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Author Topic: Market Cornering and Why it Fails  (Read 259 times)
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tamo42
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« on: 2011 May 03, 11:34:50 AM »



There has been a lot of talk on the chat recently about "cornering" the market in Chinese coins. I've heard badon mention that it would only take a relatively small amount of money to corner a particular coin. In this article, I wanted to talk about what cornering is, and why it pretty much never works.

First, what do people mean when they talk about cornering? A corner occurs when a buyer gobbles up a major portion of the supply of a particular good. It doesn't have to be the whole supply, but it must be enough to become a market maker rather than a market taker. In other words, the buyer must control enough to be able to set the prevailing price. Let's look at a hypothetical example:

If you've ever seen the movie Trading Places with Eddie Murphy and Dan Aykroyd (a fictionalized tale of the Hunt brothers exploits in silver), that's what the Duke brothers were trying to pull off in frozen orange juice. They thought they had inside information on the production figures for the upcoming season so they bought every available contract on the commodity. Through continual buying, they planned to be able to restrict the supply and name their own price when they would turn around and sell.

In the movie, the Duke brothers were actually fed false information, and their plan blew up in their faces.

In reality, it is market dynamics that dooms cornering to failure. Let's examine the issues that make cornering nearly impossible.

Issue #1: Supply is not fixed. If a buyer takes up all the available supply at a given price, that indicates to the suppliers/producers to create more. If you are buying tons of orange juice, then orange growers will grow more for next year.

Issue #2: Cornering demand drives up prices. If your plan is to buy and buy and buy, then the prices of the goods will go up and up and up. In part, that is the plan. But the natural consequence is that the one doing the cornering must have extremely deep pockets as the market value keeps rising.

Issue #3: Rising prices attract competitors. Markets are well-known. If a particular stock or commodity rises 300%, then people notice. Other buyers will come in to compete with the planned cornerer. Other sellers will come in to expand what is seen as insufficient supply.

Issue #4: Artificial demand can (and usually does) outstrip natural demand. This is probably the most important problem with cornering. It raises the question of who are you going to sell to? Let's say for the sake of argument that a particular buyer has indeed managed to control 100% of the supply of some good. Now what? If the price of the good has gone beyond what free buyers will pay, then the market collapses. It must always be remembered that the market is not some static thing. If a buyer wants a particular good, but the price goes up too much, the buyer will find a substitute or just not buy that particular thing.

Essentially what we see here is that cornering creates a bubble in a market, and we know how those turn out. The main difference between a bubble and a corner is that a bubble has a massive amount of buyers and a corner has only one. However, the nature of this market action does not mean money can't be made in a cornering operation. The losers are those who are left holding the bag on the collapse. A smart market operator will be selling into the rising prices as competing buyers come into the market.

Here's an applicable quote from the Wikipedia article:

Quote
James Fisk, Jay Gould and the Black Friday (1869)
The 1869 Black Friday financial panic in the United States was caused by the efforts of Jay Gould and James Fisk to corner the gold market on the New York Gold Exchange. It was one of several scandals that rocked the presidency of Ulysses S. Grant. When the government gold hit the market, the premium plummeted within minutes and many investors were ruined. Fisk and Gould escaped significant financial harm.

Note the last statement. Jay Gould was one of the best market operators of his day, and got out before the crash.

In the long run, market corners fail because the long run price will reflect overall supply and overall demand. Corners are an attempt to manipulate the demand, but this nets out to zero when the cornerer turns around and becomes a supplier. But because none of this is instantaneous, it creates time periods in which there is opportunity to profit. A smart trader keeps nimble feet and is ready to go in which ever direction momentum develops.


* corner.jpg (24.07 KB, 300x225 - viewed 1064 times.)
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badon
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« Reply #1 on: 2011 May 03, 11:49:16 AM »

Great article. Flexible supply and demand is what usually causes market cornering to fail. The market just adjusts itself to cut out the cornerers.
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« Reply #2 on: 2011 May 05, 05:46:47 AM »

It's too quiet around this forum. Somebody must be doing some cornering!
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badon
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« Reply #3 on: 2011 May 05, 09:26:47 AM »

No comment :)
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« Reply #4 on: 2011 May 05, 09:49:32 AM »

badon, why is your article taking so long to get published? Not that I am complaining :) We are witnessing a precious metal meltdown!
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badon
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« Reply #5 on: 2011 May 05, 09:51:23 AM »

Sorry about the delay, I have been distracted, plus there's been new developments while I was working on it that I should probably mention. Have you seen the draft? Is there anything you'd like me to talk about that's not in the draft yet?
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badon
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« Reply #6 on: 2011 May 05, 09:55:25 AM »

By the way, the draft is here, but you'll only be able to read it if you're registered on the forums. When it's published, the same link will take you to the live version that anyone can read. Hopefully it'll be done later today. I had to get some more info and some more photos before I can publish.

http://www.livebusinesschat.com/smf/index.php?topic=3650.0
« Last Edit: 2011 May 05, 10:17:59 AM by badon » Logged

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r3globe
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« Reply #7 on: 2011 May 05, 11:26:13 AM »

I did read it. Thank you. Take your time in publishing it so we can take out time "cornering" deals without much competition :)
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badon
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« Reply #8 on: 2011 May 05, 11:29:51 AM »

Hah, that's the whole point of making the drafts accessible only to registered LBC users. You have an advantage :)
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« Reply #9 on: 2011 May 05, 11:35:30 AM »

badon, how do I know if the raw pagoda set i have is a fake?
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badon
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« Reply #10 on: 2011 May 05, 11:38:45 AM »

post a picture of it in a reply to my draft article, and I will tell you.
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« Reply #11 on: 2011 May 05, 11:46:30 AM »

ok i just did. I hope it is the real thing :-O
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badon
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« Reply #12 on: 2011 May 05, 11:46:56 AM »

Looking...
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DiggingNorway
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« Reply #13 on: 2011 May 08, 10:59:27 AM »

I want to make some comments on this article.

Lets investigate the arguments one by one:

Issue #1: Supply is not fixed. If a buyer takes up all the available supply at a given price, that indicates to the suppliers/producers to create more. If you are buying tons of orange juice, then orange growers will grow more for next year.

This is true for crops and under commodities that one can harvest a yield from, or increase production of, but it is not tru for a finite amount of silvercoins that were struck 20 years ago, and we assume that counterfeits do not substitute original supply.


Issue #2: Cornering demand drives up prices. If your plan is to buy and buy and buy, then the prices of the goods will go up and up and up. In part, that is the plan. But the natural consequence is that the one doing the cornering must have extremely deep pockets as the market value keeps rising.

That depends how you buy. If you buy a commodity that has despersed supply (suppliers do not have good oversight over other suppliers sales, i.e a supply side consisting of few suppliers with small stocks) you can buy in a more "stealth mode" Also: If you refuse to pay more for your commodity, i.e. negotiate the price, you send a signal to the market that demand is not increasing, which in turn eliminates next point:

Issue #3: Rising prices attract competitors. Markets are well-known. If a particular stock or commodity rises 300%, then people notice. Other buyers will come in to compete with the planned cornerer. Other sellers will come in to expand what is seen as insufficient supply.

But as I said: stealth buying and "cornering" a market that is not offer to much attention is key.



Issue #4: Artificial demand can (and usually does) outstrip natural demand. This is probably the most important problem with cornering. It raises the question of who are you going to sell to? Let's say for the sake of argument that a particular buyer has indeed managed to control 100% of the supply of some good. Now what? If the price of the good has gone beyond what free buyers will pay, then the market collapses. It must always be remembered that the market is not some static thing. If a buyer wants a particular good, but the price goes up too much, the buyer will find a substitute or just not buy that particular thing.


I agree... but as you say in the beginning, cornering is not about controlling 100% of the market, it is to become a marketmaker. To keep up interest for your target-object you would be better of by leaving 50% of supply dispersed, that will keep interest up. But if you manage to aquire 50% of the target-object, assuming you managed to do so without increasing prices while you bought, you can profit by releasing small quantitites at the time.

just my thoughts... I belive it is possible to manipulate markets...
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tamo42
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« Reply #14 on: 2011 May 09, 08:16:13 AM »

Your points are valid, and I realize you are most interested in the Chinese coin market while I was talking about all markets. Manipulating a market is much easier than cornering a market. As long as you have enough money to buy at a floor level or enough supply to sell at a ceiling level, you can establish those price levels in the markets. After all, the US gov does this every day with all sort of commodities (mostly food).

So really, it's a matter of degree. Manipulation is an influence, cornering is control. And while you don't need to buy up 100% of the supply to control a market, the key is that you need to buy enough to be a price maker instead of a price taker. In the very small-mintage Chinese coin markets, this is most likely possible if you are very patient and don't run up prices faster than natural demand (issue #4). It would be significantly more difficult to do so on a coin like the 2000-2008 pandas that have mintage in the hundreds of thousands.
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