Definition
Cornering the Market refers to an illegal strategy where an individual or a group purchases large quantities of a particular security or commodity to gain a significant enough control over its supply, enabling them to manipulate and control its price. This is usually done with the intent to create a monopoly situation or to command higher prices, which is against fair trading principles and regulations.
Examples
- The Silver Corner by Hunt Brothers (1970s): The Hunt brothers attempted to corner the silver market by buying a large amount of the precious metal. They nearly succeeded, causing the price to soar dramatically before regulations were enforced to halt their activities.
- The Onion Futures Act (1958): This act was passed in the U.S. to prohibit trading in futures contracts on onions after traders Sam Siegel and Vincent Kosuga attempted to corner the onion market in the 1950s, thereby manipulating prices.
Frequently Asked Questions
What makes cornering the market illegal?
Cornering the market is illegal because it disrupts free market principles, creates unfair competitive advantages, and can lead to price distortions that harm consumers and other market participants.
How is cornering the market different from hoarding?
While both involve gathering large volumes of a commodity, cornering the market aims to control and manipulate prices, whereas hoarding simply involves stockpiling goods, typically without the intent to control the market.
What are the consequences of cornering the market?
The consequences include legal penalties such as fines, imprisonment, and bans from trading. It also leads to regulatory actions and changes to prevent such occurrences in the future, as seen with the creation of the Onion Futures Act.
Can someone corner the market in modern financial markets?
Modern financial markets have stringent regulations and monitoring systems in place that make it highly challenging to corner the market. However, isolated attempts still occur, prompting swift regulatory action.
Market Manipulation
Actions or strategies designed to alter or interfere with the free and fair operation of the market, often to create false or misleading appearances regarding the price or trading activity of a security.
Monopolistic Practices
Strategies used by a company or individual to dominate a particular market, enabling control over prices and limiting competition.
Pump and Dump
A fraudulent scheme where the price of a security is artificially inflated through false and misleading statements to create demand before selling off shares at the elevated price.
Online References
Suggested Books for Further Studies
- “Market Abuse and Insider Trading” by Suzanne Cory
- “Market Manipulation: Theory and Case Studies” by Todd Milbourn
- “The New Financial Deal: Understanding the Dodd-Frank Act and its (Unintended) Consequences” by David Skeel
- “Law and Markets” by Robin Paul Malloy
Fundamentals of Cornering the Market: Business Law Basics Quiz
### What does "cornering the market" entail?
- [x] Purchasing a security or commodity in large volumes to control its price.
- [ ] Selling a security or commodity at a reduced price to undercut competitors.
- [ ] Holding a small fraction of a market share to influence prices.
- [ ] Diversifying investments across multiple sectors.
> **Explanation:** Cornering the market means purchasing large quantities to control the price.
### Why is cornering the market considered illegal?
- [ ] It only maximizes profits for some investors.
- [x] It disrupts free market principles and creates unfair competition.
- [ ] It is done without a government license.
- [ ] It decreases the overall supply of commodities.
> **Explanation:** It disrupts free market principles and leads to unfair competition.
### Which historical event involved an attempt to corner the market on silver?
- [ ] The Gold Rush
- [x] The Hunt Brothers' silver corner (1970s)
- [ ] The Black Monday
- [ ] The Great Depression
> **Explanation:** The Hunt Brothers attempted to corner the silver market in the 1970s.
### What is one common regulatory response to market manipulation attempts?
- [ ] Deregulating the market.
- [x] Imposing penalties, fines, and creating new laws.
- [ ] Offering government subsidies.
- [ ] Encouraging competition.
> **Explanation:** Penalties, fines, and new laws are imposed to prevent market manipulation.
### What practice involves creating misleading statements to inflate a security's price before selling off shares?
- [ ] Market Cornering
- [ ] Arbitrage
- [x] Pump and Dump
- [ ] Spoofing
> **Explanation:** Pump and dump involve inflating prices by misinforming investors and then selling at a profit.
### Under what circumstances can hoarding become similar to cornering the market?
- [ ] Hoarding always controls market prices.
- [ ] When it is done legally with full disclosure.
- [x] When the intention is to control market prices by holding significant stock.
- [ ] When the items are perishable goods.
> **Explanation:** Hoarding becomes similar to cornering when it intends to control market prices.
### Who are generally affected negatively by cornering the market practices?
- [ ] Only large corporations.
- [ ] Government agencies.
- [x] Consumers and other market participants.
- [ ] International traders.
> **Explanation:** Consumers and other market participants are mainly negatively affected due to price manipulation.
### Which U.S. Act was created as a result of market cornering in onions?
- [ ] The Sherman Antitrust Act
- [ ] The Dodd-Frank Act
- [x] The Onion Futures Act
- [ ] The Sarbanes-Oxley Act
> **Explanation:** The Onion Futures Act was created after an incident of market cornering in onions.
### How do modern financial regulations inhibit market cornering?
- [ ] By reducing market participation.
- [ ] By encouraging free-market manipulation.
- [x] By increasing monitoring and implementing strict laws.
- [ ] By state-controlled pricing.
> **Explanation:** Modern regulations include monitoring systems and strict laws that make it hard to corner the market.
### Which term refers to illegal strategies designed to interfere with market operations?
- [ ] Hedge Fund Allocation
- [x] Market Manipulation
- [ ] Trading Equilibrium
- [ ] Portfolio Diversification
> **Explanation:** Market manipulation includes illegal strategies that interfere with fair market operations.
Thank you for participating in exploring the concept of “Cornering the Market” and testing your understanding through the quiz. Keep enhancing your knowledge of market practices and regulations!
