What Does Cornering A Market Mean?
(Last Updated On: 19. March 2023)
In the world of trading, there were several occasions of so-called cornering a market. This term means, in general, a situation where someone with a certain market or financial power is able to create an artificial shortage of whatever. In this article, we will take a closer look at the term cornering a market and check some examples.
Historical Background Of Cornering A Market
The term cornering a market got publicly known back in the late 19th century when the futures traders in Chicago were exploiting an advantage by creating an artificial shortage called “corners”. That’s where the term cornering a market comes from.
How did they do this? Well, they used the anonymity of futures, and bought as much of them as there was sufficient to control the market. Usually, it was pretty often the wheat traders who made the term “cornering” infamous!
As they bought, the sellers of the wheat futures were obligated to deliver. That’s how the idea of futures works. But there was, of course, a lot of speculation, also among the futures sellers. A certain amount of them sold more futures than they could deliver. Doing this, they were just speculating that the price of the futures would fall, and with that, they would buy their too many sold futures back for a lower price and thus make an extra profit.
And here was the catch: As one wheat trader, or sometimes a couple of them, cornered the market and held the most contracts in their own hands, there weren’t enough futures the sellers could buy back to get rid of the too many sold futures contracts. At least, not for a regular price. In other words, they were “backed into a corner”.
But to fulfill their obligations, they were forced either to deliver the wheat or buy the futures back at exorbitant prices!
Those who could deliver the grain fulfilled their obligations, and the person who cornered had a lot of it. And the price got, because of the artificial shortage, pretty high. Now the next step was to bring this grain to the markets, where the wheat was sold at a loss to make sure to get rid of it all. Doing that, the artificial shortage turned into a glut, and the price collapsed literally. This move of selling the grain at a loss was called “burying the corpse”.
The first futures trader who was cornering the market in a big way was a wheat trader called Benjamin Hutchinson (Old Hutch) from Massachusetts. In 1888, he successfully cornered the wheat pit and earned a couple of millions of dollars. If you want to know more about cornering a market, and the history of futures trading, I can recommend you to read the book “The Futures“* by Emily Lambert. I really enjoyed this one, and I hope it will enrich and widen your horizon as it did in my case.
Is Cornering The Market Illegal?
Cornering a market is for sure illegal because it creates an unfair advantage and price manipulation. For that reason, the Securities and Exchange Commission (SEC) closely watches the trading activities of particular securities but also foreign exchange or commodities. The goal (or the attempt) is to prevent and prosecute illegal trading behavior. But also the Commodity Futures Trading Commission is monitoring the futures market and is bringing from time to time someone to justice, like in the case of Fenchurch Capital Management, imposing $600.000.
Disadvantages Of Market Cornering
Apart from the fact that cornering a market is illegal, there are also some disadvantages for the person trying to corner the market. That’s what I would call poetic justice.
As opposed to the early wild west days in the futures trading in Chicago, one of the disadvantages of cornering a market is the fact that it is just difficult to do nowadays. Cornerers usually groan under the pressure of their own size. Because you really need a huge amount of money to hold almost all positions available, and most companies or traders don’t have the infrastructure or the means to pull off a corner successfully.
Not only that – in a digital trading world with maximum transparency, it’s just a matter of time before getting busted. From this moment, it becomes pretty difficult to get successful in this undertaking, and the whole entity becomes vulnerable.
Examples Of Cornering The Market In Futures
I’ve already mentioned the cornering of the wheat pit by the “Old Hutch” in 1888. Let’s check some more cornering examples in the world of the futures:
Wheat – by Joseph Leiter in 1897. He bought wheat futures worth $22 Million and wheat worth $18 Million. Philip Armour, one of the richest persons in Chicago back then, sold Leiter an impressive load of futures until he realized that he was cornered by Leiter. Because of that, he offered Leiter a deal to settle up for $4 million. But Leiter refused to believe he could send the wheat price higher.
But Armour, with deep pockets, could get enough wheat to fulfill his delivering obligations. Besides that, because the cornering process took several months, the farmers got wind of the high wheat prices. Therefore, they started to grow a lot of wheat and caused a glut which was contributing to the price collapse. Long story short, Leiter lost all his paper profits and turned the whole deal into a huge loss of $10 Million.
Rye – by Daniel Rice and General Foods in 1944. Because of a complaint from the regulators, it ended up in a trial where the judge found that Rice and his companions had attempted to corner the market. There were rumors that Rice had sunk a boat full of rye to corner the market. If true or not, we will never know. But as a result, Rice and the respondents were denied trade for various periods and got other restrictions.
Onions – by Vincent Kosuga and Sam Siegel in 1955. Actually, there were more traders involved in the manipulation, but only these two were nabbed. In the autumn of 1955, Kosuga and Siegel bought onion futures and onions to control 98% of the onion market in Chicago. As expected, this move caused not only an artificial shortage but also an increase in onion prices, and with this, the farmers around started to grow more onions to sell them at a higher price. But in 1956, with a higher offer of onions, Kosuga and Siegel helped to drive prices down with the onions they had in stock. As an answer to this manipulation, President Eisenhower signed in 1958 the so-called Onion Futures Act, banning onion futures. That’s why since that time trading onions on an exchange is not possible anymore. To read the whole story, check the book “The Futures“* by Emily Lambert.
Silver – by Hunt brothers in 1979 – 1981. The Hunt brothers, who were heirs of the oil tycoon H. L. Hunt tried to corner the soybean market around 1977 before they started the next attempt. This time on the silver market. In 1979, the silver pit went haywire because the Hunt brothers were buying silver futures in huge amounts. With this, they drove the silver price such high that people across the United States started to take their silver out of the drawers and sell it to local jewelers who melted the silver down. Long story short: the Hunt brothers already held in 1979 estimated $100 million troy ounces of silver and a lot of several futures on silver.
But in the end, Hunts overextended themselves and got a margin call for freaking $100 million they couldn’t meet. As a result, they lost more than a billion dollars.
Examples Of Cornering A Market In Securities
Northern Pacific – in 1901. The Northern Pacific Railway was a railroad that operated across the western United States from Minnesota to the Pacific Coast. This example of cornering a market happened because of the interest in the company called “Chicago, Burlington and Quincy Railroad”. At this time, Charles Perkins was the president of this company that had a direct connection to Chicago. Henry Villard, the early president of Northern Pacific, James J. Hill, the CEO of the Great Northern Railway, and Edward Harriman, the director of Union Pacific Railroad wanted to buy this company.
Charles Perkins wanted $200 per share for his Chicago, Burlington. Harriman and Hill were willing to pay it. In the end, The Chicago, Burlington, and Quincy Railway was purchased by them with 48.5% going to both the Great Northern and the Northern Pacific.
But Harriman from Union Pacific decided to buy out the Northern Pacific. Therefore, he initiated a raid on Northern Pacific stock and was able to purchase a majority total worth $80 million. Hill from Great Northern started to “shoot back” by purchasing 200.000 stocks of Northern Pacific in a single day, pushing the stock price higher and higher. The problem was that many traders had short positions in Northern Pacific stock because the raid made the stock overvalued.
With such a big position, Harriman had unintentionally cornered Northern Pacific stock, and Hill, with his 200.000 shares on a single day, added more fuel to the fire. The consequence was that there were scarcely any shares left to buy back to cover the shorts. The stock price then exploded in a short squeeze with the highest recorded price on the NYSE of $1000.
As neither Hill nor Harriman was willing to sell their stocks, they decided to call a truce, leaving the short traders in economic ruin.
If you are interested in the Northern Pacific corner in more detail I can recommend you to read Reminiscences of a Stock Operator* by Edwin LeFèvre*, who documented the dealings of the Northern Pacific Corner. Another interesting book about the fight between Harriman and Hill you can read is the one called Harriman vs. Hill: Wall Street’s Great Railroad War* by Larry Haeg.
The Stutz Motor Company – in 1920. In this case, it was a “war” between the short sellers and the owner of Stutz Motor Co, Allan A. Ryan, who cornered the shorts. Also, in this case, there were no winners, but the whole situation ended in a disaster for Ryan and the short sellers as well. In February 1919, Dow Jones turned per definition into a bear market and with this, the Stutz stock also suffered a certain decline. But Ryan interpreted this decline not as a bear market but as a short raid caused by the short sellers. To thwart this, he started to buy the Stutz stock massively, also by borrowing millions of dollars to support the price. The shorts, on the other hand, were convinced that sooner or later the stock price would collapse, and they continued to short Stutz.
At a certain point, when Ryan was the only lender of the stocks, he soon knew who shorted him because back then, there were no anonymous machines making the trades but persons acting “against” each other. So he knew that most borrowers were members of the NYSE including the members of the Board Governors. In other words, the persons who bet against him were working with him on the floor, and they tried to ruin him with their short positions. So it got personal for him, I guess. Maybe that’s why he offered the short sellers to settle for $750 while the “regular” price of the Stutz stock was around $391.
Because of that, the whole situation ended up in a seesaw and dragged on for a couple of months, involving several contentions and disputes between Ryan and the NYSE. Ryan even resigned his member seat on the NYSE to be able to act independently. In April 1920, the shorts finally agreed to accept a settlement price of $550. With that, Ryan would make $1.5 million in profit. But appearances were deceiving, for he had to pay the banks he owed millions he took to purchase the stocks. So the only way he could pay the banks was to sell shares on Stutz. But because the NYSE had suspended the Stutz stock, he couldn’t sell enough stocks to the public. Long story short: Ryan’s ostensible victory ended in his bankruptcy because the banks wanted their money back. So in this case of cornering a market, both sides lost tremendously.
Volkswagen – in 2008. What happened in this attempt of cornering a market? Long story short: Porsche tried to get the majority of shareholding in Volkswagen which caused a panic among the short sellers. This caused a soar in Volkswagen stock up to more than €1.000. But how did it come to the situation and the panic? Well, Porsche announced that it owns around 75% of VW shares. As the German federal state owns 20% of VW’s stocks, this meant that only 5% of VW’s stocks were available, and thus, the corner on VW was “perfect”. But of course, not for the short sellers as they started to close their short positions, and with this, it came an unbelievable short squeeze in VW’s stock. In total: Porsche won, but the financial damage for the hedge funds was enormous – around $30 billion.
Summary
- Cornering a market means getting an advantage over a certain market by creating an artificial shortage
- It’s highly illegal nowadays, and that’s why the markets are getting observed by the SEC and CFTC
- There were several occasions of corners but not every attempt was successful in the past
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(Last Updated On: 19. March 2023) In the world of trading, there were several occasions of so-called cornering a market. This term means, in general, a situation where someone with a certain market or financial power is able to create an artificial shortage of whatever. In this article, we will take a closer look at the term cornering a market and check some examples. Historical Background Of Cornering A Market The term cornering a market got publicly known back in the late 19th century when the futures traders in Chicago were exploiting an advantage by creating an artificial shortage called “corners”. That’s where the term cornering a market comes from. How did they do this? Well, they used the anonymity of futures, and bought as much of them as there was sufficient to control the market. Usually, it was pretty often the wheat traders who made the term “cornering” infamous! As they bought, the sellers of the wheat futures were obligated to deliver. That’s how the idea of futures works. But there was, of course, a lot of speculation, also among the futures sellers. A certain amount of them sold more futures than they could deliver. Doing this, they were just speculating that the price of the futures would fall, and with that, they would buy their too many sold futures back for a lower price and thus make an extra profit. And here was the catch: As one wheat trader, or sometimes a couple of them, cornered the market…