What is Cornering in Stock Market?

What Cornering Means?

In the stock market, the term "cornering" is used to describe a scenario in which one trader or a group of traders try to control the supply of a specific security in order to manipulate the price to their benefit. In this blog post, we will go through what cornering is, why it's an illegal practice, and any potential repercussions for those that engage in it.

When Cornering Occurs

Cornering occurs when an individual or a group of traders try to gain control over a particular security by buying up a significant portion of its supply. This strategy is often used in an attempt to drive up the price of security by creating artificial scarcity. By restricting the supply of the security, cornering traders can cause other market participants to bid up the price of the security, thereby making a profit on their initial investment.

Why is Cornering an Illegal Practice?

However, cornering is illegal because it violates securities laws and can have severe consequences for the market as a whole. For example, when a single entity tries to corner a particular security, it can disrupt the natural balance of supply and demand, leading to market distortions and a potential market crash.

History of Cornering 

In the past, some traders have attempted to corner the market in various securities, including commodities, stocks, and even crypto currencies. For instance, the Hunt brothers famously attempted to corner the silver market in the 1980s, which caused the price of silver to skyrocket. Ultimately, their attempt failed, and they were forced to sell their holdings at a significant loss.

One of the most well-known examples of cornering in the stock market occurred during the Great Depression. At the time, a group of traders attempted to corner the market in United States Steel Corporation stock. This caused the price of the stock to skyrocket, leading to panic buying by other market participants. Ultimately, the scheme failed, and the traders involved faced severe legal consequences.

Ways Cornering can occur

There are several ways that cornering can occur in the stock market. One method involves buying up a significant portion of the outstanding shares of a particular company. By doing so, the cornering traders can gain control over the voting rights associated with those shares, giving them significant influence over the company's decision-making process.

Another method of cornering involves the use of derivatives such as options or futures contracts. These financial instruments allow traders to make bets on the future price of a particular security. By buying up a significant number of these contracts, cornering traders can create artificial demand for the underlying security, leading to a rise in its price.

Cornering can also occur in the commodity market. For instance, a trader could attempt to corner the market in a particular commodity by buying up a significant portion of its physical supply. By doing so, the trader can create an artificial scarcity of the commodity, leading to a rise in its price.

Why Cornering is a Dangerous and Illegal Practice?

Cornering is seen as a manipulative and illegal practice in the stock market. It is considered unethical because it is an attempt to artificially inflate the price of a security by manipulating the supply and demand balance. Moreover, it creates a dangerous situation for the market as a whole by introducing significant volatility and unpredictability into the system.

If a trader is caught cornering the market, they can face severe legal consequences. For example, they may be fined or imprisoned, and they may be required to pay damages to the other market participants who suffered losses as a result of their actions. In addition, they may face a permanent ban from trading in the securities markets, effectively ending their trading career.

Cornering is an illegal and unethical practice in the stock market that can have significant consequences for both the market as a whole and the traders involved in the scheme. It involves attempting to gain control over the supply of a particular security, leading to artificial price movements and market distortions. Although some traders have successfully attempted to corner the market in the past, it is a risky strategy that is more likely to result in legal consequences than financial gain. Therefore, it is essential for traders to understand the legal and ethical implications of cornering and to avoid engaging in such practices.

Ways to Protect Against Cornering

To protect against cornering and other manipulative practices, regulators have established laws and regulations to ensure fair and transparent markets. For example, the Securities and Exchange Commission (SEC) enforces securities laws in the United States, and the Financial Conduct Authority (FCA) performs a similar role in the United Kingdom.

Traders who suspect that a cornering scheme may be underway can report their suspicions to the appropriate regulatory authorities. By doing so, they can help to prevent illegal market manipulation and maintain the integrity of the securities markets.

Conclusion

In the stock market, cornering is an unlawful and unethical technique that involves attempting to restrict the supply of a specific security, which results in manipulated price movements and market inefficiencies. Trading professionals must be aware of the moral and legal ramifications of cornering and refrain from using this unlawful technique. Regulators have implemented laws and regulations to maintain fair and transparent markets in order to safeguard against cornering and other manipulative activities. Trading participants can contribute to preserving the integrity of the securities markets and preventing illicit market manipulation by reporting any suspicious conduct to the proper regulatory authorities.