Corner the Market

Corner the Market is a trading irregularity, wherein an investor with a long future position in a commodity has also purchased the commodity in the open market. On the other hand, the investors with short positions were pressurized to either opt for delivery by purchasing the commodity from the open market at a higher price or close out the trade by entering into a long future position. This scenario resulted in an increase in the demand for the commodity resulting in an inflated price of the commodity.

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The Sumitomo Copper affair:

The Sumitomo Copper affair is a metal trading scandal in 1996 involving Yasuo Hamanaka, the chief copper trader of the Japanese trading house Sumitomo Corporation a Japanese firm.

Phase 1: There were three parties to the transaction Hamanaka, Global Minerals, and Mining Corp (Global acted as a middle man in the transaction), and Zambian copper. Hamanaka entered into strings of monthly purchasing agreement from Global and Global would in return purchase copper from Zambian copper (copper producer).

Phase 2: Hamanaka established a massive long Copper Future position on LME (London Metal Exchange). This massive long copper position was through small brokers and Global. He controlled almost 5% of the copper supply of the world. Hamanaka now began to take delivery of copper on the future position.

Phase 3: This resulted in an increase in the copper price. The investors with a short position in the futures market were now forced to purchase copper at an inflated price from the physical market or close out their trade at a loss by entering into a long future position.

Phase 4: Hamanaka was helped greatly by the fact that the LME had no mandatory position reporting and no statistics showing open interest.

Phase 5: The market conditions changed due to the resurgence of mining in China. Copper prices were still considerably higher than they should have, but a rise in supply placed more pressure on the market to correct it.

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Bottom Line:

Regulators usually deal with this type of irregularity of the market by increasing margin requirements, imposing stricter position limits, prohibiting trades that increase a speculator’s open position, and forcing market participants to close out their position.

Author: Divya Sankhla

Divya has completed her graduation in Bachelor’s Accounting and Finance. She has worked in Deloitte Touche Tohmatsu Services, Inc. as a Research Analyst for 1 year and at JM financial as a Credit Risk Analyst for 1.3 years. She has a keen interest in learning about Financial Market. Well versed with Bloomberg, Capital Line, and Excel.

 

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