— September 12, 2014
What is Short Selling ?
When a company is going through some trouble or has signs of trouble, the short sellers organize a bear raid by selling the stock short, (which is borrowing stocks from brokers and selling them in the hope of buying them back at a much lower price ) . They start spreading rumors about the company in the hope it will result in a selloff eventually allowing the short sellers to profit by the difference in the price they got paid for selling the stock and the price they had to pay to buy back the stock.
image credits : marketintelligencecenter.com
How Corner works ?
The bulls on the other hand can make a counter move to prevent the short sellers from bringing down the price of a stock by organizing a “Corner”. A Corner is a move in which an individual investor or a group of investors decide to buy most of the available stocks of the company under attack in the stock market. This would include the borrowed shares that the short sellers are selling.
Once they are confident that they have bought most of the outstanding shares in the market without the knowledge of the short sellers, they issue a notice to the short sellers to return the borrowed shares. According to the shock exchange rules, a short sellers needs to return the borrowed share to the lender or broker who has lent it within 24 hours after it is recalled. Failure to comply could result in fine and jail term or both.
Under normal circumstances a short seller can buy or borrow his the shares of a company from other investors in the market and return it back to the broker or lender who had lent him his stocks in the first place. However when a corner is organized the short sellers have no one to buy or borrow their shares from expect the investors who are organizing the “Corner”. This gives the bulls or the organizes of a corner an opportunity to name any price for the stock resulting in a short squeeze with short sellers clambering to buy any available stocks of the company in the market.
History of Corners
Corners are rare in markets today and their impact is limited, however in the early 1900’s they were a common part of the game and had significant impact on the entire stock market. In the book Business Adventures: Twelve Classic Tales from the World of Wall Street
author John Brooks describes one such “Corners” organized by Clearence Saunders, the founder and president of “The Piggly Wiggly stores”. Mr. Saunders invented the concept of discount stores or super markets when he founded the Piggly Wiggly stores in 1919.
ThePiggly Wiggly stores had presence in many states in America through direct ownership and franchises. During 1923 some of the stores operated by franchises ran into financial trouble and closed their operations. The short sellers saw an opportunity and organized a bear raid against the Piggly Wiggly stock in the New York stock exchange. This resulted in steep fall in the price of Piggly Wiggly stocks and raised concerns among its investors and creditors.
Mr. Saunders wanted to foil the bear raid on his company by the short sellers and decided to organize a “Corner” to teach the greedy wall street traders a lesson. Mr. Saunders borrowed ten million dollars from bankers and started buying Piggly Wiggly shares in the stock market and secretly accumulated close to 200,000 shares which was most of the shares trading in the stock market. He then started lending those shares to the short sellers. Once he was sure that the short sellers were cornered, he issued a notice demanding the shares of Piggly Wiggly from the short sellers and set a high ask price on the Piggly Wiggly stocks . This resulted in a clambering of short sellers in the New York stock exchange eager to buy the stocks sending the stock price to the roof.
The stock exchange intervened and suspended trading of Piggly Wiggly stocks. Later the New York stock exchange extended the deadline for the short sellers to fulfill their obligation from 24 hours to five days . As per the New York stock exchange,the decision was taken considering the disastrous outcome of the previous “Corners”, which usually resulted in a sell-off of the entire stock market initiated by the short sellers to fulfill their obligations. This gave enough time for the short sellers to access the shares of Piggly Wiggly that were not in circulation in the stock market forcing Mr. Saunders to offer his shares at a steep discount and hence rendering his “Corner” ineffective.
The silver lining in this whole incident is the fortune made by an individual investor who held the 1100 shares of Piggly Wiggly patiently throughout this episode and sold it during the short squeeze and walked away with huge profit.
Ninety years later there are more than 600 Piggly Wiggly stores serving communities in 17 states. All Piggly Wiggly® stores are independently owned and operated. The company is incorporated in Florida and is held privately.
There are many tricks in the tool kit of Wall Street firms and a individual stands no chance in beating them at their own game, but if you are a wise investor who focuses on strong underlying business and who is willing to ride out the bull and bear raids of the Wall Street… fortune awaits you