Cornering the market

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Cornering the market is where an individual or company buys up enough of a particular commodity to allow the price to be manipulated. This can be done through several mechanisms, for example buying futures contracts on a commodity then selling them at a profit after inflating the price.

In attempting to corner a market, the term stockpile is used as a verb: to stockpile something is to hoard, or retain a quantity of a given commodity. In this context, stockpile can also refer to the hoarded commodity in its collective sense, regardless of its location (money in a bank, oil traveling through pipelines or refineries for example).

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.

An 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. Due to dubious governmental changes on margin requirements, 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. The brothers still have personal trust funds with hundreds of millions each. Herbert is still active and successful in the oil industry.

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 CFTC filed papers indicating its belief that BP traders illegally cornered the U.S. propane market.[1] The CFTC and the Department of Justice later agreed to allow BP to pay a fine over $300 million in return for dropping the civil suit and the criminal investigation.[2]