Cornering the market is obtaining and holding/owning enough stocks, assets, or commodities to effectively control the market price of said items. It involves acquiring the biggest market share without becoming a monopoly.
How It Works
There are a number of ways to attempt market cornering. The most straightforward approach is to buy and hoard a massive percentage of a certain commodity. Specifically, in the area of futures trading, cornering is more easily accomplished than in any other market. A cornerer may purchase a huge amount of futures contracts for a particular commodity, inflating the price and ultimately looking to sell and bring in a huge profit.
Most companies aim to corner their respective markets in order to make bigger profits for themselves. Company XYZ may wish to charge more for a product or line of goods. By cornering the market by gaining the required supply of a commodity, they are then able to charge what they want without fear of losing substantial business by raising prices.
Disadvantages of Market Cornering
Despite its prevalence in commodities trading, cornering the market is difficult to do. Cornerers usually cave under the pressure of their own size. It’s a powerful position to hold, and most companies lack the infrastructure or means to pull off a corner successfully. When the attempt to corner is known to many parties, it becomes that much more difficult, with pressure suddenly put on by other companies in the same space, resisting the cornering actions.
The government may also step in to prevent cornering. For example, the margin requirements for commodity futures contracts may be significantly increased, and the aspiring cornerer may lack sufficient funds to put up the additional margin required to hold their position. They are then effectively forced to sell part of their holdings.
Example of Market Cornering
Let’s say that the goal is to corner the market on wood products from Lumber Company A. Shares of the company must be purchased in large quantities and hoarded. Buying that many shares instantly begins to drive the price way up. Rising prices usually attract more buyers. This results in increased demand, which means prices rise even more dramatically.
The unnatural price rise allows the cornerer to then begin selling off the hoarded shares. Taking a short position at such a point is pretty much a given because the cornerer knows that once the shares are released back into the market, the organic supply and demand forces will return and prices will drop back down.
Why Cornering the Market is Illegal
In the simplest terms, cornering the market is illegal because it’s completely unfair and manipulative. The advantage rests solely with the individual(s) or entity that does the cornering. They effectively own the sole right to set the price on the “cornered” commodity, which could potentially put other businesses in the same space out of operation.
Other companies become unable to function and compete for business. The practice, because it unnaturally inflates prices, is also harmful to the overall economy. As a result, the Securities and Exchange Commission (SEC) usually monitors how many shares of a specific security are purchased by the same party.
The War on Market Cornering
The market usually provides a way to correct any cornering attempts naturally. Cornerers essentially set the price for the commodity they corner. However, when the party that does the cornering becomes known to the public, that entity becomes vulnerable.
The threat to the given market is met with opposing positions, operating as a wall against the cornerer. That begins to reduce the value of the shares that a cornerer owns. The cornerer then faces difficulty exiting their position without sending prices down.
Cornering the market is highly illegal. It provides a decidedly unfair advantage to the cornerer, allowing them to manipulate prices in order to make a profit. In most cases, attempts at cornering are unsuccessful because oppositional forces rise up against the cornerer, weakening its position.