What is Cornering the Market?
'Cornering the market' refers to the process of acquiring enough shares of a certain security or asset with the intention of illegally manipulating its price.
How Does Cornering the Market Work?
Let's assume you want to profit from cornering the market on Company XYZ. First, you begin stockpiling shares of XYZ. The continual buying pushes up the value of shares. The rising price will attract more buyers, and demand pushes prices up even more, causing an upward price spiral. Short sellers are driven out of the market through a 'short squeeze,' and the increased buying pressure that comes from short sellers covering their positions would inflate the price of XYZ even more.
Eventually, you begin to sell your holdings at the artificially-inflated price. At that point, you can exit the investment and/or take a short position knowing that the price will fall once normal supply and demand forces return.
Why Does Cornering the Market Matter?
Cornering the market is illegal because it creates an unfair advantage. The Securities and Exchange Commission (SEC) closely watches accumulations of particular securities for this very reason.
The market also has a hand in correcting the behavior. Although the cornerer has the power to influence prices, that advantageous position also makes him or her very vulnerable -- particularly if the rest of the market is aware of the cornerer's identity.
The market will see the inefficiency and start taking opposing positions, thereby reducing the value of the cornerer's holdings. This makes it very difficult for the cornerer to exit his or her position without further contributing to falling prices.
In some markets, investors don't need to control the majority or even a third of a particular investment to be perceived as trying to corner the market. Over the years, many people and companies have infamously tried to corner markets on many things, including soybean oil, silver, copper, propane, natural gas, and even the Nikkei .
To learn about one such attempt, click here to read 3 Lessons from the Biggest Silver Bust in History.