GUIDE TO THE STOCK MARKET

Market Corners

The crude oil market is highly susceptible to market corners by industry insiders.

The crude oil market is highly susceptible to market corners by industry insiders.

Market corners are defined as “a market condition brought about intentionally — though sometimes accidentally — when virtually all of the purchasable, or floating, supply of a company’s stock is held by an individual or group who are thus able to dictate the price when settlement is called.” See Note 1.

A market corner is an extreme form of short squeeze, where the buy side of the market has almost complete control of all floating (purchasable) shares. A 2006 academic finance article finds strong evidence that large investors and corporate insiders possess enough market power to manipulate stock prices through a market corner.  See Note 2.

They make it clear in their article that “one of the main hurdles in studying market manipulation is that the data are hard to obtain since the activity is often illegal and thus participants do their best to hide it.” The article further notes that “although stock markets are far better regulated today than in the 19th century, market manipulations by large investors and insiders still occur around the world.”

A Brief History of the Market Corner

You need to understand how the robber barons of the past manipulated the market to understand how the stock market has evolved into what it is today — especially how it is manipulated today. The favorite tool of the super-rich stock market manipulator, the robber baron, was the bear corner.

These financially powerful men were in a special position to hoodwink unwary investors because they were generally inside corporate officers as well as large stockholders. These manipulators often controlled a huge amount of the common shares of stock
— often more than the whole float at the time they forced settlement — putting them in a position to dictate the share price the short sellers had to pay. Stock prices generally gapped a lot when the stock was cornered causing huge increases with no intermediate price points around the corner date. The amount of wealth con- trolled by the manipulators was also large compared to the market capitalization of the stock. See Note 3.

I have to admit that it was probably easier for these men to corner the market back then. It was also a lot easier to take a short position. According to John Gordon, “Most short sellers were not affected by borrowing the stock as is done today but by using seller’s options. Stock was often sold for future delivery within a specified time, usually 10, 20, or 30 days, with the precise time of delivery up to either the buyer — in which case it was called a buyer’s option — or the seller…These “options” differed from modern options — puts and calls — in that the puts and calls convey only a right, not an obligation to complete the contract.”

Since many short sellers often sold large quantities of naked options, the manipulator, having acquired the fl oat, could force a corner by exercising his buyer’s option for immediate delivery and then wait for the delivery due date to bear squeeze other investors who had sold the seller’s option. Insider Cornelius Vanderbilt purchased all floating shares as well as all sellers’ options during the Hudson River Corner which I will explain shortly. See Note 4.

Margin requirements were also less restrictive. You learned earlier in this book that the most Wall Street will lend investors today is 50% margin. Prior to 1934 when Roosevelt enacted the Securities Act, margin was negotiated between brokers and their clients. It could be as low as 10%, which allowed the manipulator to acquire large blocks of stocks with relatively little capital. Corporations also had no financial reporting requirements to stockholders whatsoever, so the general public had very little knowledge about the float of a particular stock — or even who the major stockholders were – let alone how much stock they owned.

Because of this, short sellers had a false sense of security when they shorted a stock, not realizing that the float was often far smaller than they had thought — meaning the stock price would shoot up, not down. There were other reasons for the restricted float. Poor transportation made it difficult for out of town and overseas investors to bring their shares to market — effectively taking their stock out of the float. In 1869, for instance, foreigners owned $243 million in railroad stock shares, but were not a concern to manipulators during this period when many railroad stocks were cornered.  

The legal system was much more corrupt than it is today and judges could be bribed by manipulators to issue injunctions to restrict the issue of new shares. By controlling the supply of new shares, it made it a lot easier for the manipulator to achieve a corner. In addition, there was an even more blatant disregard for director conflicts of interests and minority shareholder rights. Directors often took advantage of their position to manipulate the stock price because they were able to restrict the supply of shares. All of these reasons

– Doc Brown

Dr. Scott Brown

Dr. Scott Brown

BIO: Doc Brown is a national expert on the stock market. His courses “How to Make a Million Dollar Portfolio from Scratch” at the Oxford Club is a national bestseller. Dr. Brown’s research appears in some of the most prestigious academic journals in the field of finance. See Journal of Financial Research and Financial Management. Scott is an associate professor of finance in the Graduate School of Business at the University of Puerto Rico.

made corners easier in the 19th century. People still get caught doing them today, so pay close attention.

Footnote 1.   Wyckoff, P., 1972, Wall Street and the Stock Market: A Chronology (1644-1971),
Philadelphia: Chilton Book Company.

Footnote 2.   ‘‘ F. Allen, L. Litov and J. Mei, ‘‘Large Investors, Price Manipulation, and Limits to
Arbitrage: An Anatomy of Market Corners’, Working Paper 06-02, Wharton Financial Institutions

Footnote 3.   Cornelius Vanderbilt, for instance, put together a stock pool of $5 million in cash for the second Harlem corner. At the time, he already owned a large block of Harlem stocks from the first Harlem corner. On March 29, 1864, Harlem had a market capitalization of $11.9 million with 110,000 shares outstanding. By the end of April, Vanderbilt and his allies in the pool owned 137,000 shares, with the difference sold to them by short sellers. At the time of his death, Vanderbilt left an estate to his heirs worth $90 million. See Gordon, J. 1999, The Great Game: The Emergence of Wall Street as a World Power: 1653-2000, New York: Touchstone.
Footnote 4.   In the second Harlem corner, Vanderbilt was so furious at the short sellers, led by Daniel Drew, that he was planning to drive the stock price up to $1,000 per share. He dropped the plan after he found out that this would bankrupt almost all brokerage firms on Wall Street. See Clews, H. 1888, Twenty Years in Wall Street, New York: Irving Publishing Co.


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CHAPTER CONTENTS

Chapter 7: Hysteria and Manipulation

Topic 1: Mass Hysteria

Topic 2: Beta Death

Topic 3: Tulip Mania

Topic 4: Ponzi Schemes

Topic 5: Irrational & Happy

Topic 6: Savvy Investors

Topic 7: Insider Executives

Topic 8: Market Corners

Topic 9: Hudson (1851)

Topic 10: Harlem (1863)

Topic 11: Harlem (1864)

Topic 12: Prairie (1965)

Topic 13: Michigan (1866)

Topic 14: Erie (Mar 1868)

Topic 15: Erie (Nov 1868)

Topic 16: Gold (1869)

Topic 17:  Erie (1872)

Topic 18: NW (1872)

Topic 19: NP (1901)

Topic 20: Stutz (1920)

Topic 21: Piggly (1932)

Topic 22: RCA (1928)

Topic 23: Recent Corners

Topic 24: Anti-Corner Laws

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LAST TOPIC

FIRST TOPIC