Cornering A Market – Explained For Dummies

The world of finance is quite complex yet interesting. Today, I will try to cover a topic quite common yet misunderstood by many. I will try to explain what is cornering a market. It holds a lot when it comes to the real world. However, we will try to grasp a basic understanding through some examples.

Cornering a market in simple terms would mean buying a high percentage of stocks, commodities, or an asset of a particular niche industry. Suppose you buy above 70 percent shares of a particular asset in the market. You will then have the largest market share, which means you are cornering the market. You basically acquire a large number of shares of a security type of firm, especially in a niche market. It is done to manipulate the market by acquiring the highest amount of shares of that asset.

How Cornering A Market Works

There are various ways to corner a market. The most simple method would be to buy a large number of shares in the market and then hoard them. For those who are not into the financial jargon, no worries! Hoarding means purchasing a particular product in very large quantities in a particular market. This creates a scarcity of that product for others. Hence, the prices for that product rise.

You can use futures trading as well for cornering a market. Let me first explain what is futures trading. It means buying or selling a particular share in the future with a predetermined price. The predetermined price is called the forward price. The time at which the trade would happen is known as the delivery date.

Let us understand this with a simple example.

You want to corner a market and make profits on the company “ActualSimple”. The first step is as basic as the definition of cornering a market. You start purchasing and hoarding large amounts of shares of ActualSimple. When you are buying the majority of the shares, it becomes less available in the market. Hence, the price rise for others. This attracts other buyers too. They may think that the shares are increasing and are a good buy to go for. As a result, it creates more demand for the shares and you see an upward price rise. In such scenarios, short selling also happens. It is done by short sellers. They buy and sell the shares in a short span of time hoping to buy them later at lower prices. As you remember, the prices are going upwards due to large buying by you. Let’s say today the share is for 400. A short seller sees the pattern of this price rise. He will buy the share. As the price is increasing rapidly, it may rise to 800 in two to three days. The short seller will sell the share and make a profit out of it. Now, this is profitable for the short seller. But this is profitable for you as well. This short selling increases your percentage of shares as you may purchase them. This will further increase the price of the shares.

After all this, you begin to sell your shares. These shares are quite high in price. You can then exit the entire investment or take a short position later when prices return to normal ranges.

Is Cornering A Market Illegal?

In most cases, the strategy of cornering a market is regarded to be illegal. As you buy most of the shares, you tend to control the market. There is no option for other buyers and sellers that drive the market. This is why it is called cornering a market. You are basically cornering the entire market and fetching the control in your hands.

You may think that why such a strategy is illegal when one is financially capable of buying the majority of the shares. The reason is that market is supposed to be fair for all. While cornering a market, you are indirectly taking advantage and leaving fewer options for other traders. The other businesses and competitors should also get an equal opportunity to grow and trade.

Disadvantages Of Cornering A Market

Requires Huge Investments

It requires huge investments as you are trying to buy the majority of the shares of a particular product in a niche market. On average, a majority would mean somewhat above 70 percent. This cannot be done with limited capital. So, cornering as a strategy requires a huge investment right from the initial stages.

Highly Volatile

Even after huge investments, there is a high risk of failure. Although you are the one trying to corner the market, it may not turn to your side as always. You may end up in the same position or maybe with even less than what you had. There are other players too in the market with certain strategies to compete in cornering.

Illegal And Many Government Regulations

Cornering the market is seen as an illegal strategy by everyone in the market. Moreover, most governments have established many authorities to regulate and keep a check on certain practices by tracking the market on a daily basis.

Some Historical Examples Of Cornering A Market

There are certain examples of cornering a market in the 19th century as well. However, I would like to cite a few recent examples that would make it more relatable to us.

In the 1950s, there was an allegation of cornering the onion product industry. The allegation was put by American onion farmers on Sam Siegel and Vincent Kosuga who were Chicago Mercantile Exchange Traders. As per an investigation done by the authorities, a ban was put on onion futures trading that still remains to effect as of 2022.

In the 1970s, two brothers, Nelson Hunt and William Hunt attempted to corner the silver market. They were holding around more than half of the world’s deliverable silver. Due to this, silver prices rose from $11 an ounce to $50 an ounce by January 1980. The exchange rules for the purchase of commodities on margin were changed a few days later. As a result, the price of silver dropped to below $11 an ounce two months later on a day that is known as silver Thursday.

In the 1990s, 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. However, this attempt was a failure. He lost $2.6 billion. In the month of June 1996, he confessed to his attempt at cornering the market with his trading strategies. He was sentenced to eight years in prison.

In 2010, in the month of July, Armajaro purchased 240,100 tonnes of cocoa. The purchase was valued at £658 million and accounted for 7 percent of annual global cocoa production. This was the largest single cocoa trade in the last 14 years. It was carried out by co-founder of Armajaro holdings Anthony Ward. Ward was dubbed “Chocfinger” by fellow traders for his exploit.