Cornering the market
From Wikipedia, the free encyclopedia
In business, cornering the market is an illegal attempt to buy up enough of a particular commodity to allow the price to be manipulated. It is also possible to make even more money by buying futures contracts on the commodity, and selling them at a profit after inflating the price.
Cornering the market has a long and checkered history. Although there have been many attempts to corner markets in everything from tin to cattle, to date very few of these attempts have ever succeeded. The party attempting to corner a market can become very vulnerable, due to the size of their position, especially if this becomes widely known. If the rest of the market senses weakness, they will resist any attempt to artificially drive the market any further than some point, by actively taking opposing positions. When the price starts to move against the cornering party they are in a very difficult position, as it is likely to be impossible to exit much of their position without catastrophically moving prices against themselves. In such a circumstance, many other parties will be able to profit from the cornerer's need to unwind their position.
One of the most infamous attempts from the early 1960s later became known as the Great Salad Oil Swindle, in which Tino De Angelis not only attempted to corner the market on soybean oil, but sold contracts in the oil and used the money to buy futures as well. In fact it turned out he had no oil, just tanks filled with water, and when the scheme was eventually discovered $175 million evaporated overnight.
A particularly blatant example occurred in 1980 when brothers Nelson Bunker Hunt and Herbert Hunt attempted to corner the silver markets. Bunker and Herbert started investing in silver as a hedge against inflation, and by 1980 it was estimated that they held one-third of the world's supply of the metal. However when this became clear the price of silver actually fell, and the Hunt brothers failed to meet huge margin calls on their futures contracts. This sparked a panic on commodity and futures exchanges, culminating in a 50% one-day decline, known as Silver Thursday, on March 27, 1980. A consortium of US banks provided a $1.1 billion line of credit to enable the brothers to pay their debts, which were backed by H. L. Hunt's petroleum empire. When the oil market collapsed in the mid-'80s, the entire Hunt oil company was nearly wiped out, although the brothers still have personal trust funds with hundreds of millions each.
The collapse of Barings Bank, then the oldest merchant bank in the UK was largely due to Nick Leeson's illegal attempt to prop up the Nikkei Index, building up a huge long position. Another recent example was that of Yasuo Hamanaka, who in 1996 attempted to corner the copper market, resulting in a loss of 1.8 billion dollars for the Sumitomo Corporation and an eight year prison sentence for Hamanaka.
[edit] In the News
On June 28, 2006 the SEC ruled that BP traders illegally cornered the U.S. propane market, creating price spikes that affected some seven million households.[1]
In September 2006, Amaranth Advisors LLC, a large hedge fund suffered 65% losses after one of its energy traders, Brian Hunter, attempted to corner the natural gas market.
