Cornering the market


Cornering the market

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. Another definition: "To have the greatest market share in a particular industry without having a monopoly. Companies that have cornered their markets usually have greater leeway in their decisions; for example, they may charge higher prices for their products without fear of losing too much business. Large companies, such as Wal-Mart or Microsoft, are considered to have cornered their markets." [1] In either case, 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 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 cornerer can become vulnerable due to the size of the position, especially if the 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. If the price starts to move against the cornerer, any attempt by the cornerer to sell would likely cause the price to drop substantially. In such a situation, many other parties could profit from the cornerer's need to unwind the position.

More success in cornering the market has come by gaining a near-monopoly share in industries such as computers (like IBM) and software (like Microsoft).

Contents

Historical examples

ca 6th Century BCE: Thales of Miletus

According to Aristotle in The Politics (Book I Section 1259a),[2] 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.

19th century: Classic examples by Edwin Lefèvre

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.

Cornelius Vanderbilt and the Harlem Railroad

One of the few cornerers whose rationale was published and justified, Cornelius Vanderbilt started accumulating shares of the Harlem Railroad in 1862 because he anticipated its strategic value. He took control of the Harlem Railroad and later explained that he wanted to show that he could take this railroad, which was generally considered worthless, and make it valuable. The corner of June 25, 1863 can be seen as just an episode in a strategic investment that served the public well.

James Fisk, Jay Gould and the Black Friday (1869)

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. It was one of several scandals that rocked the presidency of Ulysses S. Grant. When the government gold hit the market, the premium plummeted within minutes and many investors were ruined. Fisk and Gould escaped significant financial harm.

Lefèvre thoughts on corners of the old days

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.

20th century: The Northern Pacific Railway

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.

1920s: The Stutz Motor Company

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 Thomas Fortune Ryan.

1950s: The onion market

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 2011.

1970s: The Hunt brothers and the silver market

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.[3] 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.[4] Silver prices ultimately collapsed to below $11 an ounce two months later,[4] 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.[5]

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.[6] At one point during this "Sumitomo copper affair," Hamanaka is believed to have controlled approximately 5% of the world copper market.[6] As his scheme collapsed, Sumitomo was left with large positions in the copper market, ultimately losing US$2.6 billion.[7] In 1997 Hamanaka pleaded guilty to criminal charges stemming from his trading activity and was sentenced to an eight year prison sentence.[7]

2008: Porsche and shares in Volkswagen

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.[8] 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—enabling it to perform a short squeeze on them.[9] It was ultimately unsuccessful, leading to the resignation of Porsche's chief executive and financial director and to the merger of Porsche into Volkswagen.[10]

One of the wealthiest men in Germany's industry committed suicide after shorting Volkswagen shares.[11]

2010: Armajaro and the European cocoa market

On July 17, 2010, Armajaro purchased 240,100 tonnes of cocoa.[12] The buyout caused cocoa prices to rise to their highest level since 1977. The purchase was valued at £658 million and accounted for 7 per cent of annual global cocoa production.[13] The transaction, the largest single cocoa trade in 14 years, was carried out by Armajaro Holdings, a hedge fund co-founded by Mr Anthony Ward. Ward, the manager of the hedge fund, has been dubbed "Chocfinger" by fellow traders for his exploits. The nickname is a reference to both the Bond villain Goldfinger as well as a British confection.[14]

This example demonstrates that 7 per cent of a perishable good is enough to allow profit taking via cornering a market.

2011: Oil and hedge funds

All of the above examples had effects that were limited to niche markets. This opens up the question about the possibility of cornering one of the markets for strategic commodities that are fundamental to all economies around the world. In Summer 2011 Jim Cramer drew the public's attention to a corner of the oil market [15].

the cartel of nonconsumers who are using oil futures as part of an investing strategy that includes endless attempts to corner the market for crudes in order to make fortunes for them. that's what they did in 2008 when they cornered it and took it to $147. we know the futures markets are thin for oil. almost all the execs on the show confirm to me these futures are unreliable and easily manipulated. the price can be the benchmark for real commerce, meaning they can make a lot of money so long as no one seeks to bust the cartel price.

While Cramer points out frankly that this is a corner (calling into question the proper working of the free market), official sources avoid calling this situation a corner. For example, the U.S. Department of Energy explained it would release million barrels of oil from the Strategic Petroleum Reserve and called this

a warning shot to speculators in the oil market

"Obama's SPR oil release confounds analysts". Yahoo. 2011-06-24. http://finance.yahoo.com/news/Obamas-SPR-oil-release-cnnm-1977710904.html. .

Since this corner is not yet over, it has to be evaluated later if this is a global corner showing how a corner can harm the public interest.

Fictional examples

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.

References

  1. ^ Lefèvre, Edwin (1923), Reminiscences of a Stock Operator, chapter 19.
  2. ^ Aristotle. Politics. Translated by H. Rackham. http://www.perseus.tufts.edu/hopper/text?doc=Aristot.+Pol.+1.1259a&redirect=true. Retrieved 2011-01-11. 
  3. ^ Gwynne, S. C. (September 2001). "Bunker HUNT". Texas Monthly (Austin, Texas, United States: Emmis Communications Corporation) 29 (9): p78. 
  4. ^ 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 2008-06-29. 
  5. ^ "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 2008-06-29 
  6. ^ a b Gettler, Leon (2008-02-02). "Wake-up calls on rogue traders keep ringing, but who's answering the phone?". The Age (Melbourne). http://business.theage.com.au/wakeup-calls-on-rogue-traders-keep-ringing-but-whos-answering-the-phone-20080201-1plq.html. Retrieved 2008-06-29 
  7. ^ 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 2008-06-29 
  8. ^ "Hedge funds make £18bn loss on VW". BBC. 2008-10-29. http://news.bbc.co.uk/1/hi/business/7697082.stm. 
  9. ^ "Squeezy money". Economist. 2008-10-30. http://www.economist.com/finance/displaystory.cfm?story_id=12523898. Retrieved 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 Daily Telegraph
  10. ^ "VW prepares to take over Porsche". BBC. 2009-07-23. http://news.bbc.co.uk/1/hi/business/8165524.stm. 
  11. ^ Boyes, Roger (2009-01-07). "Adolf Merckle, German tycoon who lost millions on VW shares, commits suicide". London: The Sunday Times. http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5460281.ece. 
  12. ^ Farchy, Jack (16 July 2010). "Hedge fund develops taste for chocolate assets". Financial Times. http://www.ft.com/cms/s/0/e50feefc-9120-11df-b297-00144feab49a.html. Retrieved 27 July 2010. 
  13. ^ Sibun, Jonathan; Wallop, Harry (17 July 2010). "Mystery trader buys all Europe's cocoa". The Telegraph. http://www.telegraph.co.uk/finance/markets/7895242/Mystery-trader-buys-all-Europes-cocoa.html. Retrieved 27 July 2010. 
  14. ^ Werdigier, Julia; Creswell, Julie (July 24, 2010). "Trader’s Cocoa Binge Wraps Up Chocolate Market". The New York Times. http://www.nytimes.com/2010/07/25/business/global/25chocolate.html?_r=2. Retrieved July 27, 2010. 
  15. ^ "No Huddle Offense: Oil 24 Jun 2011". CNBC. 24 June 2011. http://video.cnbc.com/gallery/?video=3000029661. Retrieved 25 June 2011. 

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