NYU Paper on Market Corners and Shorting going back to 1863. Piggly Wiggly, RCA and the Hunt Brothers (in silver) ------------------------------------------------------------------
"Using a hand-collected new data set, this paper investigates price and trading behavior around several well-known stock market corners occurred between 1863 and 1980. We find strong evidence that large investors possessed market power that allowed them to manipulate prices. Manipulation leading to a corner tends to increase market volatility and has an adverse price impact on other assets. We also find that the presence of large investors makes it extremely risky for would-be short sellers to trade against the mispricing. Therefore, regulators need to be concerned about corners since they are accompanied by severe price distortions and liquidity erosion. --
IV. Concluding Remarks
This paper investigates price and trading volume patterns around some well known stock market corners in US history. The analyses are based on a hand-collected new dataset of price and trading volume reported in the New York Times and Wall Street Journal from 1864-1928. We present strong evidence that large investors and corporate insiders possess market power that allows them to manipulate market price. Our results show that market corners as a result of manipulation tend to increase market volatility and could have an adverse price impact on other assets. We demonstrate that the presence of large investors makes it extremely risky for short sellers to arbitrage mispricing in the stock market. This creates severe limits to arbitrage in the stock market that tends to impede market efficiency. It can create a situation when there can be overpricing but arbitrageurs are unwilling to establish a short position because of manipulation risk (in addition to fundamental and noise trader risk). Therefore, regulators and exchanges need to be very concerned about ensuring that corners do not take place since they are accompanied by severe price distortions and significant erosion of liquidity. An important question for future research is how corners occur in a rational expectations setting. The historical evidence shows that corners occurred repeatedly, until they were outlawed and suggests that they were profitable for those causing them. This implies that those undertaking short sales must be losing when a corner occurs. Why would they be willing to bear the risks of such a loss? Presumably the reason is that the rest of the time when the market is not cornered they make sufficient profits from their short sales to at least make up for the corners. This will only happen if the market is fairly inefficient in the sense that arbitrage does not lead prices to fully reflect fundamentals. Interestingly the possibility of corners can increase the price of stocks before the corner attempt. Those who actually hold the stock when the corner takes place are able to sell at a high price and this will be reflected beforehand. If corners involve sufficient risk, however, then the price effect may be negative relative to an equilibrium with nor corners"
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