The Second Failed Erie Corner (1872)
In the summer of 1872, Jay Gould invited Daniel Drew and Henry Smith to join him for a bear raid on Erie Railroad stocks. They schemed to push down the stock price by suddenly withdrawing large sums of money from New York banks, which created a liquidity crisis restricting margin that made it hard for speculators to buy stock. This reduced the number of buy orders entering the market and reduced upward pressure on prices. This was possible due to the lack of lenders of last resort at the time (now we have the Federal Reserve System).
Drew turned bullish…
after the team’s initial success to extract revenge on Gould for having done the same before in the first Erie Corner I described to you. Daniel built a large long position without notifying Gould or Smith. On September 17, he cornered the market by calling for a settlement of all short interests, but Gould was able to deliver the shares of stocks he had borrowed to sell short. The corner had a large impact on the prices of all stock prices, which caused a general decline. Gould was mad and came away intent on teaching Daniel Drew a final lesson which I will explain shortly.
When inside corporate executives decided they had driven stock prices up as much as they could and then sold as a unified team at the same time in 1999 and 2000, this strengthened the 2000 through 2003 crash. The really great news is that the big market players, like Jay Gould and Daniel Drew of the world today, have to report all of their holdings if they are a director or own more than 5% of a company. This is important, because if you know when and where to look, you can actually see visible insiders selling at the top of a bull market!
– Doc 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.
SURVIVAL RULE: The big players behind the scenes have a huge impact
on the market.
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