopes for a decline in value.
In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative.
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
In the stock market, a short squeeze is a rapid increase in the price of a stock owing primarily to an excess of short selling of a stock rather than underlying fundamentals. A short squeeze occurs when demand has increased relative to supply because short sellers have to buy stock to cover their short positions.
Adolf Merckle was a German entrepreneur and billionaire. He died by suicide at age 74 due to losses during the financial crisis of 2007–2008. He was at one point the fifth-richest person in Germany with a net worth of $9.2 billion.
Silver may be used as an investment like other precious metals. It has been regarded as a form of money and store of value for more than 4,000 years, although it lost its role as legal tender in developed countries when the use of the silver standard came to an end in 1935. Some countries mint bullion and collector coins, however, such as the American Silver Eagle with nominal face values. In 2009, the main demand for silver was for: industrial applications (40%), jewellery, bullion coins and exchange-traded products. In 2011, the global silver reserves amounted to 530,000 tonnes.
In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances with respect to the price of, or market for, a product, security or commodity.
Silver Thursday was an event that occurred in the United States silver commodity markets on Thursday, March 27, 1980, following the attempt by brothers Nelson Bunker Hunt, William Herbert Hunt and Lamar Hunt to corner the silver market. A subsequent steep fall in silver prices led to panic on commodity and futures exchanges.
Porsche Automobil Holding SE, usually shortened to Porsche SE, is a German multinational corporation primarily known as a holding company of Volkswagen Group with investments in the automotive industry. Porsche SE is headquartered in Zuffenhausen, a city district of Stuttgart, Baden-Württemberg and is majority owned by the Austrian-German Porsche-Piëch family. The company was founded in Stuttgart as Dr. Ing. h.c. F. Porsche GmbH in 1931 by Ferdinand Porsche (1875–1951) and his son-in-law Anton Piëch (1894–1952).
The Onion Futures Act is a United States law banning the trading of futures contracts on onions as well as "motion picture box office receipts".
The Sumitomo copper affair refers to a metal trading scandal in 1996 involving Yasuo Hamanaka, the chief copper trader of the Japanese trading house Sumitomo Corporation (Sumitomo). The scandal involves unauthorized trading over a 10-year period by Hamanaka, which led Sumitomo to announce US$1.8 billion in related losses in 1996 when Hamanaka's trading was discovered, and more related losses subsequently. The scandal also involved Hamanaka's attempts to corner the entire world's copper market through LME Copper futures contracts on the London Metal Exchange (LME).
The State Reserves Bureau copper scandal refers to a loss of approximately US$150 million as a result of trading LME Copper futures contracts at the London Metal Exchange (LME) by rogue trader Liu Qibing, who was the chief trader for the Import and Export Department of the State Regulation Centre for Supply Reserves (SRCSR), the trading agency for the State Reserve Bureau (SRB) of China in 2005.
Armajaro Asset Management is a commodity investment firm based in London. The company specializes within the cocoa and coffee markets, managing investments in soft commodity hedge funds. Armajaro is run by Anthony Ward.
Vincent W. Kosuga was an American onion farmer and commodity trader best known for manipulating the onion futures market. Public outcry over his practices led to the passing of the Onion Futures Act, which banned the trading of futures contracts on onions.
LME Copper is a group of spot, forward, and futures contracts, trading on the London Metal Exchange (LME), for delivery of Copper, that can be used for price hedging, physical delivery of sales or purchases, investment, and speculation.