The Biggest Attempts To Corner Commodities
Attempts by unscrupulous individuals to corner various markets have been occurring pretty much since the first markets formed. Traders, companies and even governments at certain times (arguably the Fed & BoE today with their QE measures) have tried to gain price control of a particular asset in order to make abnormal profits or to protect an interest they may have in a commodity. In most cases these attempts have failed and in certain situations the artificial manipulation of prices eventually bought the individuals concerned a ticket to jail and being labelled as a rogue trader to boot. In order to corner a market, the first thing the “cornerer” needs is money and usually lots of it. Without the necessary funds, control of an asset simply cannot be achieved. The cornerer often needs to buy large amounts of an asset and future contracts (where futures are concerned) and without the deep pockets at the first sign of weakness the cornerer would simply be forced to sell his position and register heavy losses before he had even started.
The Onion Market and the Onion Futures Act
The Chicago Mercantile Exchange (CME) has always been an important market in terms of commodity trading. It allows not only for speculators to explore any price opportunities, but also for producers to buy and sell the commodities they need in a (relatively) organised way. Unfortunately what happened in 1955-56 revealed what many traders since this time have found out to their cost, that the futures market can also be the ruin of many...
Although most attempts have been unsuccessful, such is the fascination amongst the investing public that interesting nicknames have been conjured up for the perpetrators. Mr. Copper and Chocfinger are two examples of it.
Back in 1955, onion futures represented 20% of the total contracts traded at the CME, making it the most traded product on the exchange.
We’ll look here at four of the most interesting attempts to corner a market: the onion market attempt back in 1955, the Hunt Brothers silver case which occurred in 1979, Mr. Copper’s decade long operation culminating in 1995 and the “sweetest” case of all — Chocfinger which likely ended in 2010.
Sam Siegel and Vincent Kosuga, two CME traders, hatched a plan to corner the onion market and they set about putting their plan to work in 1955. They bought enough onions and futures contracts to control 98% of the available onions in Chicago at that time. The total amount they bought was stored in Chicago and weighed around 30,000,000 pounds.
“The cornerer often needs to buy large amounts of an asset and future contracts (where futures are concerned) and without the deep pockets, at the first sign of weakness the cornerer would simply be forced to sell his position and register heavy losses before he even started.”
After the first part of the corner operation was accomplished they then, astonishingly, convinced the farmers and onion producers to buy their onions, otherwise they would sell them and flood the market and so pressurise prices down which would most certainly result in heavy losses for farmers. They were successful at this stage and the farmers started buying their onions while they silently accumulated a large short onion futures contracts position! At the end of the onion season, the two traders started flooding the market with onions and in the process quickly drove onion prices down. From a high of $2.75, a 50-pound onion bag quickly saw its price trading at a low of 10 cents. So successful were they in driving the price down, the end result was that onions were basically worth nothing and producers just dumped their stocks into Lake Michigan.
February 2013
| www.financial-spread-betting.com | 7