Definition
In the context of markets, a “corner” is a manipulative tactic used primarily in the futures and commodities markets. It involves creating a situation where other participants have contracted to deliver more of a good or security than is actually available. By obtaining control over a substantial portion of the available supply, the holder can force others who are unable to deliver to pay a premium to be released from their contracts.
Historical Context
The practice of cornering markets dates back to the 19th century and has been linked to several high-profile financial scandals. One of the most infamous attempts to corner a market was the “Silver Corner” in 1980 by the Hunt brothers. They accumulated vast amounts of silver, causing prices to surge, only for the market to collapse when they were unable to meet margin calls.
Types/Categories
- Commodity Corner: Accumulating a significant quantity of a physical commodity to drive up prices.
- Securities Corner: Buying large volumes of securities or futures contracts to exert control over the market.
Key Events
- Hunt Brothers’ Silver Corner (1980): Nelson Bunker Hunt and William Herbert Hunt attempted to corner the silver market, leading to a dramatic spike in silver prices before regulatory changes caused a crash.
Detailed Explanations
Mechanism of a Corner:
- Accumulation: The cornerer begins by buying up large quantities of the commodity or security.
- Control: As their holdings increase, they begin to exert control over the available supply.
- Contract Pressure: Other market participants with short positions find themselves unable to meet their delivery obligations.
- Profit Realization: The cornerer profits as these participants are forced to buy the commodity or security at inflated prices to cover their short positions or settle contracts.
Mathematical Models/Formulas
Profit Calculation:
- If \( P_s \) is the spot price before the corner and \( P_c \) is the cornered price, the profit \( \Pi \) can be expressed as:
$$ \Pi = (P_c - P_s) \times Q $$where \( Q \) is the quantity held by the cornerer.
Importance and Applicability
Understanding corners is crucial for regulators to prevent market manipulation and for traders to recognize and avoid potential traps in the markets.
Examples
- The Silver Corner: As mentioned, the Hunt brothers’ manipulation of the silver market in 1980 is a classic example.
- Potato Corner (1976): Sol Goldman attempted to corner the potato market on the New York Mercantile Exchange, resulting in regulatory intervention and significant losses.
Considerations
- Regulatory Scrutiny: Markets are heavily regulated to prevent such manipulative practices. Regulators like the SEC and CFTC have strict rules against market corners.
- Market Dynamics: A successful corner is difficult due to market liquidity and potential for new supply sources entering the market.
Related Terms with Definitions
- Short Squeeze: A situation where short sellers are forced to buy back stocks to cover their positions, driving the price higher.
- Market Manipulation: Practices that interfere with the free and fair operation of the market.
- Margin Call: A demand by a broker for an investor to deposit further cash or securities to cover potential losses.
Comparisons
- Corner vs. Squeeze: While both involve exerting pressure on market positions, a corner specifically requires controlling the supply of the commodity or security.
Interesting Facts
- Historical Regulations: Early 20th-century commodities regulations in the US were significantly influenced by attempts to corner markets.
- Economic Impact: Market corners can lead to significant economic distortions, affecting everything from raw material costs to consumer prices.
Inspirational Stories
The failure of many who attempted corners highlights the importance of market integrity and the perils of manipulation.
Famous Quotes
- John D. Rockefeller: “The way to make money is to buy when blood is running in the streets.”
Proverbs and Clichés
- “He who laughs last laughs best”: Often applicable to the eventual downfalls of those attempting to corner markets.
Jargon and Slang
- “Squeeze Play”: A tactic similar to a corner but often less extreme.
- [“Pump and Dump”](https://financedictionarypro.com/definitions/p/pump-and-dump/ ““Pump and Dump””): Although different, it also involves manipulation of prices for profit.
FAQs
Is cornering a market illegal?
Can a corner happen in modern markets?
References
Summary
A market corner is a manipulative tactic aimed at controlling the supply of a commodity or security to profit from contracts where others cannot deliver. Despite historical instances of attempted corners, modern regulations have made it increasingly difficult to execute such strategies successfully. Understanding and recognizing the signs of a potential corner is vital for traders and regulators alike to maintain market integrity.
