What Is a Corner?
In investing or trading, a corner is an act of one entity obtaining a controlling interest of a business, stock, commodity, or other security so that they may manipulate the price. Cornering may happen to a specific security or a market area if an individual or group of people have established a significant degree of control. Another term for cornering is market manipulation. In most instances, cornering and market manipulation are illegal.
- In an investing context, a corner refers to when an individual, group, or business gains control over a company, stock, or commodity to the point where it is possible to manipulate the price.
- Some instances of cornering the market are unintentional and legal, while others are unlawful schemes devised by fraudsters looking to mislead and manipulate investors.
- In a pump-and-dump scheme, culprits will attempt to artificially pump up the price of a stock by spreading exaggerated claims about the stock; after the share price increases, the culprits will sell or "dump" their shares back onto the market for a profit.
- Conversely, in a poop-and-scoop scheme, fraudsters will attempt to drive down a stock's price by spreading false negative news about a company; once the price declines, these individuals will "scoop up" or buy the company's shares at bargain prices.
- The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) police and prosecute fraudulent market manipulation involving the securities and commodities markets.
How a Corner Works
When someone is said to have cornered the market, they have gained significant power over the manipulation of quantity and price. In other words, the obligations on future contracts to deliver a particular commodity greatly outweigh the actual amount of the product available.
For example, if a volcanic eruption in Hawaii should destroy all except one pineapple grower, that surviving grower would have a corner on the pineapple market. While there was no malicious intent by the grower, they now can determine a market price for the remaining crop. While rare, an event like this could drastically affect the futures market. Our grower has, now, cornered the pineapple futures market. In this situation, there are more existing market commitments for delivery than there is of the available product.
Types of Market Cornering
Many people who try to corner the market are not innocent bystanders like our grower, but instead, active participants. The two most common cornering methods have colorful but fitting names.
Pump and Dump
In a pump-and-dump scheme, those with an existing position attempt to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements. This strategy frequently attempts to manipulate and artificially inflate a micro-cap or small-cap stock. The culprits will then sell out, leaving later buyers to hold the bag.
Poop and Scoop
Less frequent is the poop and scoop approach. Here a small group of informed people attempts to drive down a stock's price by spreading false information, rumors, and otherwise damaging information. If successful, the market price of the asset will fall as others sell. After the market selloff, they can then swoop in and purchase the stock at bargain prices, knowing the fundamentals of the business are sound.
A business or individual may attempt to corner a market using other methods, including:
- Improperly limiting the number of publicly traded shares that are available
- Making trades to create a false image of the demand for the security
- Price rigging to artificially inflate the price of a stock
Painting the tape is another type of market manipulation that occurs when a group of market players attempts to control a stock's price by buying and selling the security among themselves, creating the illusion of significant trading activity.
Regulations to Avoid Corners
Passed in 1936, the Commodity Exchange Act (CEA) provides federal control of all futures trading activities in the United States. The purpose of the CEA is to help advance a competitive and efficient market for futures trading by regulating transactions on commodity futures exchanges. The CEA looks to restrict and police fraudulent trade practices, thereby protecting investors from market manipulation.
The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) regulate and monitor activities involving securities and the commodities markets. These entities are responsible for preventing, and in some cases prosecuting, attempts to corner the markets if the actions include any violations of applicable laws. SEC penalties can be both civil and administrative and may include disgorgement, sanctions, fines, and the loss of trading rights.
Real-World Examples of Market Cornering
In May 2018, the SEC charged four individuals in a fraudulent scheme that involved unlawful stock sales of micro-cap company Biozoom, Inc. According to the SEC's complaint, the alleged scheme generated almost $34 million for the defendants from illicit stock sales and caused significant harm to retail investors. The defendants allegedly used various methods to artificially inflate Biozoom's share price and to hide their deception, including using offshore bank accounts and sham legal documents.
In Aug. 2017, the SEC settled a case with an overseas stock manipulator, who was accused of a pump-and-dump scheme to artificially boost the stock price of a small oil and gas company. The stock manipulator, who had a significant stake in the company, ran a fraudulent promotional campaign to inflate the stock price, dumping the shares once the share price increased. The manipulator was permanently barred from trading penny stocks and paid almost $800,000 in disgorgement, interest, and penalties.