Cornering the Market: Illegal Practice in Trading

Cornering the Market is the practice of purchasing a security or commodity in large volumes to control its price, which is considered illegal due to its artificial price manipulation effects.

Cornering the market refers to an illegal trading practice where an entity purchases a significant volume of a particular security or commodity to gain control over its price. This form of market manipulation can distort market conditions, leading to artificial price inflation or deflation, thereby disrupting fair trading practices.

Historical Context

Historically, instances of market cornering have caused significant economic disruptions. One of the most famous examples is the silver market manipulation in 1980 by the Hunt Brothers, which led to extreme volatility and subsequent regulation to curb such practices.

Types of Market Cornering

Commodities

Cornering in commodities involves buying a large percentage of a commodity, such as oil, gold, or agricultural products, causing scarcity and driving prices up artificially.

Securities

When securities such as stocks or bonds are cornered, it typically involves acquiring a substantial number of shares to control the stock price, influencing market perceptions and investment patterns.

Legal Framework and Regulations

Many financial markets have stringent regulations to combat such manipulative practices. Regulatory bodies like the SEC (Securities and Exchange Commission) in the United States have rules in place to monitor and prevent cornering attempts. Violations can lead to severe penalties, including fines and imprisonment.

Examples and Case Studies

Hunt Brothers and the Silver Market

In the late 1970s and early 1980s, the Hunt Brothers attempted to corner the silver market, pushing prices from around $6 per ounce to nearly $50 per ounce. Their actions led to significant market instability and regulatory changes to prevent future occurrences.

Volkswagen Short Squeeze

In 2008, Porsche’s attempt to increase its stake in Volkswagen led to a short squeeze scenario, causing VW’s share price to surge dramatically. Although not a classic case of market cornering, it highlighted the impact of large-scale acquisitions on market prices.

Comparisons with Related Terms

• Market Manipulation: A broader term including various illegal practices to distort market prices, such as insider trading and pump-and-dump schemes.
• Monopoly: While a monopoly involves control over a market segment or industry, cornering the market specifically refers to buying up a significant volume of securities or commodities to manipulate prices.

FAQs

Is cornering the market legal?

No, cornering the market is considered illegal in most jurisdictions due to its manipulative nature and adverse impact on market fairness.

What are the penalties for cornering the market?

Penalties can include hefty fines, imprisonment, and bans from trading in securities or commodities markets.

How can regulators detect market cornering?

Regulators use various tools, including transaction monitoring, auditing, and market surveillance, to detect unusual trading patterns indicative of market cornering.

Summary

Cornering the market is a fraudulent practice involving bulk purchase of securities or commodities to manipulate their prices. It disrupts the market equilibrium, creating artificial scarcity or surges that impact fair trading. Legal frameworks are in place globally to prevent and penalize such activities, ensuring market integrity and fairness.

References:

1. Securities Exchange Act of 1934
2. Commodity Futures Trading Commission (CFTC) Regulations
3. “The Great Silver Bubble,” by Stephen Fay

By comprehensively understanding and identifying the signs of market cornering, traders and regulators alike can contribute to maintaining a fair and efficient market system.