What is a Corner
In investing or trading, a corner is an act of one entity obtaining 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 have established a significant degree of control. Another term for cornering is market manipulation. Unless you are a central bank, cornering and market manipulation are illegal.
BREAKING DOWN Corner
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. Since in this situation, there are more existing market commitments for delivery than there is of the available product.
Most 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.
- The pump and dump 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 stock. The culprits will then sell out leaving later followers to hold the bag.
- 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 is sound.
Other methods to corner the market include a business who improperly limit the number of publicly traded shares that are available, pricing or making trades to create a false image of the demand for the security, and rigging quotes
Regulations to Avoid Corners
The Commodities Exchange Act (CEA) provides federal control of all futures trading activities. It is designed to prevent and remove obstructions on the interstate commerce in commodities by regulating transactions on commodity futures exchanges. The CEA looks to limit, or abolish, short selling and eliminate the possibility of market manipulation.
The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) regulate and monitor activities involving securities and the commodities markets. Those entities are responsible for preventing, and in some cases prosecuting, attempts to corner the markets if the actions including 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 Examples of Pending and Settled Cornering Cases
In May 2018, the SEC charged four individuals for roles in a fraudulent scheme of illegal sales of Biozoom, generating nearly $34 million from the illicit stock sales and caused significant harm to retail investors.
In August 2017, the SEC settled a case with an overseas stock manipulator paying nearly $800,000 and permanent barring from trading penny stocks. They hid a significant stake in a small oil & gas company while running a fraudulent promotional campaign, boosting the stock price, then dumping their shares.
An example of cornering In an article by the New York Times, the CFTC charged Chicago based Fenchurch Capital Management manipulation and effectively cornering of the 10-year Treasury market in 1993. The firm paid $600,000 fine to the CFTC and the firm's president paid $200,000 to the Chicago Board of Trade.