Commodity Exchanges Exchanges Commodity and and
Futures Trading Trading Futures
Commodity Commodity Exchanges Exchanges AND AND
Futures Trading Trading ANDD PR I N C I P L E SAN PRINCIPLES
0 PER A:T I N G MET HOD S METHODS OPERATING
Julius B. B. Julius
Baer
OF THE NEW YORK YORK. BAR
and
Olin Glenn Saxon PROFESSOR OF ECONOMICS YALE UNIVERSITY
HARPER
HARPER
& &
BROTHERS ~ PUBLISHERS BROTHERS PUBLISHERS ~
COMMODITY EXCHANGES AND FUTURES TRADING fr Brothers Copyright, Harper & Brothers 1935, 1949, 1929, 1935, 1949, by by Harper Copyright, 1929,
Printed in in the America the United United States States of Printed of America All rights in this book are All this book are reserved. reserved. rights in
part of No part the of the in any in manner whatsoever whatsoever manner any without written permission except case of in the the case written permission without brief of brief except in quotations embodied in critical articles and reviews. embodied articles in critical and reviews. quotations For For information information address Harper & Brothers. fr Brothers. address Harper book may book be reproduced may be reproduced
L-D L-D
in a This was published published in smaller edition book was a smaller This book in 1929 edition in 1929 under under the the title title COMMODITY EXCHANGES by Julius B. B. Julius by Baer and and George P. Woodruff Baer P. Woodruff George
Contents
x
Preface Preface II
HISTORICAL DEVELOPMENT OF COMMODITY EXCHANGES Ancient Markets-Markets Markets Markets in in the the Dark Ages Ages-The The Medieval Fairs F'airs-Merchant Associations-The Merchant Associations The "Law Merchant"-Courts Merchant" Courts of Fair The "Law Merchant" Becomes the of the the Fair-The the Common Law in the United States-Development States Development of the Modern Commodin the of the Market Organized Commodity Commodity Markets-Not All Comity Market-Organized Markets Not All ity modity Markets Have Exchanges-Organization of Markets Markets of Exchanges Organization modity Agents-Dealersbefore Exchanges-Brokers-Commission before Brokers Commission Exchanges AgentsDealers Risk Bearing Bearing-Risks of Commodity Commodity Dealers Dealers-The Risk Risks of The Market Risk Risk of the the Dealer-Credit Risks of of Dealers Dealers-Other Dealers of Dealer Credit Risks Other Risks Risks of of Dealers -Major in the the Physical Physical Markets Which Operate withDefect in Major Defect Operate without Exchanges The Growing for Exchanges-The Need for Exchange Services in in Services Growing Exchange All Commodity Markets-Producers' Associations-Dealers' All MarketsProducers' Associations Dealers' Commodity Establishment of Trade Associations Associations-Establishment by DealDealof Self-Regulation Self-Regulation by Associations-Arbitration Disputes-Standardizaers' Arbitration of of Disputes Standardizaers' Trade Associations tion of of Contracts-Standardization of Qualities tion Contracts Standardization of or Grades Grades Qualities or
33
11 II
THE ECONOMIC FUNCTIONS OF COMMODITY EXCHANGES Market-Place Exchange in in of the the Commodity Place of The Exchange Exchange Market Commodity Exchange
27 27
Distribution-The Risks of Industrial Society-The of Modern Industrial The Risks Distribution Society The a as Exchange Market as a Guarantor of Deliveries (at Deliveries Contract Exchange (at Contract Time) and of Payments for Deliveries (at Contract Price)for Deliveries of Contract (at Price) Time) Payments Exchanges Commodities Liquid-Profit Margins Profit in DisDisMake Margins in Exchanges Liquid tribution Expedite MarketingMarketingReduced Exchanges Expedite tribution Are Reduced-Exchanges Exchanges a World Market Market-Exchanges Level Prices Prices bebeExchanges Level Exchanges Form a Markets-Buyers May Anticipate Requirements-Contween Markets Contween Buyers May Anticipate Requirements tinuous Prices Prices aa Factor Factor in in Fair Fair Dealing-Does Exchange the Exchange tinuous Dealing Does the Prices?-Price Movements Discount the Future-The Stabilize the Future The Discount Stabilize Prices? Price Exchange as a Source of Trade Information-Exchanges RegInformation Exchanges RegExchange as a Source of ulate Speculation-Exchanges Uniformity in in the the ulate Speculation Exchanges Promote Uniformity Trade-Exchanges Regulators of of Consumption as Regulators Trade Exchanges as Consumption v
vi
Contents Contents
vi
III III
SPECULATION-A SPECULATION A CONSTRUCTIVE COMMODITY EXCHANGES
ECONOMIC ACTIVITY ON
51 51
The Function of of Organized in the the Distribution Distribution of of Organized Speculation Speculation in Staples-Without Organized Speculation Exchange Markets Markets StaplesWithout Organized Speculation Exchange Function-Attacks on Speculation-Defenses Could Not FunctionAttacks of Speculation Defenses of Speculation-Speculation and Gambling-Does Speculation Gambling Does Speculation Speculation Speculation Make for Prices?-Phases the Contention that that SpecuPhases of of the for Lower Prices? Speculation Lowers Prices-Does lation Prices Does Speculation Prices? ExSteady Prices?-ExSpeculation Steady Trading Levels Prices between Markets-The change Trading Levels Prices Markets The Speculachange Speculaof Risk Risk-Speculators Provide aa Broad Market tor's Assumption Assumption of tor's Provide Speculators -Large of Transactions Transactions on Exchanges Exchanges-Short Short Selling Large Volume of Selling -Regulation of Speculation of Regulation Speculation IV
GRADING, STANDARDIZATION, AND INSPECTION Advantages of of Inspection Inspection and Grading-Establishment of Grading Establishment of Advantages Standard Grades Grades and Methods of in of Classification-Standards Classification Standards in the Trade-Inspection in the the Grain Grain Trade the Cotton Cotton Trade Grading in Inspection and Grading in the Trade Sampling Grading Ware-Standards the Rubber Trade-Sampling-Grading-WareStandards in
86 86
housing housing V
PRICES, CROP AND MARKET REPORTS, REPORTS, AND PUBLICITY OF PRICES,
OTHER STATISTICS Importance of of Reports Reports and Statistics-The Statistics The Importance of Importance Importance of of Prices-Sources of InformationWidespread Publication of Prices InformationPublication Sources of Widespread of the Reports Issued-Daily Report of the New York Cotton ExExIssued Daily Report Reports change-Daily Report of of :the Coffee and the New York Coffee changeDaily Market Report Sugar Exchange-Crop Statistics in the Grain Trade-Annual in the Trade Annual Sugar Exchange Crop Statistics Publication Prices ConReports-Prompt and Widespread Publication of of Prices-ConWidespread Reports Prompt Reports-Market Letters-Regtrol of of Quotations-Newspaper Market Letters trol RegQuotations Newspaper Reports ulation of ulation of Consumption Consumption VI
COMMODITIES ADAPTABLE TO FUTURES TRADING
96
llO 110
Units Must Be Homogeneous-The SusUnits Homogeneous The Commodity Commodity Must Be Susceptible of Standardization of Grades-Supply and Demand of Grades Standardization of Supply ceptible Large-The Naturally to to MarketThe Supply Must Be Large Supply Must Flow Naturally Supply and Be Uncertain-The Commodity Must The Demand Uncertain Commodity Supply Must Not Be Perishable-Commodities Exchange in Which Exchange Perishable Commodities in to Trading Is Conducted-Commodities Adapted to Futures Not Is Commodities Conducted Trading Adapted Trading-Commodities Might Be Adapted to Futures Futures Trading Commodities Which Might Adapted to Trading-The Metals-Iron-Other Commodities Wool PeThe Metals Iron-Other Commodities-Wool-PeTrading troleum-Coal-Condusions Coal Conclusions troleum VII VII
THE FUTURES OR EXCHANGE CONTRACT Markets DevelPhysical (Cash (Cash or or Spot) Markets and Futures Markets-DevelPhysical Spot) Markets of the opment of the Futures or Exchange Contract-Origin the Exchange Contract Origin of opment of the Futures
126
Contents Contents
vii
vii
Futures Exchange Contract-A Futures Contract Futures or Exchange ContractA Futures Contract DefinedDefined of the the Futures Futures Contract Contract-Characteristics FuThe Form of Characteristics of of the the Fufor aa Basis Basis Contract-Considerations tures Contract-Reasons tures Contract Reasons for Contract Considerations in Deliverable on Commodity in Establishing GradesGrades Deliverable Establishing Grades-Grades Commodity Exchanges-Differentials-Unit Decimalsof Trading-Price Exchanges Differentials Unit of Trading Price Decimals Months-Delivery at Seller's Option-Warehouse The Delivery Months at Seller's Warehouse Delivery Delivery Option Receipts Receipts VIII' VIII-
ORGANIZATION AND OPERATION OF A COMMODITY EXCHANGE
143 143
Ancient Markets and Modern Exchanges Exchanges-Cash Markets and Ancient Cash Markets Futures Markets Markets-Organization of Exchanges-ObjectivesFutures Organization of Exchanges ObjectivesMembership-Seats-Dues-Government-The Seats Dues Government The Secretary-ComSecretary ComMembership Committee-Arbitration of ControCommittee Arbitration of Controversies-Arbitration of of Grade or Disputes-Discipline versiesArbitration or Quality Quality Disputes Discipline -Business Conduct Committee Committee-Supervisory Business Supervisory CommitteeFloor Committee-Quotations Committee Committee on Floor Committee Quotations Committee-Committee Commissions-Committee Statistics GradCommissions Committee on Information and Statistics-GradOther Warehousing Committee-Other Committees-The ing Committee and Committees The Warehousing ing The Exchange and Its Facilities-The Trading Ring-Reporting Its Facilities Exchange Trading Ring Reporting Trades-Telephone Booths-Hours Hours of of Trading-Limitation Trades Trading Limitation on Telephone Booths mittees-The Arbitration The Arbitration mittees
Daily Fluctuations-Statistical Information-Standard Statistical Information Standard Price Fluctuations Daily Price Calls Contract-Price Months-Calls-Trading Months Price Quotations-Trading Contract Trading Quotations Trading Rules-Commissions-Members Floor-Contract Contract Slips the Floor Rules Commissions Members on the Slips IX
THE CLEARING HOUSE AND ITS RELATION TO THE EXCHANGE
164 164
Direct Direct
of Contracts-Functions the Settlements of Contracts Functions of and Ring of the Ring Settlements Modern Commodity Commodity Clearing House-Organization of a ClearHouse of a ClearClearing Organization the Clearing ing Association-Reporting House-Original to the Clearing House Original ing Association Reporting to Margin Requirements Requirements-Variation or Market-Difference Market-Difference MarVariation or Margin gins-Margin Requirements Requirements Imposed of ExImposed on Customers of ginsMargin Members-Protection change Members of Customers' Customers' Accounts-ClearAccounts ClearProtection of change Careful Provision ance the Surplus-Careful Provision against Fees and the ance Fees against LossSurplus Security of the Clearing House-An Efficient Medium of DeAn Efficient of DeHouse the of Clearing Security livery-Limitation of Interest-Confidential Relationship Interest Confidential of of Relationship of liveryLimitation the Clearing Clearing House and Its Its Members Members-Summary the Summary
X
A TYPICAL TRANSACTION ON THE EXCHANGE
188 188
Course of Transaction What Brown Solda Speculative Sold of a The Course Speculative Transaction-What Confirming the Sale-Clearing the Trade-Brown's Margin Brown's Trade the the Sale Margin Clearing Confirming Confirmation with L. Purchase-Confirmation of Purchase L. & Co.-Confirmation Co. Confirmation of with of Sale-Commissions-Variation Margins-Switching-Brown's of Sale Commissions Variation Margins Switching Brown's Market Place Trade Closed-A Protective Sale-The Central Place Central Trade Closed A Protective XI
HEDGING Risks of Manufacturer-Eliminating the RiskDealer and Manufacturer of Dealer Risks Eliminating the of the Operation of the Hedge-Object of the Hedge-Classes of the of Hedge Classes of HedgeObject Operation
197 197
viii
Contents Contents
viii
The Hedges-The Hedges
Degree of Protection Protection-Correlation Correlation between between Degree Prices of Material and Manufactured Goods-Shifting Prices of Raw Material Goods Shifting the Hedge-Hedging Applies Only the Hedge to Balances-Selecting Balances Selecting the the Hedging Applies Only to Market of the Market-Choice the Month Month-Practice Delivery Choice of Practice Regarding Regarding Delivery in Other Commoditieson Hedges Hedges-Hedging by Transactions in Hedging by in Financing Hedging as as an Aid in Financing-Relation Relation of of Spot and Future Future Hedging Spot and Prices Credit Insurance Prices-Credit Insurance through through Hedging Hedging-The The Work of of the the Arbitrageur-Summary Arbitrageur Summary XII
XIII
HEDGING IN PRACTICE Discounts Discounts on Distant Distant Months Months-Changes in Basis the Basis Weaken the Changes in as Insurance in Basis upon Protection Effect of Hedge as Insurance Protection-Effect of Change in Basis Hedge Change upon the in the the Hedge Hedge-Hedging the Grain Trade-Reasons Trade Reasons for for Spot Hedging in Spot in the by TerTerSelling Futures in the Grain Trade-Hedging Trade Hedging by Selling above Futures minal Elevators-Users Elevators Users of of the the Buying Hedge-Hedging by ProProBuying Hedge Hedging by ducersMarkets ducers-Markets Used for for Hedging Hedging Grains-Summary of Grains Summary of in the Trade in the Grain Trade-Hedging in the Cotton Trade Hedging in the Cotton Trade Hedging Hedging in the -Hedging the Sugar in the the Coffee Coffee Trade Sugar Industry-Hedging Hedging in Industry Hedging in in the -Hedging in the Rubber Trade-Hedging in Cottonseed OilTrade in Cottonseed Hedging Hedging Hedging by Copper Smelters-Hedging by a FabriCustom Smelters a FabriHedging by Copper Hedging by cator-Hedging by by aa Miner Miner-Summary catorHedging Summary
219 219
THE COMMODITY EXCHANGE ACT
251 251
Markets Co-operative Associations-Registration Contract Associations Registration of Contract Markets-Co-operative of Futures Merchants and Floor Floor Brokers Brokers-Protection Futures Commission Merchants Protection of Customers' Margin Margin Moneys Moneys-Limitations of Customers' Limitations on TradingTradingHedges Exempted-Unlawful Transactions and Practices-AcUnlawful Transactions Practices AcHedges Exempted cidental Omissions, Trades, Cross Trades, cidental Sales, Cross Omissions, Exceptions-Wash Exceptions Wash Sales, or Ex-Pit TransactionsPrivileges, etc.-Permissive Ex-Ring etc. Permissive or Ex-Pit TransactionsEx-Ring Privileges, Bucket Shops, Affecting of Law Affecting Bucket Shops, Misrepresentation-Provisions Misrepresentation Provisions of of Commodity Commodity Exchanges Exchanges-Penalties ProPenalties and ProNon-Members of the cedure-Proceedings before the Commodity Exchange Combefore cedureProceedings Commodity Exchange mission-Proceedings before before the of Agriculturethe Secretary AgriculturemissionProceedings Secretary of of Secretary Criminal Offenses Offenses-General Powers of Agriculture of Agriculture General Powers Criminal Secretary of
XIV
THE LAW OF COMMODITY EXCHANGESRELATIONS EXCHANGES-RELATIONS WITH THE STATE-RELATIONS WITH MEMBERS RELATIONS STATE
Legal Nature of of the the Organization-Control Organization Control over Membership Legal Nature Membership -Corporate Powers-The Dissolution of Exchanges-Commodof Exchanges The Dissolution Powers CommodCorporate Power to the State-Power to Regulate Tradingity Exchanges the State and Regulate Tradingity Exchanges Legality of of By-laws By-laws and Rules Rules-Contract Contract of of Membership-The Membership The Legality Admission of of Members-SlIlspension Expulsion-Discipli~ Members Suspension and Expulsion Admission Discipli nary Proceedings Proceedings-Right Appeal to to the the Courts-Nature Courts Nature of of of Appeal Right of nary a Member Attachment of Member-Attachment and a Membership Membership-Bankruptcy of a a Bankruptcy Taxation The Execution-Transfer, Pledge, and Assignment Assignment-Taxation-The Execution Transfer, Pledge, Exchange's Control of Its Quotations Quotations of Its Exchange's Control :
266 266
Contents Contents XV XVI
ix
ix
THE LEGALITY OF CLEARING HOUSE OPERATIONS
297 297
THE EXCHANGE AND THIRD PARTIES
301 301
Legal Relations Relations between between Member and Customer-Broker CustomerBroker and Legal Customer Customer
'
TABLE OF CASES
311 311
BIBLIOGRAPHY
315 315
INDEX
319 319
Preface Preface
The publication publication of of this with its the this book with its comprehensive descriptions of the comprehensive descriptions development, functions, and operating methods of Commodity Exchanges methods of Commodity Exchanges development, functions, operating Exchange is the organization organization of is most timely. Since of the first Commodity the first timely. Since the Commodity Exchange after been the shortly after the Civil War, these Exchanges have the scapegoats of the Civil these War, shortly Exchanges scapegoats of producers, consumers, and politicians. They have been held responsible held have producers, consumers, politicians. They responsible both for inflation and for deflation. At the peak of every inflationary for inflation for deflation. the peak of every inflationary for the Exchanges speculative operations thereon are spiral, are blamed for Exchanges and speculative spiral, the operations thereon are charged high prices. At the the bottom of of every every deflationary deflationary period, period, they they are charged high prices. with the responsibility for for low prices. prices. the responsibility with Congressional Committees Committees have have from time held extensive time held extensive time to to time Congressional public hearings hearings with with respect investigations and public to these these Exchanges. Exchanges. investigations respect to Recent activities activities in in this this field field (in (in 1947 have centered mainly Recent centered mainly 1947 and 1948) have 1948) around the because of high prices wheat, of wheat, the grain of prevailing around grain Exchanges prices of Exchanges because prevailing high corn, and other both domestic markets. Yet, when other cereals cereals on both domestic and foreign markets. Yet, corn, foreign in one examines the facts facts objectively, objectively, it only in the United that it appears that the United examines the only appears States today do free free markets, markets, responsive responsive to to economic forces, prevail in in States today forces, prevail in grains and most other staple commodities. Since eady in II Since other World War II commodities. most early staple grains there has has been been no free market for wheat in the Dominion in Canada where the free market for wheat there fixed prices has been been the the exclusive exclusive buyer buyer at of all at fixed all wheat for of for Government has prices it to the British on long term contracts at export, selling it to the British Government contracts at long export, selling prices determined determined by by the the two governments. Likewise, the the Argentine Argentine governments. Likewise, prices Government has has become the the exclusive and seller of all wheat all seller of wheat exclusive buyer and buyer as a many other other products products for for export. the Argentine a consequence, 1947, as many export. In 1947, Argentine consequence, the at the of to at the equivalent of $4 to $5 per Government was selling wheat bushel $4 $5 per bushel selling equivalent on a long-term five year contract, was exporting wheat to a and Canada, five to Canada, long-term year contract, exporting England per bushel, bushel, while while the the United States, market, at $1.80 the only free market, States, the $1.80 per England at only free to Europe at prices ranging from $2.40 to $3.20 per was shipping to at wheat to $2.40 $3.20 per Europe prices ranging shipping bushel. In In other other words, words, the the Argentine Argentine farmer is to sell bushel. is forced forced to sell at at low, low, arbitrary prices his government sells abroad at exorbitant his at wheat which sells exorbitant government arbitrary prices profits, possible only in in aa starving starving world. world. Meanwhile in in Canada, where Canada, where profits, possible only x
Preface Preface
xi xi
the the government, government, with with the the wheat exchanges exchanges suspended, sold its its farmers' farmers' suspended, sold wheat crops crops short over aa five year period period at the farmer receives receives short over five year at fixed fixed prices, prices, the to 60% in the prices 50 to 60% below those those prevailing prevailing on the the free the United United free markets in prices in States. In fact, States. fact, Canada is is engaged in the gigantic commodity the most engaged gigantic commodity specuspeculation in lation in history history and has has caused caused losses losses of its farmers. of billions billions of of dollars dollars to to its farmers. In the the other the United States, other hand, the grain States, on the hand, the grain Exchanges, Exchanges, operatoperating freely, have maintained the only markets for have maintained the undominated for cereals markets cereals ing freely, only in the entire entire world during in the II. While prices have since World War 11. during and since prices risen sharply as a consequence of extraordinary war demand, risen as a of demand, drastically sharply extraordinary drastically consequence disrupted production production and transportation transportation facilities, short post-war post-war facilities, and short disrupted crops Europe, they they have have not not been been arbitrarily in Europe, fixed by crops in arbitrarily fixed government. by government. the contrary, prices have been established solely through interOn the the interhave been established solely through the contrary, prices action forces, the the prevailing prevailing supply action of of economic forces, supply and demand on uncontrolled markets markets where where merchants, merchants, producers, producers, converters, trolled converters, consumers, consumers, and at under federal speculators have free to sell or buy at will federal regulation have been to sell or will free speculators buy regulation to to prevent prevent abuses abuses and unfair unfair practices. practices. The results results have been free prices, free prices, fair to to both both producer producer and consumer in of all existing circumstances. fair in light of all circumstances. existing light In a a world world in in which which private private trading trading is rapidly being being replaced by State is rapidly State replaced by it is trading in all all basic basic international staples, it not too much to to say that international staples, is not trading in say that to free commodity markets, markets, properly properly regulated regulated by by government to prevent free commodity government prevent abuses, the symbols symbols of societies. With many nations of of the the world are the of free free societies. abuses, are many nations accepting State in some form, it is is highly that State Socialism now accepting Socialism in form, it highly important important that that State State Socialism, the people people of of the the United United States realize that States realize the Socialism, whether Communist, Fascist, Fascist, or or Socialist, the destruction destruction of of free free markets Socialist, means the Communist, replacement by by governmental governmental buying buying and selling monopolies their replacement and their selling monopolies such as is not in -i.e., exclusive State trading such as is being practiced not only now State exclusive i.e., being practiced only in trading various South American Communist countries, countries, but but also in England England and various also in nations. nations. and European European to a free Commodity Exchanges not not only vital to free economy, are vital economy, but they they Commodity Exchanges only are serve a much more important important function function than do Stock Stock Exchanges. serve a Exchanges. The of a free society latter are are vital vital to to the the economic stability a free because they they latter society because stability of bonds that of stocks give liquidity to the billions of dollars of stocks and that represent billions dollars of to the represent give liquidity the capital capital investments of the the American people the nation's nation's productive productive investments of the people in the the general machinery upon upon which depend welfare, distributive machinery and distributive general welfare, depend the of all the and living standards of all the people. The Commodity prosperity, people. Commodity living standards prosperity, for the Exchanges, however, not only provide constant liquidity for the basic basic not however, liquidity only provide Exchanges, but also staple commodities traded upon these Exchanges, they also perform these traded commodities they Exchanges, perform upon staple other v~tal economic economic functions functions which are not served served by by Stock Exchanges. are not other vital Exchanges. interested in are vitally Both the federal governments in the the state and federal the state Both vitally interested governments are unfair to regulation of Commodity Exchanges to prevent unfair trade practices of practices prevent Commodity Exchanges regulation interest. and other other potential potential abuses to the the public public interest. abuses contrary and contrary to of technical terms; This book book is is not not aa trade trade manual or terms; nor or hand-book of This
Preface Preface
Xll xii
is it an extensive extensive analytical theoretical treatise treatise on the functhe economic funcanalytical or theoretical of the the Commodity Exchange. Rather its tions of tions its primary is to to Commodity Exchange. primary purpose purpose is supply a simple, clear analysis of the economic functions, the of a clear of the the methods of functions, analysis supply simple, operation, trading practices, practices, and the the regulation these Exchanges the trading of these operation, the regulation of Exchanges by the themselves and by by the the Exchanges the federal federal government. Exchanges themselves by government. The objecobjecof the authors has has been to to produce produce aa book which will will be useful useful to tive the authors tive of students college courses courses on Marketing Marketing and, the at the students in college the same time, and, at time, meet the of the needs of of the ever-growing users users of the Exchanges Exchanges-the producers, merthe ever-growing the producers, merchants, brokers, brokers, dealers, dealers, commission agents, chants, converters, farm cooperatives, agents, converters, cooperatives, and traders, are availing of the the Exchange themselves of facilities more traders, who are availing themselves Exchange facilities extensively from year year to to year. year. extensively P. Woodruff, The authors are are greatly greatly indebted to to Mr. George Woodruff, aa member George P. who collaborated with of the in the of the New Jersey Bar, collaborated Mr. in the authorship Baer Bar, Jersey authorship first in of "Commodity Exchanges," first published in 1929 by Harper Brothers, of & Brothers, 1929 "Commodity Exchanges," published by Harper & with several editions. with several subsequent subsequent editions. to John C. Gardner, authors owe a personal personal debt to Gardner, President, The authors President, New John C. and Coffee & Sugar York Coffee Exchange Vice President, Lowry A. President, Co.; J. Sugar Exchange Lowry & Co.; J. A. H' ". Jr., Jr., Former Executive Executive Vice Vice President, President, National National Association Association of of IT" Commodity Exchanges and Allied Allied Trades, Inc.; C. Huntting, Vice Vi.ce C. E. E. Huntting, Trades, Inc.; Commodity Exchanges F. H. Peavey fc Company; Jerome Lewine, President, F. Peavey & former President, President, Lewine, President, Company; Jerome Commodity Exchange, Inc., Partner Partner of of H. Hentz & Co.; Linstrom, S. Linstrom, Co.; Evan S. Commodity Exchange, Inc., Bache & Co.; Co.; H. E. E. Luedicke, Commodity Editor Editor of Journal of of The Journal Luedicke, Commodity of Commerce, J. McClintock, Executive Vice President, O. Vice McClintock, Commerce, New York City; President, City; J. of Trade of the City Marks, Esq., Esq., Partner Partner of of Chicago; Board of of the of Chicago; Donald Marks, City of Baer & & Marks, Marks, attorneys for Commodity Exchange, Inc.; I. Baer Gustave I. Inc.; Gustave attorneys for Commodity Exchange, Tolson, former former President, President, New York Cotton Exchange, Partner of Geo. H. Partner of Geo. H. Tolson, Exchange, McFadden & Bro., Bro., and Richard F. F. Uhlmann, Uhlmann, President, President, Board of of Trade of the City of Chicago and President, Grain Co., for their Uhlmann of the City of Chicago review President, Co., for their review of all or or part part of the manuscript, manuscript, and their their many helpful suggestions. of the of all many helpful suggestions. Special thanks are are also also due to to Phelan Beale, Beale, Esq., Esq., Counsel, Counsel, New York Special thanks S. Dunn, Cotton Exchange; J. A. A. S. Dunn, Treasurer-Secretary, Coffee Treasurer-Secretary, New York Coffee Exchange; J. F. & Sugar Clearing Associations, Inc.; M. F. Faber, Treasurer-Secretary & Inc.; Faber, Associations, Clearing Sugar Treasurer-Secretary of Clearing Clearing Associations Associations operating of operating in conjunction conjunction with Commodity Commodity Exchange, Inc.; Inc.; Henry J. Fink, Exchange, Inc.; Inc.; Fink, Secretary Secretary of Commodity Henry J. Commodity Exchange, Exchange, B. Tatistcheff, Tatistcheff, Former Economist and Statistician Statistician Commodity and Alex B. Commodity of have read the Exchange, Inc., parts of the manuscript valuable and who made valuable Inc., manuscript parts Exchange, suggestions. suggestions. is it
.
JJULIUS uuus
B. BAER BAER' OLIN GLENN SAXON
July 20, 20, 1948 July
Commodity Exchanges Commodity Exchanges and
Futures Futures Trading Trading
~
CHAPTER
CHAPTER
I ) I J
Historical Historical Development of Commodity Development of Commodity Exchanges Exchanges
Ancient Ancient Markets. Markets. Long before the the dawn of history, ancient of history, civilizaancient civilizaLong before tions of the the world and even even primitive primitive societies tions of societies had established established market where places hunters, fishermen, herdsmen, farmers, artisans, merchants, artisans, merchants, fishermen, farmers, hunters, herdsmen, places speculators, consumers, and, at times, foreign traders from distant lands at traders distant lands times, foreign speculators, consumers, and,
met and exchanged their products products or or stocks in trade trade-raw or raw materials stocks in materials or exchanged their
finished goods. All trading trading at at first by barter-the first was by finished barter the exchange of one goods. All exchange of another a condition limits the article for for another-a condition which seriously limits the and article volume seriously in or among efficiency of of commerce. Barter Barter is is practiced practiced only nations efficiency only in among nations of money as a common denominator of not yet yet conceived conceived of money-as which have not of of exchange, whereby the value of one article common medium of the of value article exchange, whereby can readily gauged gauged in in terms terms of of another-or among nations nations whose another or among can be readily exchange are to one another or their media of are no longer of exchange or to to their longer acceptable acceptable to
values, aa values,
peoples. peoples. of barter, To eliminate eliminate the the obvious limitations limitations of barter, even the the earliest earliest sociesocieof ties to establish of exchange, using cattle, furs, shells, media establish to ties attempted cattle, furs, shells, exchange, using attempted tobacco, and the the like like as money or or common denominators, measures of as money of denominators, measures tobacco, wealth, standards of value. early "moneys," however, were value. These and of standards wealth, early "moneys," however, subject to various risks, such as destruction or as destruction or deterioration deterioration and consevarious to conserisks, subject are to quent loss of value. Such articles are bulky, costly to store, and generally of articles value. loss store, bulky, costly generally quent imperfect of exchange. exchange. imperfect media of In time, man, in in his his eternal search for to reduce for ways eternal search In the reduce the time, man, ways and means to innumerable risks risks to to which nature nature subjects him, conceived of the idea innumerable of the idea him, subjects of gold, gold, silver, or copper the best, best, most efficient, as the of efficient, most stable, stable, and most silver, or copper as durable metals then had, had, and gold of exchange. durable medium of exchange. These metals gold today today still has, all all the the essential essential characteristics characteristics of a satisfactory satisfactory medium of of a still has, of exchange, namely, relatively high value in small bulk, durability without value in small without bulk, durability exchange, namely, relatively high relative scarcity, risk of of loss loss from shrinkage or deterioration, deterioration, relative ready risk shrinkage or scarcity, and ready or at adaptability to storage or safe-keeping at small expense. the to When the storage safe-keeping expense. adaptability silver coins to ancient first given gold and silver coins to substitute for for ancient Romans were first substitute given gold exchange, with with the the bullion or metallic metallic contents cattle, as a medium of as a of exchange, contents cattle, 3 3
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
4
of the coins by government, they called moneys pecunia pecunia of the coins determined by called these these moneys government, they after the Latin word for herd, pecus. after the Latin for herd, pecus. of metallic The introduction introduction of metallic money money as the medium of as the of exchange, exchange, the metal gold (which is and throughout especially where the metal was all history where is gold (which throughout all history especially in all all organized organized societies the best has been been acceptable acceptable in has societies as as the best common denominator or measure of of values values yet yet devised devised by by man) man), was aa major or measure major step step toward of both internal and foreign trade throughout the world. expansion both internal trade of world. foreign throughout the expansion production and distribution distribution were were no longer proThereafter, production Thereafter, local, and prolonger local, ducers and merchants merchants had no fear of losses to deterioration fear of the losses due to ducers deterioration of of the "hard" money money taken taken in in exchange exchange for or services. They their own goods for their or services. They goods had, risks to to subject themselves to eliminated certain certain risks to had, however, however, only only eliminated subject themselves others-risks of fluctuations the money money prices prices of and services, as fluctuations of of the of goods as others risks of services, goods well as as governmental control of the value of their money and the possibilcontrol of the value their well of the governmental money possibilthat irresponsible irresponsible governments governments (as (as they have done periodically throughity ity that they have periodically throughout the course course of recorded history) history) would defraud their peoples by of recorded out the their own peoples by manipulation of the value of money. This process is accomplished by is the of value money. process accomplished by manipulation of of the the value through the the deliberate value of governments deliberate cheapening of their their governments through cheapening of devices moneys for political or fiscal reasons by various centuries-old devices for or fiscal various reasons centuries-old by moneys political not concern concern us us at at this this time. time. which do not The use use of of money money as a medium of of exchange rise as a also encouraged the rise exchange also encouraged the of the professional professional money money lender banker-both the banker lender and the vital economic both vital of the forces. They They furnish risk-bearing capital capital to to enterprising furnish risk-bearing forces. enterprising producers producers and distributors of goods and services, in the the supply of goods increases in distributors services, stimulating stimulating increases supply and wider wider use use of of goods goods and services services through lower costs to the people to the costs lower people through of more efficient tools of resulting development of efficient tools of production, resulting from development production, more effective transportation and distribution, economical means of of transportation economical distribution, and more effective competition for consumer markets. markets. for competition markets of the classical Rome, civilizations of of Greece of the classical civilizations Greece and Rome, The trading trading markets after the development of the use use of of hard money, capital savings, of the after the development money, capital savings, comof commerce by the consequent consequent expansion mercial credit, credit, and the sea mercial expansion of by sea and land routes, attained a high high degree degree of of organization for the the distribudistribuattained a land routes, organization for also domestic tion of not not only only foreign, foreign, but but also domestic products. products. Both Greece and tion of Rome became substantial exporters, as well as internaas importers, of internaas well substantial exporters, importers, of products. In Athens the the Agora, Agora, which tional staples tional staples and manufactured products. of the of later the political political center center of the maritime power of the Athenian the later became the power a Empire, originated as a commercial market place. The famous commercial as Forum place. Empire, originated of Rome, Rome, from which that that city city for for centuries ruled the the major part of centuries ruled of the the of major part known world, first established established as center.· In the a trading -In as a center. the likewise was first world, likewise trading heyday of power by there were were in sea there in of Roman dominion and power by land and sea heyday called fora nineteen such trading markets, markets, called fora vendalia (sales such trading Rome nineteen (sales marthe distribution of in the distribution of specific commodities, many kets) , which specialized in commodities, specific many kets) specialized corners the of them brought from the far corners of the earth by caravan and galley. far of earth the of by brought galley. ,
,
Historical Historical In
Development of of Commodity Exchanges Development Commodity Exchanges
55
Rome there also other there were also other fora fora where bankers bankers and money money lenders lenders
met to to do business business with one another, merchants, and with with the public. the public. another, with merchants, of Rome, organized and protected The domestic and foreign commerce of Rome, foreign organized protected by Roman law and Roman legions legions throughout the Roman world, world, was was by throughout the extensive vital to to the the economic, economic, social, life not not only only extensive and vital social, and political political life of of the the capital capital city the entire Empire, but also of the rest of the known and the entire but also of the rest of the city Empire, world. Roman citizens transacted aa large world. citizens transacted of world-wide world-wide large annual volume of
the medium of of Roman currency, business through business in effect, for which, in effect, for through the currency, which, a world currency, acceptable everywhere. became a currency, acceptable everywhere.
centuries centuries
Many of of the the trade trade customs, principles, and comcustoms, legal Many legal concepts concepts and principles, mercial practices which today today govern intricate modern economic life life mercial practices govern our intricate in their origins in the operations of the Greek agorae and the Roman the had their the the of operations origins agorae in turn, fora, turn, had benefited benefited from the of traders traders of of the experience which, in fora, which, experience of the more ancient that had risen risen earlier to power power and fallen into the ancient empires fallen into earlier to empires that centuries. The decay over the centuries. concepts of the modern corporation, the over of the the decay corporation, the concepts law of sales, and the the principles principles of instruments of negotiable of contracts contracts and sales, negotiable were first by these or expanded civilizations after after first developed these classical classical civilizations were developed or expanded by the earlier of adoption from the earlier empires of Assyria, Persia, Egypt, Carthage, Persia, Assyria, Egypt, Carthage, empires adoption and other powers. other powers. in the final disruption decline and final Markets in the Dark Ages. Ages. With the the decline of Markets disruption of for centuries centuries had maintained a the Empire (whose (whose legions legions for a the Roman Empire stern, but far-reaching effective peace, domestic Roman under and which domestic but effective stern, far-reaching peace, as never trade foreign commerce had flourished flourished as never before) before) came the the trade and foreign stark the Dark Ages, Ages, when political, political, economic, of the centuries of dismal centuries stark and dismal economic, of Europe, and social chaos swept swept over the entire entire continent of Europe, the the Middle over the social chaos currencies were disorganized. East, Africa, the British British Isles. Isles. All All currencies Africa, and the East, disorganized. International trade trade and most domestic domestic commerce dwindled to to near near International the vanishing point. The Empire broken up into hundreds of petty into was of petty the vanishing point. up Empire kingdoms, states, principalities, baronies, and independent cities or cities or baronies, states, independent principalities, kingdoms, Asiatic hordes towns. Large Large sections by Asiatic hordes who looted, looted, retired, retired, sections were overrun by towns. and returned to loot loot again. again. There was no common law and no in waves to returned in central political enforcement enforcement agency, agency, and local local agencies weak, central political small, weak, agencies were small, sea and generally incompetent. Transportation by land and sea broke down generally incompetent. Transportation by sea with the closing of centuries-old land and sea routes. Internecine strugroutes. Internecine strugwith the closing of centuries-old the small states gles, seemingly endless, among the small states and principalities, principalities, hamendless, among gles, seemingly drastic consequences pered production distribution, with drastic to the the and distribution, consequences to pered production in all standards of life all areas. areas. life in standards of local distribution, All organized organized markets, markets, except for strictly strictly local All distribution, disapexcept for disapsome common man, seeking degree of protection himself for himself peared. The man, seeking degree protection for peared. of political and his family family in in aa world world of political turmoil and economic chaos, either and his chaos, either to the serf became man" voluntarily or necessity a serf to the "strong of his from of his or necessity "strong voluntarily feudal the time community; as a consequence, the feudal system in time shackled and shackled a system consequence, community; as
66
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
of Europe British enslaved the part of of the the population population of Europe and the the British the greater enslaved greater part Isles. Only in the cities did still contrive to relatively men still to remain cities did contrive in the Isles. free, relatively free, Only
preserve the germ of of specialized specialized production production for markets, free markets, for free the germ preserve knowledge of of trade trade skills skills and commercial practices ish the the knowledge ish practices
and nournourand prinprinand of distribution finance, down from earlier and ciples handed more earlier of distribution finance, ciples prosperous generations. generations. prosperous the Dark Ages Ages slowly merged into the EuroYet, into the the Middle Ages, Euroas the Yet, as slowly merged Ages, the pean continent and Britain laboriously regained by degrees some semBritain s'emlaboriously regained by degrees pean continent order, and peace peace on the the economic, politiblance of blance of stability, economic, social, social, and politistability, order, cal as small political units were merged by force or consent into units force or into as small were cal fronts, consent fronts, political merged by larger units units-states principalities-while states and principalities while independent cities and independent cities larger maintain towns organized defensive leagues to maintain their freedom and encourdefensive to their encourtowns leagues organized age trade. These larger units, the the forerunners the present national forerunners of of the larger units, age trade. present national in enforcing states of Europe, Europe, were were more successful law and order within successful in law order states of within enforcing their limited, limited, but but expanding jurisdictions, thereby making it possible it their expanding jurisdictions, thereby making possible than for trade to become once again more than strictly local for trade and commerce to again strictly local for more than and for producers to to produce produce again again for than strictly local markets. local markets. for producers strictly sea were reopened. routes by by land land and sea transAncient trade trade routes Ancient reopened. Travel and transportation safer. Merchandise again began to flow across local safer. local to flow became across again began portation and state borders, the merchants peddling their wares from town to to state borders, the peddling their wares door. door to to door. town and door all progress in The Medieval Medieval Fairs. Fairs. During the Dark Ages Ages all During the progress in comfinance had been been practically practically suspended merce and finance the Continent Continent and merce suspended on the in British Isles. Isles. Few constructive constructive developments taken place for had taken for in the the British developments place It is is surprising that the the old principles, skills, many old concepts, skills, surprising that generations. It concepts, principles, many generations. in the of those lost in and practices practices were were not not lost the chaos of those centuries. In the centuries. In the Middle response to to the the gradual return to Ages, however, however, in in response to law and order order and gradual return Ages, the consequent consequent growing growing economic pressures pressures of of rising the rising populations populations and increasing productivity of the people, inter-city, inter-principality, of the increasing productivity people, inter-city, inter-principality, and inter-state commerce slowly slowly revived revived and expanded. inter-state expanded. first the wandering merchants, merchants, traveling traveling from town to to town town and the wandering At first in country to country, on foot or horseback, in caravans or singly, peddled foot or caravans or singly, peddled horseback, country to country, their to door. time, in response to to their door. In time, in response their wares wares individually their individually from door to all needs and the the steadily steadily growing demands of all peoples for of own needs the growing peoples for the for those other exchange of local products for those of other areas, these wandering merthese of local merareas, exchange products wandering chants with with "pieds poudresJ " or or dusty dusty feet, working in co-operation with in co-operation chants with feet, working "pieds poudres" local merchants, merchants, finally finally induced the the constituted political authorities of constituted political local authorities of the cities to to permit permit them to formal trading centers to organize the towns and cities centers organize trading for aa specific time each year year they where for their foreign they could display specific time display their foreign sale merchandise for and sale and buy local products for resale local merchandise for inspection for resale buy inspection products in into elsewhere. These centers, in time, developed into periodic fairs, and the elsewhere. the time, developed centers, periodic fairs,
Historical Historical
Development of of Commodity Commodity Exchanges Exchanges Development
foreign merchants merchants were were authorized authorized to to move move from from town town to to foreign country to country, operating exclusively through the fairs. to the fairs. country country, operating exclusively through
7
town and and town
Merchant Associations. Associations. In In due due course, course, the the medieval medieval fair fair of of the the Middle Middle Merchant Ages became became aa highly highly organized organized and efficient efficient institution institution for for the the marketmarketAges ing of domestic and foreign products throughout all Europe the BritBritand all and of the domestic ing foreign products throughout Europe domestic merchants, merchants, co-operating co-operating together, together, with with the the ish Isles. Isles. Foreign Foreign and domestic ish the town, town, city, city, or or state state authorities, authorities, organized organized themselves themselves into into consent of of the consent fairs assemblies or associations of merchants, with fixed dates for their fairs of fixed for their with dates assemblies or associations merchants, periodically scheduled each year at particular particular places, places, usually usually on various various each scheduled year at periodically saints' days. In England England these these fairs fairs reached reached aa high high degree degree of of organization organization and In flourished extensively extensively between between the the eleventh eleventh and the the fourteenth fourteenth centuries, centuries, flourished attained their their peak peak of of prestige prestige and importance importance in in the the economic they attained when they life of of the the Western Western world. world. In In some instances instances they they operated operated under royal royal life charters or or decrees; decrees; in in others, others, under grants grants from local local bishops, bishops, princes, princes, charters barons, and officials officials of of cities cities and towns towns throughout throughout the the British British Isles. Isles. 1l barons, They obtained obtained specific specific rights rights and privileges, privileges, but but in in return return assumed various various They authorities. obligations and and duties duties to to the the constituted constituted authorities. obligations of the center center of at The British British fair, held annually at Stourbridge, fair, held Stourbridge, became the annually center fair Winchester the English trade with Flemish merchants; the Winchester fair was the center the Flemish merchants; English trade with fairs of with French, of commerce with merchants; and other fairs French, Italian, Italian, and Spanish Spanish merchants; British or specialized in the products of various foreign countries or British domescountries of various in the foreign products specialized tic tic areas. areas. 2 of To assure efficient operation assure speedy, management of orderly, and efficient operation and management speedy, orderly, the fairs, without conflict with local or state laws and regulations, the laws state with local or the fairs, without conflict regulations, the consent merchant their own initiative, assemblies acting on their merchant assemblies-acting initiative, but with the of tthe constituted authorities-established, promulgated, and enforced authorities of -the constituted established, promulgated, transactions their the conduct and transactions rules and regulations their own rules regulations governing governing the fairs. at the fairs. of of in the sale or purchase of merchandise at in the or sale all who participated of all purchase participated This was essential to make certain that their customs and principles their certain that This was essential to principles of letters of to contracts, sales, bills lading, warehouse receipts, relating bills of of to sales, contracts, receipts, letters lading, relating interof trade credit, negotiable bills of exchange, and other trade practices of interother of credit, negotiable bills practices exchange, national of which had been handed down over the commerce many of national commerce-many centuries, finally developed centuries, car,efully developed upon, and finally improved upon, preserved and improved carefully preserved be ethics would not tbe into definite code of law and ethics-would overridden by law of code definite a fairly into a by fairly totally different local or national laws and regulations. laws or national local different regulations. totally saints' days.
leave England with merchandise merchandise to enter and leave enter and 11 Tht! of foreign merchants freely to The? right England with right of foreign merchants freely forced when King was forced was Carta (Sec. 15, 1215, 1215, when ,on June confirmed by was confirmed King John John was June 15, 41) ,on (Sec. 41) Magna Carta by Magna freedom. to that fundamental charter of of Anglo-Saxon to sign Anglo-Saxon freedom. sign that fundamental charter Ronald Press, York: Ronald 22 A. Securities (New Press, 1934) S. Dewing, A. S. of Corporation (New York: 1934) • Corporation Securities Study of Dewing, A Study pp. 19#. pp. 19D· ,
88
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
The "Law Merchant." Merchant." Consequently by custom and long long the fairs, fairs, by Consequently the their trade trade practices into aa usage, preserved, preserved, improved, improved, and expanded expanded their practices into usage, generally accepted code of international mercantile law, as of international as the the mercantile known law, generally accepted "law merchant," which was acknowledged, acknowledged, respected, respected, and enforced volunenforced volun"law merchant," in all their merchants in all countries throughout Europe the tarily among countries throughout among their Europe and the tarily British Isles. Isles. Any Any merchant who violated violated any provision of the code could of the British any provision be ostracized ostracized by by the the trade. trade. be The codes of the the fairs were practical practical rules fairs were rules and regulations 'the codes of for 'the regulations for ethical and equitable equi,table conduct of all business business at the fair binding at the fair and were binding of all ethical both domestic participants. They terms of of condefined terms conon both domestic and foreign They defined foreign participants. tracts well as as methods of weighing, and as well of sampling, tracts of of sale, sale, as sampling, inspecting, inspecting, weighing, delivery. They established principles for the grading of merchandise. established for the of grading delivery. They principles but of of settlesettleThey regulated not only the of sale, also the terms of the also the not methods sale, only They regulated of the ment and payment. payment. Although Although the the vast vast majority majority of the trading trading was in in for the merchandise on "spot," ready for immediate delivery, nevertheless the nevertheless delivery, "spot/' ready fairs at times contracts to to sell sell merchandise merchandise "to delivarrive" or "for "for delivfairs at times made contracts "to arrive" at some future ery" time, the the quality to be equal to samples future time, to ery" at quality to samples submitted to equal to the buyer the buyer by by the the seller. seller. so organized Courts the Fair. Fair. Finally, Finally, the the merchant assemblies the Courts of assemblies so of the organized the fairs avoid conflicts conflicts with with local local and state state courts. courts. They fairs as as to to avoid They demanded and secured the authorities, authorities, either either local local or national, the the right or national, to enforce enforce secured from the right to their own rules and regulations through their own "courts of the "courts of the fair," their rules fair," regulations through their as they were were called in Britain, courts of poudres" (dusty called in of the the "pieds as they Britain, or courts "pieds poudres" (dusty feet) on the the Continent, Continent, to to arbitrate arbitrate disputes merchants and all all feet) disputes among among merchants purchasers or sellers at the fairs, and to enforce their decisions on the spot to enforce their decisions the spot purchasers or sellers at the fairs, by their sanctions penalties. and their own sanctions by penalties. fair were chosen from those The members of of these these courts courts of of the the fair those of the of the in the assembled merchants merchants who were experienced experienced in the particular assembled trade particular trade involved and its its rules rules and practices. practices. They but involved They rendered rough-and-ready, rough-and-ready, but fair justice justice in all disputes, basing their decisions on their own trade cusin all their fair decisions their trade cusdisputes, basing practices and carrying carrying out out their their toms and practices their decisions decisions summarily toms summarily by by their interference from the own methods, methods, without without recourse recourse to to or interference the local local courts. courts. in fact, trade customs customs and practices practices-in of Those trade international code code of fact, an international in England ethics and law law-were at last last recognized recognized officially were at ethics officially in England by by royal royal authorized 'the the merchants to to establish decree, establish "merchant courts" courts" decree, which authorized to administer administer the the "law merchant." merchant." These courts superseded the the jurisjuristo courts superseded diction and authority authority of of local courts in in disputes transactions local courts diction of transactions disputes arising arising out of at the the fairs. . at fairs. In due the fairs had In course, when the fairs served their major major purposes purposes in in the the served their course, of their their time time and had become less under changeconomic life life of less important important changing economic, social, social, and political political conditions, the common law courts law courts conditions, the ing economic, of of England the "law merchant" into British common into the the British England incorporated incorporated the
Historical Historical
Development of of Commodity Exchanges Development Commodity Exchanges
9g
law of sales, and negotiable negotiable instruments. of contracts, instruments. Thus the law the "law "law contracts, sales, merchant" became the the "law of of the the land." land/' merchant" The "Law Merchant" Becomes the the Common Law in in the the United United States. States. With the colonization of of America, America, the the common law of England was transthe colonization of England transplanted to in the the seventeenth the Amerto North America in seventeenth century after the planted century and after ican Revolution became the the common law law of the individual of ican Revolution all the of all individual states states of the those had inherited French or Spanish States except those which inherited or the United States except Spanish law. concepts and principles principles underlying underlying the the bulk of of law. The fundamental concepts our present present common law law of negotiable bills bills of >commercial commercial contracts, contracts, sales, sales, negotiable of exchange, letters letters of of credit, credit, bills bills of of lading, of exchange, lading, and warehouse receiptsreceipts in our highly the very very life life blood of orderly orderly trade trade and commerce in highly organorganthe ized enforced today today in in both our state as enforced federal ized modern economic life, state and federal life, as of the courts-are those of the "law merchant/' merchant," based based on international practices courts are those international practices over the the centuries centuries from the of ancient ancient Greece and handed down over the days days of Rome, by the courts of the medieval fairs, and improved or the courts of the fairs, Rome, developed developed by improved or expanded as condi tions developed from time to time. conditions time as new to time. developed expanded medieval fairs fairs were were also also the the source pracof other other ins,titutions The medieval source of institutions and pracin civilization. found in our civilization. The stock and comtices commonly tices modern stock commonly modity exchanges of the States-as well as the trade associations in States the trade of the United as well associations in as modity exchanges their principles those fields fields which operate without exchanges-with those of exchanges with their operate without principles of self-regulation, their of arbitration and enforcement of decisions, their methods of arbitration of decisions, self-regulation, and their their clearing clearing house house systems, systems, are are the the direct of direct or or indirect indirect outgrowth outgrowth of the medieval fairs. fairs. Today, these modern institutions institutions establish, the medieval establish, improve, Today, these improve, and continue to enforce enforce their their own trade trade practices practices and customs and to to continue to expand their self-regulation to ever and changing conditions, to meet ever new changing conditions, expand their self-regulation both economic and social. social. both Development of the Modern Commodity Market. After the decline in in the decline of the Commodity Market. Development in the economic importance of the fair in Europe and England, hundreds the England, Europe importance of the fair of local local market centers, centers, called bourses on the Continent and exchanges exchanges called bourses of in Great sprang up rapidly to serve more effectively the functions to serve functions the in Great Britain, Britain, sprang up rapidly effectively at performed Iby the fair. fair. They They were at first places, where first general general market places, 'by the performed their buyers and sellers could freely exchange their many kinds of merchandise kinds of could sellers many freely exchange buyers at time during the year. developments were forced by These forced the time at any developments by economic during year. any or in dealt in all all types necessity. earlier bourses bourses or market places places dealt types of of necessity. The earlier commodities. They usually usually operated commodities. They open in public operated in the open-in public squares squares or on the town town common. As economic conditions with greater policonditions improved, the greater poliimproved, -the of ,the present the consolidation consolidation of national states of tical stability states of tical present national stability and the Europe, as transportation and communication facilities expanded, facilities as and expanded, transportation Europe, the trade in in each each commodity larger and in in due of trade the volume of larger and larger commodity grew grew larger for particular course led led finally finally to to the the organization particular course organization of specialized specialized markets for staples. staples. This development trading for trading stalls for evolved out of specialized This posts or stalls specialized posts development evolved
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
io 10
in in the in individual individual commodities in the original original general the volume markets. As the general markets. still further, of such business business grew grew still further, specialized specialized markets to trade in in particuparticuof to trade
lar commodities grew grew up up in in all all countries. time, these lar commodities countries. In time, these special markets, special markets, in previously in the open streets, officially and conducted the were housed streets, open previously officially or to re-establish their began to establish establish or re-establish their own special regulations rules and regulations began special rules improve trading trading conditions conditions for for each commodity and all who traded and improve all traded commodity in in it. it. This special type of local called a bourse, boerse) of a local market was called beurs, bourse, boerse, beurs) special type borsa, or bolsa in various languag,es on the Continent and an exchange exchange or in various languages bolsa the borsa, in the United States, although nowhere did it perform the the in England it perform States, although England and the highly specialized functions and services of the modern commodity functions services of the highly specialized commodity exchange. exchange. In the Uni,ted States the earlier markets for the United for international States the earlier markets international staple staple comwith which we are are primarily concerned here, were developed modities, here, modities, primarily developed in cotton and, in the the major major cereals-wheat, oats, tobacco and cotton in tobacco cereals wheat, corn, and, later, later, in corn, oats, rye. Thousands of local markets, markets, scattered the various various agriculagriculand rye. of local scattered over over the in the tural tural states, up in areas producing producing each commodity, centhe areas states, sprang sprang up commodity, and cenin tral distributing markets wcre organized in New York) Chicago, Savannah, markets tral distributing were organized York, Chicago, Savannah, cities. New Orleans, Orleans, and other cities. in New York, As early as 1752 established in York, at the foot at the foot 1752 an exchange exchange was established early as in of Broad Street, to trade trade in domestic produce. produce. Another market was organof Street, to organized at at the of Wall Street the sale imported by by Street for for the sale of of merchandise imported the foot foot of ized sailing vessels abroad. developmcnt of the York Stock the of from abroad. The vessels Stock New sailing development of stock Exchange began began with with out-of-door meetings of trading on out-of-door meetings stock 'brokers, brokers, trading Exchange in securities the curbs curbs of securities of of domestic corporations. Street in first of Wall Street the corporations. The first attempt at formal organization of the York stock market was in New in of the stock at formal organization attempt 3 although its first constitution did not become effective until 1817. 1792,3 effective until 1817. 1792, although its first constitution at of Trade of of the the City City of at present the largest largest and of Chicago, The Board of Chicago, present the in the most important important commodity commodity exchange exchange in the world, world, was officially officially organorganin 1848, although it did not function until 1865 as an "organized ized it did function not until 1865 as ized in 1848, although "organized commodity exchange" the sense sense in in which that that term is used today. is used It exchange" in the today. It commodity did, however, provide a for organized trading in "spot" lots, a for market in did, however, provide organized trading "spot" lots, ready for immediate delivery, delivery, and in in contracts delivery of of contracts for for forward delivery ready for in grain. In due course, similar grain exchanges developed in other were similar other In course, grain exchanges developed grain. trading centers, centers, such as as Kansas City, City, Minneapolis, Minneapolis, and Duluth. trading in 1862. Exchange was organized The New York Produce Exchange 1862. Then came organized in the New York Cotton Cotton Exchange in 1870, by the the cotton cotton exchange the 1870, followed by Exchange in exchange of the in New Orleans. Coffee Exchange Exchange of the City of was of New York was Orleans. The Coffee in City in raw incorporated in 1885. Trading in sugar inaugurated by this was sugar inaugurated by this incorporated in 1885. Trading name of the exchange in 1914. In 1916 the of the exchange was changed the to the the in 1914. exchange changed to exchange Inc. First After Coffee and Sugar Exchange, Inc. After the First the World War New York Coffee Sugar Exchange,
J.
3 J. E. E. Meeker, Meeker,
pp. 6H4. 63-64. pp.
the Stock The Work of Stock Exchange Exchange (New York: Ronald Press, Press, 1922) of the (New York: 1922) , ,
Historical Historical
Development of Exchanges of Commodity Development Commodity Exchanges
11
the development development of of exchange exchange trading trading in rapid. in various various commodities was rapid. in the Exchange the following following commodities was was inaugurated subExchange trading trading in inaugurated subsequent to 1920: cocoa, rubber, tin, copper, soy beans, black pepper, to black 1920: cocoa, rubber, tin, beans, sequent soy copper, soy pepper, soy bean oil, tops, grease grease wool, wool, onions, onions, hides, potatoes, soy oil, wool tops, hides, potatoes, soy bean meal, meal, zinc, cottonseed meal, silver, lead, mill mill feeds, Prior to the Second silk. Prior cottonseed meal, to the zinc, silver, lead, feeds, and silk. in tin, World War trading trading was suspended suspended (and (and has has not yet yet been been resumed) resumed) in tin, lead, silver, silk. silver, and silk. lead, It should be made clear, It however, that that many in clear, however, markets, in commodity markets, many commodity the United States the were organized States and elsewhere, for specialized centers for elsewhere, were organized centers specialized trading before the institution of the commodity exchange before the institution modern of the trading (which commodity exchange (which is primarily and fundamentally an insurance supplementary to to is insurance device, device, supplementary primarily fundamentally its such markets) markets) was conceived conceived and developed to its present state of of to state developed present efficiency vital importance importance to to our modern economic life. life. In order efficiency and vital that the intricate that the economic necessity necessity for for and the the various various functions functions and intricate methods of of the the modern commodity of operation operation of exchange may commodity exchange may be more it fully appreciated, it is advisable to review the functions is to review the functions and methods of advisable fully appreciated, operation of commodity markets markets before the development of specialized before the of operation specialized commodity development of an the exchange services-an development which originated after the services American after exchange originated development Civil War in Civil in grain trading on the the Chicago of Trade. grain trading Chicago Board of A brief brief examination of of trading trading methods (on physical markets), the physical (on the markets) preceded the the development development of the commodity exchange which preceded still of the commodity exchange and still prevail in each ,commodity trade, whether or not there is an exchange, in there each or not is whether prevail exchange, commodity trade, will not only understanding of to will not facilitate understanding of the the exchange its relation relation to only facilita'te exchange and its the physical physical market, market, but but also also emphasize emphasize the the importance of the vital conthe vital the of conimportance to the tributions exchange trading trading have made to the economic life life of the tributions which exchange of the world today. today. to Organized Markets. In many it is is customary many quarters customary to Organized Commodity Commodity Markets. quarters it speak of exchange markets as the only organized markets. This practice of the markets. markets as exchange only organized practice speak ignores the the specialized physical markets markets for the for particular ignores specialized physical particular staples staples and the slow, processes through which, over the years, the over slow, tedious, which, tedious, and evolutionary years, evolutionary processes through operators in ,these physical markets gradually, trial and error by error and by these physical gradually, by by trial operators in in each trade, patient co-operative co-operative efforts of all trade, developed all elements efforts of elements in developed patient highly organized centers and efficient trading techniques the idea idea efficient centers trading techniques before the highly organized of the exchange exchange was conceived. In fact, is the commodity conceived. In of the fact, the commodity exchange exchange is the newest addition, the latest development in this evolutionary merely in this latest the newest the addition, evolutionary merely development process. process. Exchange was an American development, the use of of though the development, though trading was Exchange trading of the the institution institution had become world-wide world-wide before before the the outbreak of the Second the Undoubtedly this this process process of improvement of of of evolutionary World War. Undoubtedly evolutionary improvement as economic, trading operating practices practices will will continue, continue, as economic, trading methods and operating political, social conditions change, as new ideas are conceived, and ideas are as conditions and social conceived, change, political, as new techniques are developed. In fact, the commodity exchange In the modern as fact, commodity exchange techniques are developed. ,
12
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
itself has become aa highly highly organized efficient institution institution only because itself has only because organized and efficient of processes. of such such evolutionary evolutionary processes. The exchange was conceived instrument to to as a a new instrument conceived and established established as was exchange functions perform insurance functions in commodity markets and offer protection offer insurance commodity protection perform market against various risks operators could not secure through risks which various not secure operators through against the insurance companies or otherwise. insurance or otherwise. the regular companies regular All Commodity Exchanges. Some commodities, Not All commodities, Commodity Markets Have Exchanges. even those which have have highly highly organized markets for dealing, i.e. i.e. for dealing, even those organized physical physical markets petroleum, coal, burlap, other staples, do not lend themselves to and other not lend to themselves coal, burlap, staples, petroleum, exchange operations. reasons for this are inherent in the commodithis The reasons for are inherent in the exchange operations. ties themselves themselves or in the the conditions, as monopolistic ties controls by conditions, such as by monopolistic controls or under are or private cartels, which they are produced or governments cartels, they governments private produced or are readily distributed. In some commodities commodities which are readily adaptable to distributed. adaptable to exchange trading, many operators, producers, dealers, and converters, dealers, converters, exchange trading, many operators, producers, whose full full co-operation is essential essential to to successful successful exchange whose exchange operations, operations, co-operation is the development of the exchange, largely because because have been been opposed to of to the the exchange, largely development opposed of their lack of of the the long-term long-term advantages the exchange of the their lack of appreciation of advantages of exchange appreciation of understand their failure to the (to themselves to the public) and their failure to the and themselves to the (to public) valuable economic benefits benefits rendered rendered by by an exchange. Consequently valuable exchange. Consequently life of of many markets, markets, highly highly important important to the economic life there are many to the there are the nation nation and the the world, world, which do not not now (although they could) the (although they could) enjoy the benefits of a commodity others, also also are others, of a the benefits exchange. There are commodity exchange. enjoy not and cannot have exchanges because effectively organized, organized, which do not effectively exchanges because in the of defects defects inherent inherent in the commodities themselves. themselves. Finally, there are there are of Finally, where those which have developed exchange trading centers producers, those producers, developed exchange trading centers if they dealers, converters, and consumers consumers can, can, if they so insure themso choose, choose, insure dealers, converters, in their selves various market and credit their functions credit risks risks inherent in functions selves against against various and operations and can transfer these risks to others who are willing transfer these risks to others are willing operations able to to assume them. them. and able Organization of Markets Before Exchanges. Exchanges. In every Markets Before every staple staple comOrganization of modity, whether whether or not there there is exchange, there there is is a a physical or not is an exchange, modity, physical market in which there there will will be be found certain types of certain types of institutions, in institutions, associations, associations, agencies, each of perforills various various economic functions essenof which performs functions essenand agencies, tial to to these these markets. markets. tial are two main classes staple commodity there are physical classes of of physical For every commodity there every staple local markets markets: the the primary primary or or local markets and the the central markets. There are central markets. markets: are of primary hundreds or or even thousands thousands of primary markets markets in in some commodihundreds ties-such as as cotton, cotton, wheat, wheat, and other cereals. procereals. They in. all all protiessuch They develop develop in. the local rail ducing areas and center the local rail or water shipping points center around or shipping points ducing areas from which the forwarded to the large central markets is forwarded central the commodity to the markets commodity is large Kansas of world, such as as Chicago, Buffalo, Minneapolis, City, of the the world, Buffalo, Chicago, City, WinniMinneapolis, peg, and Buenos Aires Aires for grains, and New Orleans, for grains, Orleans, Galveston, Galveston, SavCl.nnah, Savannah, peg,
Historical Historical
Development of of Commodity Exchanges Development Commodity Exchanges
.
1~ i*
Houston, New York, York, Liverpool, Liverpool, Cairo, Houston, Cairo, Calcutta, Calcutta, and Rio de JaneirC1, Janeiro, for cotton. cotton. for During the Second World War many many nations nations disrupted trades these trades During the disrupted these and trade by "bulk purchases" purchases" of (wool, trade channels channels by of entire entire crops sugar, crops (wool, sugar, wheat, and so forth). Other nations nations adopted various restrictive devices so forth) various restrictive devices wheat, adopted to inflation. Since the war state many commoditie:. Since the in many state trading to control control inflation. commodities trading in as an has continued, either as emergency activity, with the avowed purpose either the has continued, emergency activity, purpose of preventing inflation, or as the normal function as the function of of a communistic of preventing inflation, or a state, as in in Russia Russia and eastern or of a socialistic state, in Engor eastern Europe, of socialistic as in state, as state, as Europe, England. government is is now the the sole buyer of sugar, British government land. The British sole buyer of sugar, cotton, cotton, wheat, for Great Britain, Africa it in West Africa it other commodities for Britain, and in wheat, and other is the sole of cocoa beans. The commodity exchanges have been of beans. cocoa is the sole exporter commodity exchanges exporter state trading banned in in all all those those countries in which state trading prevails prevails and fre(' countries in fre^ in physical markets have destroyed in those commodities. shall been markets have those commodities. shall We destroyed physical as they therefore they existed before the existed before the Second World describe conditions conditions as therefore describe in War and as as they are today in those markets which have not been prepreare those markets not they today state trading. empted by by state trading. empted in the Brokers. In each primary primary market, market, as well as large central mar, as well as in the large central marBrokers. all kets, there are individuals, partnerships, and corporations all of which of kets, there are individuals, partnerships, corporations the are organized organized to to act as agents agents for for the the purchase and sale of the commodit~, act as sale of are commodity purchase among of risk-bearing risk-bearing producers producers and local local merchant merchant the thousands thousands of among the or primary dealers constitute the the local local or primary markets, markets, as as well well as as among dealers who constitute among the hundreds hundreds of manufacturing converters up the the of dealers dealers and manufacturing converters who make up the large central markets. markets. central large These brokers brokers are are go-betweens go-betweens who offer or offer on behalf behalf of of producers producers or of dealers specific grades and quantities of commodities to other dealers to other dealers dealers quantities specific grades of each contract or to manufacturers; the consummation of a contract they earn a or to manufacturers; on the they earn fee or or brokerage. brokerage. They business with all all corners. comers. Their activity, as a a fee They do business activity, as rule, is to their their own local local or they central market, in which they or central is confined confined to market, in rule, operate primarily primarily by by telephone telephone or telegraph telegraph or by by personal upon calls upon personal calls operate in order to of the the spot lots which they customers to display display samples they have customers in samples of spot lots for sale. for sale. Brokers are experts in grades, grades, qualities, qualities, trade trade terms, terms, and contract contract terms, Brokers are terms, experts in in warehousing warehousing and transportation transportation problems. buy and as well well as as in as They buy problems. They sell of specific specific grades grades of the account account of a commodity for the sell specific commodity for specific quantities quantities of of others market, credit, transportation, and other risks. all market, other risks. others who assume all of credit, transportation, In the primary primary markets markets they they do business business for their customers for their customers not only In the only for immediate delivery, but in spot 'merchandise, ready for they also make in spot also merchandise, ready delivery, they at definite definite negotiated negotiated prices prices for the contracts sales for forward delivery, contracts for for sales at delivery, the which call for delivery of definite quantities of specific grades, known as definite quantities as call for delivery of specific grades, in trade. standard grades grades and commonly accepted as such in each trade. as standard commonly accepted Commission Agents. Agents. In each each primary primary and central incentral market other other in.
14
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
or corporations dividuals, partnerships, partnerships, or to act buying act as are organized as buying dividuals, organized to corporations are or selling producers and dealers, manufacturers who convert of producers or manufacturers convert or dealers, or selling agents agents of
into consumer goods. long as the commodity commodity into the brokers, so long as they the brokers, so goods. Like the they within the laws of agency, they do not assume market, operate within the laws of not credit, market, credit, agency, they operate or risks. They They also fee or for a fee also work for or commission, is fixed or other other risks. fixed commission, which is by contract with their principals and is based upon the volume of business their based the with is of business contract by principals upon they transact. transact. they Dealers. In In every primary market market-as well as Dealers. as in in the the central central markets markets as well every primary of the world world-for practically every every staple commodity, the of the for practically the merchant staple commodity, dealer in has been been for to aa great in commodities for centuries, commodities has in dealer extent in centuries, and, and, to great extent most markets markets still continues to to be, be, the the great still continues of the risk bearer bearer of the physical great risk physical dealers are the backbone or are the markets. These dealers or the the wheelhorses wheelhorses of of the markets. the markets where commodities commodities are are bought bought and sold for spot sold either either for or spot (immediate) (immediate) 01' in number as as compared for They are are relatively relatively few in with for forward delivery. delivery. They compared with of producers the hundreds hundreds or thousands of of converters converters and the the millions millions of producers or thousands the in the in the various various trades. trades. act as Dealers as principals, principals, buying buying and selling Dealers act at their their selling commodities at a risk merely for own risk for a chance of a profit. By selling to them, the producers of to the them, merely producers profit. By selling of all or miners of all commoditieswhether commodities-whether farmers farmers or miners or ranchers-can or cattle cattle rancherscan shift of the the risks risks of loss which nature nature and their their occupations impose shift some of of loss occupations impose upon them; by buying such dealers, the converting manufacturers from such the manufacturers them; dealers, by buying converting upon can transfer to them certain certain of of their their hazards. hazards. transfer to Risk-Bearing. Throughout the entire entire history history of the economic life life of the Throughout the Risk-Bearing. of man runs runs the the never-ending never-ending story of his struggle to eliminate or miniof of his to eliminate or ministory struggle possible, the the many many and varied varied risks risks to to which he is mize, when possible, is subjected mize, subjected nature. civilization has developed, ways and means have been by civilization has As nature. have been by developed, ways devised for for protection protection against certain kinds of hazards by transferring certain kinds of hazards devised against by transferring them from those those who do not not want to to assume them to to those willthose who are are willing and able able to types of risks are being to do so. so. Slowly, of risks are being Slowly, more and more types ing so that their burden brought control so that their may be shifted, desired. control be under when desired. shifted, may brought Insurance against the the risks risks of of marine casualties-loss casualties loss of of or or damage Insurance against to damage to at first developed ships cargoes at sea-was first developed on a highly organized and sea and was cargoes highly organized ships efficient scale; in time, time, its use became so widespread as permit marine marine so widespread to permit its use as to efficient scale; in cover practically insurance at at more or rates to to cover every hazard hazard or less less nominal rates insurance practically every of transportation by land, sea, air. In turn came various forms of and air. of various forms of sea, land, transportation by life called fire highly organized protections called fire and life insurance. Still insurance. Still more highly organized protections of casualty slowly developed other forms of casualty insurance-protection other forms insurance protection against slowly developed against hurricane, tornado, theft, burglary, and embezzlements, embezzlements, and, and, later, later, against theft, burglary, tornado, against hurricane, and other other risks risks from the the elements. elements. In time, many types types of growing out of hazards, insurance against out of of war, time, insurance hazards, growing war, against many evolved. laws, requiring protection evolved. Then came workmen's compensation compensation laws, requiring protection against the hazards hazards of of industrial accidents, and, legislation industrial accidents, social legislation and, finally, finally, social against the
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Development of of Commodity Exchanges Commodity Exchanges Development
15 15
in the of old health, and unemployment unemployment insurance, imposed old age, in the form o insurance, imposed age, health, the federal federal government. government. Efforts Efforts more recently recently have by the the states states and the by been made to to develop develop crop insurance against risks of boIl weevils, been of drought, weevils, crop insurance against risks drought, boll grasshoppers, beetles, the like. Credit insurance in the retail trades and the like. Credit in retail trades the insurance grasshoppers, beetles, in certain is now extensively extensively carried carried in is in a a limited limited manner is is certain lines lines and in possible in certain staple and wholesale trades. Certain paternalistic in Certain certain trades. wholesale paternalistic possible staple the years years between between the the two world wars governments in in the credit wars even offered offered credit governments insurance to their exporters to expand a subsidy as a their foreign trade. insurance to their subsidy to exporters as expand their foreign trade. Insurance of risks, however, however, in in whatever whatever form, the transtransof risks, the Insurance is merely form, is merely another from one who desires party to to another-from to be be ference of a risk risk from one party ference of desires to it to is willing and able it. to another who is freed from it to assume it. freed able to willing Risks of Commodity Dealers. risk bearers of the physical Dealers. The risk Risks bearers of the of Commodity physical markets and risks the producer, the converter, the dealer. They assume the are the dealer. the risks the are the producer, converter, They profession when they they voluntarily voluntarily become farmers growers of their or sheep of their profession farmers or sheep growers in the the world. of the or mill, mill, factory, factory, or mine operators operators or the products products of world. or or dealers dealers in The producer, producer, the the dealer, dealer, and the the consuming converter, as a rule, carry a consuming converter, as rule, carry insurance protection with with the the established established fire fire insurance insurance protection insurance companies; companies; when their commodities their commodities are are in in transit transit from one point point to to another, another, they they can insure against the transportation hazards through through of the insure against most of storage hazards transportation and storage the casualty companies. the regular regular casualty companies. be developed developed later, the commodity commodity exchange itself is intricate is an intricate As will will be later, the exchange itself insurance permit the the transfer transfer of market and credit to permit insurance device device to risks of certain certain market credit risks by those desire to so. Operators in commodity markets cannot desire in to do so. markets those who commodity by Operators obtain through the regular regular insurance insurance against the insurance companies obtain against the companies insurance through the risks adverse market fluctuations of adverse fluctuations or credit losses. risks risks of or credit losses. The farmer risks in the possibility of of aa sharp decline in the price of or cotton between decline the of the possibility wheat or cotton sharp price the time of of planting planting and sale of his his crop. flour miller, sale of the time sells miller, who sells crop. The flour flour to the bakery bakery trade, trade, runs runs the the risk risk of rise in price of of a flour to the a sharp in the of the price sharp rise between the the time time of of the the sale for forward forward delivery of the the flour flour for wheat between sale of delivery the time time when he must buy buy and grind produce the the and the the grain to produce grind the grain to flour. Losses to market market fluctuationslosses fluctuations-losses to to which all flour. Losses due to all commodities commodities are necessarily subjected subjected both by by their their nature nature and by the operation of the are necessarily by operation of the laws laws of demand, except in totalitarian or socialistic and in totalitarian the of supply or socialistic demand, except supply fixed and countries where free free markets markets are are outlawed outlawed and prices countries are fixed prices are in enforced arbitrarily arbitrarily by by governments-in the aggl\ g:llc each year are are enforced the ni^n^ilc governments year normal many, many times the losses resulting annually from the more the losses times the resulting annually many, many spectacJllar fire, marine, and similar casualties. similar casualties. marine, fire, spectacular commodity markets markets of of the the world, world, both both before before as The commodity as well as after after well as the for of the exchange, have for centuries attempted the development of have centuries attempted to to the development exchange, means the and of develop ways of minimizing the various risks inherent in the various in the risks inherent minimizing develop ways trades. The development the dealer dealer-the bethe risk-bearing of the trades. development of risk-bearing middleman between the producer and the converter and between the latter and the the converter the producer the latter the
16 i6
Commodity Exchanges and Futures Trading and Futures Commodity Exchanges Trading
ultimate consumer consumer-was primarily designed designed to the producer producer and was primarily to permit ultimate permit the converter, they chose to do so, to transfer transfer at chose to at least least some of of their their converter, when they so, to market risks risks to to the the dealer, even as as they they transfer to the the transfer certain market certain others others to dealer, even regular insurance companies, are scientific risk-bearers, just as which insurance are scientific risk-bearers, just as companies, regular aa commodity commodity dealer is aa calculated risk-bearer. Both for calculated risk-bearer. dealer is a consideration consideration for a which voluntarily assume risks others are eager to transfer to risks to them. others are to transfer them. voluntarily eager Both perform perform essential valuable economic functions directly essential and valuable functions which directly in the the lowering lowering of of the the costs result in of production, result costs of disconversion, and disproduction, conversion, tribution of of the economic goods goods of the world. world. The commodity dealer the economic of the tribution dealer commodity absorbs both market and credit credit risks risks which he, the mere chance for the absorbs both chance (not he, for (not assurance) of of aa profit, profit, voluntarily voluntarily assumes and to an assurance) that extent frees to that extent frees the producer or the manufacturer manufacturer from those those hazards. hazards. or the the producer in Kansas, The Market Risk Risk of of the the Dealer. Dealer. F, F, whether a wheat farmer in Kansas, in Brazil, or a a coffee coffee grower grower in Brazil, or a sugar is ready in Cuba, Cuba, when he is sugar planter ready planter in prepare for for his his new crop, to prepare to the quantity, accurately the fairly accurately crop, can determine fairly quantity, new quality, and cost of his crop. Through various brokers, trade cost various of his brokers, agents, quality, crop. Through agents, trade associations, co-operatives, governmental agencies obtain associations, agencies he can obtain co-operatives, and governmental at which his reliable reports reports of the current prices at his product product is of the current prices is selling in reliable selling in for delivery the central trading trading centers centers of of the the world for on the physical the central the delivery physical or as eighteen in the the or the the exchange markets as as much as or more in exchange markets eighteen months or in future. F does not need to to wait wait until until his has matured in order to his crop does not has order to future. crop He may find that at planting time can sell at least a portion of sell. find time he at least a sell sell. that at planting may portion of
his his
any central world market at price which in any at a a price for delivery central world new crop delivery in crop for reasonable profit. By doing so, he avoids the him aa fair fair and reasonable he avoids the so, profit. By doing in price. risk of adverse decline price. Otherwise, he is speculator on the the a speculator is a decline in of an adverse risk Otherwise, he future price price of the commodity. commodity. of the future in order On the the physical physical markets, markets, however, however, in to make his order to his contracts contracts for forward delivery, delivery, F must estimate estimate (with various casualfor various casualfor forward (with allowance for of his the offer ties) both the quantity the quality of his crop and offer definite quandefinite and both the quality crop quanties) quantity dealer or tities specific grades grades for sale to to some specific dealer or factory through for sale tities and specific specific factory through in the some broker broker or commission agent the primary primary or markets. He or central central markets. or commission agent in sell to may sell to a local dealer is to him, or he may to a is known to dealer who or a local to sell him, may sell may mill in merchant in a central or to a mill or factory in some distant market or to distant a central merchant in factory country. In doing so, he has limited his market risks, has assumed has limited his he In risks, but has so, doing country. may not not produce produce the the exact exact quantity or quality others. He may which has he has others. quantity quality he be the dealer or mill, to has sold, may bankrupt sold. Also to whom at or sold. Also the dealer sold, may mill, bankrupt at seller to to a credit credit risk. If F the time for delivery, delivery, thereby thereby subjecting the seller risk. If time for the subjecting the the value he assumes assumes the the risk risk of of changes in the value of foreign sells abroad, he cursells abroad, changes foreign curthat risk to rencies, unless unless he he can shift else. shift that risk to someone else. rencies, will Consequently, the to sell sell to to a local local dealer producer will usually prefer dealer the usually prefer to producer Consequently, or in the markets of of his his own country_ By doing so, he can central markets the central to one one in or to country. By doing so, in a avoid risks incident to selling he can reduce reduce incident to the risks avoid the selling in a foreign foreign country, country, he will assure will assure
Historical Historical
Development of Exchanges of Commodity Development Commodity Exchanges
17 17
or eliminate his his transportation transportation risks, risks, and he can more readily readily check the check the or eliminate if the credit of the local or domestic dealer, who also, the producer's producer's crop domestic dealer, local or of the credit also, if crop is inferior the specific grades he sold, will be willing to accept be to will more he is inferior to to the sold, willing accept specific grades dealer quality (at a discount) discount) than than will aa lower lower quality distant or foreign will a distant foreign dealer (at a or factory. or factory. These factors factors explain why each each physical physical market has has its its risk-bearing risk-bearing explain why in merchant dealers, those in the local markets buying from the producer those the the local merchant dealers, buying producer and selling to dealers dealers in in the the large central domestic markets. domestic and foreign large central foreign markets. selling to the other other hand, hand, the the mills mills and factories, the raw convert the On the factories, which convert in in the central markets rather material, will prefer to buy dealers to from dealers central rather will markets the material, buy prefer than from dealers producer in in the the primary primary markets. markets. M, M, whether aa or producer dealers or than in York, or a tire manufacturer in Akron, prefers to to in in sugar refiner New or manufacturer refiner tire York, Akron, sugar prefers buy his sugar or rubber from a dealer or importer in the central market or rubber a in central or the his dealer sugar buy importer or local dealer or rather than from a domestic farmer or export dealer or local dealer dealer or or an export rather in the in or East. able the planter in Cuba or the Far East. Although he may be able to buy in the to Although may buy planter that is is not often is unwillprimary market somewhat cheaper cheaper-that unwilloften the the case-he case he is primary case of of a rising ing to to assume the the risk risk of of non-shipment non-shipment in in case the rising market and the ing in necessity of a lawsuit in a foreign country or distant state. He also runs a a lawsuit or state. also of distant runs foreign country necessity the risk risk of of shipments of inferior inferior quality. quality. As aa consequence, the great the consequence, the great shipments of bulk of of the physical trade trade in in staple staple commodities flows producers the physical flows from producers bulk to local local dealers dealers in in the the primary primary markets. markets. They in turn turn sell sell to to dealers dealers to They in and latter in in the central export markets, the latter in due course sell to and the sell to in central course the export markets, in the foreign markets markets or or to to mills their domestic dealers in in their mills and factories factories in the foreign domestic dealers markets. This This is is particularly particularly true true when, when, as it is is often often the as is the case, markets. is the the case, it for trade or local custom for dealers always to pay cash on delivery of the dealers cash to local custom trade or always pay delivery of the merchandise receipt of of shipping shipping documents representing representing it, whereas or on receipt merchandise or it, whereas mills and factories frequently require require credit terms. credit terms. mills factories frequently Credit Risks of Dealers. As aa rule, rule, dealers letters dealers either either furnish furnish bank letters Credit Risks of Dealers. of credit to to their their suppliers pay cash on delivery, time at the or pay the same time of credit delivery, and at suppliers or credit extend 30-, 60-, or gO-day credit to their buyers, the convertthey often their or to extend often the convert30-, 60-, 90-day buyers, they ing mills mills and factories, may become insolvent may default insolvent and may default on factories, which may ing payment before before or delivery. Thus dealers perform aa valuable or after after delivery. dealers perform valuable credit credit payment or banking banking function. function. or In addition, the central central market dealer buys for dealer buys for forward In forward delivery addition, when the delivery a primary primary market dealer to aa mill, from aa producer producer or or from a dealer and sells sells to from he mill, he risks the possibility possibility of non-shipment or or default the seller and the necesof non-shipment default by the seller risks the the necesby of having having to to replace replace the the shipment shipment to to the mill at higher price price than than sity the mill at a a higher sity of that which he he had originally originally bought. bought. He also runs the risk, on falling also runs the risk, at which that at falling markets, of having to to pay pay for for his his own purchases price, even at contract of having contract price, even markets, purchases at though, tenders delivery delivery to to his his buyer, buyer, he may may find find that, in the the that, in though, when he tenders months between between the the date of of the the sale sale and date of the mill buyer of delivery, mill the delivery, buyer for the has insolvent and is is unable to to pay pay for the merchandise, thereby has become insolvent merchandise, thereby
18 i8
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
forcing to resell resell on aa lower lower market at heavy loss. the at a heavy the dealer dealer to loss. Again, forcing the Again, the after delivery but before before payment. payment. mill may may fail fail after mill delivery but The dealer Other Risks Risks of Dealers. dealer assumes many other Dealers. other risks. risks. He may of many may a buy a specific grade of a commodity from a distant dealer or producer of distant dealer a or producer commodity buy specific grade inferior grade grade which the who may may deliver deliver an inferior the dealer dealer cannot deliver deliver to to his buyer. buyer. his to survive, may be forced by competition to Frequently, in order order to forced by survive, he may Frequently, in competition to convert "shipment (which are are fulfilled, if shipment is contracts" (which convert fulfilled, if "shipment contracts" shipment is made in the during the specified in the contract) into "arrival contracts" into "arrival the month contracts" specified contract) during require delivery during the of arrival, whether or (which the month of or not not the the arrival, (which require delivery during in ship carrying the merchandise sinks in transit). In other words, a candy merchandise sinks other a the words, transit) candy ship carrying in Cleveland Cleveland wants wants delivery delivery of purchased cocoa in, say, factory of purchased cocoa beans in, factory in say, April, and it contracts with the the dealer dealer for for April "arrival." The dealer dealer it contracts April "arriva1." April, in April, April, even though though to to do so so requires must deliver deliver in the requires rebuying rebuying on the all cocoa beans domestic at a heavy heavy loss loss all beans which he has has sold sold under domestic market at "arrival" terms, and even though the the ship the cocoa, even though "arrival" terms, he cocoa, which he carrying the ship carrying in transit had bought bought for has sunk in transit or with the the beans or arrives arrives with for "shipment," beans "shipment," has for delivery in a seriously damaged condition, condition, unfit unfit for his sales sales contract. contract. in a delivery on his seriously damaged In spite of the fact that he may be insured for the value of the beans be insured for the of fact that he value the beans at at the In spite of the the may Africa have or to a time of Africa or Brazil, he may to replace it on a it from of shipment time Brazil, may replace shipment higher market market for for delivery delivery on his sales contracts. contracts. his sales much higher in one market and sells Furthermore, the dealer buys in dealer buys in another, sells in Furthermore, when the another, he absorbs all transportation and other other casualty risks. may try to to risks. all transportation He he absorbs casualty may try transfer some of of these these risks risks to to his his seller or to his buyer, but trade comto his seller or trade transfer buyer, petition usually usually forces forces him to to absorb himself. He does, however, absorb them himself. does, however, petition himself with the greatest extent possible, insure insure himself the fire, marine, and to the extent possible, the greatest to fire, marine, other casualty companies, but but frequently unable to the is unable to cover all the cover all other frequently he is casualty companies, in the the course many varied hazards hazards which may may arise arise in course of of transshipment transshipment many and varied in from distant points or storage in a warehouse. warehouse. or during distant points from during storage Finally, the the dealer serves another useful economic function-that of another useful function that of dealer serves Finally, accumulation by by purchase purchase of of small small parcels parcels from many many small producers small producers accumulation lots to or local dealers dealers and of resale in in large lots to large buyers-as well as the as well as the of resale or local large large buyers dealers or reverse-purchase of large parcels from large dealers or producers and sale of sale reverse purchase large large parcels producers in small parcels to to many many small small converters. converters. in small parcels All these these risks, risks, assumed by by the the dealers, are essentially All dealers, are essentially speculative speculative hazards which they they voluntarily voluntarily assume merely merely for chance of for a a chance of earning a hazards earning a or decline to profit profit on the the rise rise or prices; sometimes profit. They hope to decline of of prices; profit. They hope in of merchandise in anticipation of a rise in the price, they are "long" in the of merchandise of rise at are anticipation they "long" price, at the other times they are "short" of the merchandise in expectation of declinof are "short" merchandise in of declinother times they expectation of various ing prices. Yet, by the assumption of various risks would otherwise the risks which otherwise Yet, assumption by ing prices. upon producers producers or or converters, thereby increasing the fall upon their costs, fall converters, thereby costs, the increasing their of the ultimate ultimate costs costs of production production and distribution dealers reduce the distribution and aid dealers reduce aid .
Historical Historical
Development of of Commodity Exchanges Development Commodity Exchanges
19 19
in of living in raising the standards of by dealers of the world. Speculation the world. dealers raising the living of Speculation by serves the serves the same economic and social that the the insurance insurance comsocial functions functions that
panies serve, but with with an essential difference. The insurance essential difference. insurance companies, serve, but panies companies, of on the the law of averages and calculated risks based large by working calculated risks based on large by working averages the relatively relatively small small incidence risks, can of aa numbers and the incidence of of risks, can be be assured assured of or return return on their their investments, whereas the speculative reasonable profit profit or the whereas investments, speculative dealer is forced to to operate chance dealer is forced a much narrower base a chance for only base and for operate on a only a (not reasonable assurance) profit. His turns solely of profit. or loss loss turns His profit (not even a reasonable assurance) of profit or solely on his his ability to forecast the price trend-the rise or fall in commodity forecast to the trend the or fall in rise ability commodity price prices. prices. in all all commodity the development of There was aa time in before the trades, before commodity trades, development of and the telegraph cable the cable and, recently, the radio and the transconmore the radio the transconand, recently, telegraph in commodities tinental and transoceanic transoceanic telephone, telephone, when aa dealer tinental dealer in commodities could could of his annual turnmake profit on at a reasonable at least least a a fair iDake a reasonable profit fair percentage of turnhis percentage in exchange exchange for for the the many many services he rendered, without over merely merely in over semices which he without rendered, the of certain the acceptance acceptance of certain risks risks-especially risks. He could could accumuespecially market risks. small parcels late parcels at at prices prices slightly below his own level and sell late small market level below his sell slightly in them simultaneously in larger lots (and vice versa) at a profit sufficient vice at a lots sufficient simultaneously larger (and versa) profit to justify justify his his services, risks. He could receive to receive services, without assuming assuming market risks. cable offers overnight by telegraph, telephone, or cable from primary markets, offers markets, overnight by telegraph, telephone, primary reasonable profit profit for for his his non-market non-market risk the a reasonable sell the add a risk services, services, and sell merchandise before the close of the business day without speculation. merchandise before the close of the business day without speculation. In other there was was aa dealers' dealers' legitimate legitimate spread between prices prices in the in the other words, words, there spread between primary and central market. market. central primary with the of the the trans-ocean trans-ocean telephone the broadcasting broadcasting But, with the coming But, coming of telephone and the radio of prices throughout the world daily and hourly to all by all markets, the world radio of to markets, daily hourly by prices throughout in all all markets and with intensification of of competition competition in markets as a direct direct the intensification as a with the in practically all markets. result, this has disappeared disappeared in practically all markets. The this dealers' dealers' spread result, spread has effect, without doubt, is is to to increase the price to producers or to reduce the to increase the or to without doubt, reduce the effect, price producers cost to consumers consumers at at the the expense of the risk-bearing dealers who were of the cost to dealers risk-bearing expense in their to become more and more speculative speculative in forced to their operations. forced operations. Markets Major Defect in the Physical Which Operate Exin the Deject Major Physical Operate without Exin changes. major defect in commodity markets operate withwhich defect withThe commodity operate major changes. that there out the the benefit benefit of of exchange there is is not not aa sufficiently services is is that out sufficiently large exchange services large risk-bearing dealers a sufficiently large amount of risk or a risk number of of risk-bearing dealers or of sufficiently large the the dealers to give the stability, the liquidity, and the capital among dealers to the the the stability, give liquidity, capital among assured continuity of markets which are to satisfy producers' are essential essential to the producers' of markets assured continuity satisfy the and consumers' to transfer transfer their their speculative risks to those risks to desires to more consumers' desires those speculative willing able to absorb them. them. and to able willing Services in The Growing Exchange Services All Commodity Markets. in All Growing Need For Exchange Commodity Markets. It is is chiefly chiefly because because for for many many decades decades there scarcity of there was a growing It growing scarcity of too and a small number of risk capital in dealers' too small a of risk-bearing hands in dealers' risk capital risk-bearing
20 so
Commodity Exchanges and and Futures Futures Trading Commodity Exchanges Trading
dealers in in the the constantly constantly expanding expanding commodity markets that these very very that these dealers commodity markets dealers themselves, themselves, in in co-operation with the brokers, commission agents, the with dealers brokers, agents, co-operation of and organized at last last conceived conceived of the commodity exand converters, converters, at organized the commodity exthe work change. Their purpose was to supplement the of the middlemenwas to of middlemen Their the supplement change. purpose the dealers dealers-and assure the the entry into these these trades trades of of larger funds and assure the entry into larger capital capital funds a larger professional risk-bearers risk-bearers or well as to of professional or insurers, as well and a as to insurers, as larger number of perform functions the dealers could never perform. This new which functions the dealers could never new This perform perform. and large-scale large-scale capital could only only be be induced to these trades through to enter enter these trades through capital could a new institution institution-the exchange-which is essentially an insurthe commodity a which insuris commodity exchange essentially operation of which we shall shortly ance the organization and of shall the ance device, device, shortly organization operation undertake to to analyze. analyze. It It will will then then be be clearly that not not only seen that the undertake does the only does clearly seen exchange increase greatly the possibilities of shifting speculative and the of increase exchange greatly possibilities shifting speculative other risks which the dealers stood ready to to the of their their other risks the dealers stood ready extent of to assume to the extent but it ability, but it also possible the shifting of additional risks against the also makes of additional risks ability, shifting possible against the dealers which the dealers could could never never protect protect the producer or the producer or converter. converter. study of of organized markets, as they Before closing closing our study as they Before organized commodity commodity markets, of or still operated before the development of exchanges or as they still operate in before the as exchanges they development operate in operated in other many trades, trades, which do not not in in some cases other instances instances cases and cannot in many have the the benefit benefit of of the the services of an exchange, it is advisable to examine it to is services of advisable exchange, in and are briefly the organizations which function are common to to the trade trade organizations function in briefly each physical physical trade. trade. It must must be be clearly clearly understood understood that that in instance has has the It in no instance the exchange exchange market replaced replaced the the physical physical markets markets or major degree infringed in any market or in any major degree infringed upon their their functions jurisdictions. Rather, the exchange market is functions and jurisdictions. is Rather, the exchange market upon an auxiliary auxiliary to physical markets, markets, as a new device-essentially to the the older older physical as a device essentially an insurance of the the growing needs of the old markets out of device evolved out needs of the old markets insurance device-evolved growing functions which the the old old markets markets did never and serving did not and could could never serving functions In other words, the older physical markets developed the perform alone. the older In markets alone. other words, physical perform developed the their exchange markets to supplement their activities and them more to markets activities make exchange supplement of the servants of the public public interest. effective interest. effective and efficient efficient servants addition to Producers' Associations. Associations. In In addition to producers, Producers' commisbrokers, commisproducers, brokers, sion merchant dealers, manufacturing converters, there are sion agents, are dealers, and manufacturing converters, there agents, merchant in each commodity trade trade important organizations, the structure, methods in the each commodity methods structure, important organizations, of operation, of which are to these In every are vital vital to of markets. In functions of these markets. operation, and functions every is voluntary association of producers. There are commodity field there of is a voluntary association field there There are commodity producers. in many of these in each commodity trade and in each country, organized in trade each of these commodity country, organized many national interests the proproto represent represent the territorial, regional, regional, or to or national interests of of the the territorial, ducers. In In rubber, rubber, for for instance, instance, there there are are producers' associations in various associations in ducers. various producers' the Dutch East states-British Malaya, Ceylon, Ceylon, Indo-China, Indo-China, Brazil, Brazil, and the states British Malaya, East Indies. Their membership membership is is limited, the small-scale in some instances, to the Indies. small-scale instances, to limited, in native producers, in to large large foreign-owned in others others to native producers, foreign-owned plantations. plantations. The
Historical Historical
Development of of Commodity Exchanges Commodity Exchanges Development
21 21
in turn regional, sectional, or state state associations associations in turn are are members of of a state state sectional, or regional, national association of producers, producers, and these may be loosely be association of these again and national again may loosely rubber producers' producers' association. organized association. international rubber into an international organized into in all all comobjectives or these producers' producers' associations or functions of these associations in functions of The objectives modity trades are primarily to increase the bargaining powers are to the of their their trades increase bargaining powers of modity primarily respective through collective collective action. action. Such collective action does does collective action respective members through not relate relate to to the the commercial commercial transactions transactions of in the the trade, their members in of their not trade, but is is mobilized mobilized in in connection connection with their their negotiations negotiations with similar assosimilar associations brokers, dealers, dealers, commisson agents, manufacturing conconciations of of brokers, agents, and manufacturing their respect to to trade trade problems, as well as with their verters of their their products products in in respect as well verters of as problems, in group" activities before local, state, colonial, "pressure activities before national, and, and, in local, state, colonial, national, "pressure group" more recent recent years, years, international international legislative or administrative bodies. They bodies. or administrative They legislative their large exercise political political pressure, pressure, through through their widespread memberexercise large and widespread action prejudicial or to to secure secure ship, to prevent prevent action prejudicial to to the the producers' producers' interest interest or ship, to special privileges for such producers producers in in the the form of for such of governmental subgovernmental subspecial privileges price-fixing schemes sidies, programs for restriction of of production, production, and price-fixing for restriction sidies, programs on both both aa national national and international international scale. scale. in the Organizations of producers, producers, similar similar to to those those in the rubber trades, trades, are are Organizations of in all staple commodity fields in in all fields-in wheat in the United States, found in the United States, staple commodity in cotton Canada, Australia and the the' Argentine; Argentine; in in the United States, cotton in the United Canada, Australia States, in coffee in Brazil, Brazil, Peru, Peru, India, India, Egypt, Egypt, and China; China; in Brazil, the coffee in Central the Central Brazil, American states, the Dutch East East Indies; in sugar in Cuba, American the Dutch Indies; in states, and the Cuba, the sugar in East Indies, the the Philippines, Philippines, and Hawaii. Hawaii. East Indies, The rubber rubber producers' producers' associations associations were responsible two disasfor two disasresponsible for first of trous rubber rubber restriction restriction schemes. schemes. The first between of these these was operated trous operated between of the 1922 the auspices of the British government its British 1928 under the 1922 and 1928 auspices government and its it was limited; the second, in the 1930's included colonies, to which in it was the the 1930's included limited; second, colonies, to other producing nations, nations, with with almost almost 98 cent of the world of 98 per cent other producing the world rubber rubber per production in that period incorporated into the scheme. into in that the scheme. period incorporated production producers' associations Brazil were were responsible responsible for associations of of Brazil The coffee coffee producers' the for the ill-fated coffee valorization schemes which have been been operated almost coffee valorization ill-fated almost operated continuously by the the several several Brazilian Brazilian coffee-producing since 1907 1907 by states continuously since coffee-producing states or by by the culminated in the International Coffee in and culminated the federal government or the federal International Coffee government at the the end of the Second World War. Agreement expired at of the Agreement (1940) (1940) which expired wheat producers' producers' associations responsible for the associations of of Canada were responsible The wheat for the of the the co-operatives (in the huge speculative pool operations of wheat the huge speculative pool operations co-operatives (in western provinces) provinces) which became bankrupt bankrupt through Canadian western through speculaspeculain turn turn bankrupted bankrupted the the governments governments of which tion and in of the tion the provinces provinces which went to to the relief of of the the co-operatives. co-operatives. The provinces provinces finally rescued the relief went were rescued finally were at Dominion government at heavy losses to the treasury by the losses to the the Dominion government heavy by treasury its taxpayers. and its taxpayers.
22
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
Producers' associations were were also also responsible responsible for for a a similar similar restriction restriction Producers' associations scheme for for sugar for the various subsidy restriction in Cuba and for the various subsidy and restriction sugar in for in the United States for cotton, wheat, corn, sugar, tobacco, programs in States the United corn, wheat, cotton, sugar, tobacco, programs under other farm products the Agricultural Adjustment the and many other Acts Agricultural Adjustment Acts many products later legislation. of 1933-1939 of 1933-1939 and later legislation. All these schemes give the the producers producers certain beneAll these schemes give certain definite definite short-term short-term benein fits, but in the long they have proved disastrous in that they foster run in disastrous that foster but have the fits, they long proved they increases in production production in in uncontrolled uncontrolled and often often new virgin increases in areas, virgin areas, of the uses of substitutes and synthetics, of of stimulate the development stimulate the the uses substitutes development synthetics, of reclaimed the use use of reclaimed materials, materials, and, without encourage the almost without and, finally, encourage finally, almost of economic forces, exception, collapse collapse under persistent persistent pressures pressures of with forces, with exception, the that the the result result that the prices prices of of the the controlled controlled commodities are are driven driven (as (as in many in many past past incidents) to levels levels lower lower than ever ever before in recorded before in recorded incidents) to history or or that that state state trading trading is is substituted substituted for for the the collapsed schemes. history collapsed schemes. fact The worst worst feature of such such control beyond the feature of control schemes, the obvious fact schemes, beyond that they tend tend to to destroy free markets and attempt to substitute arbitrary, that they free markets to substitute arbitrary, destroy attempt dictated prices dictated prices for for free free prices prices established by free merchants on free free merchants free marestablished by in many is that that in many instances, instances, again again under pressure pressure of producers seeking seeking kets, of producers kets, is perpetuate war-time or emergency controls, they have evolved to to perpetuate or emergency controls, they evolved into into state permanent state trading -all buying and selling is done by a totaliwhere all totaliis trading permanent selling by buying tarian arbitrarily fixed trading is at arbitrarily State trading tarian or fixed prices. or socialistic socialistic state state at is now prices. State quite common and has been adopted, as a matter of permanent policy, of has quite adopted, as a matter permanent policy, for cotton wheat in in England, England, cocoa Africa, wheat, wheat, in British for cotton and wheat British Africa, cocoa beans beans in if not hides, in Argentina, Argentina, and so trend, if not suspended so on. skins in on. This trend, hides, and skins suspended and reversed, in time time may may well well mean the the end of in of the the capitalistic reversed, in system in capitalistic system all countries which indulge indulge in in such such state trading and may may even jeopardize jeopardize all countries state trading that in free countries. in that system free countries. system the producers* producers' associations are more construcof the The other other functions functions of associations are construcThey represent represent their their members in negotiations with other tive. They tive. in all all negotiations trade other trade organizations, both at and abroad, in establishing certain services in at both home certain services abroad, establishing organizations, beneficial to to all all elements elements in in the trade. They are beneficial the trade. which are collect, assimilate, assimilate, They collect, exchange with other associations government agencies, distribute and and other associations distribute with exchange government agencies, to their own members vital vital trade trade and crop statistics and other data essenstatistics other essento their crop tial to all all who operate operate in each trade. trade. in each tial to producers' associations associations also co-operate with with other The producers' also co-operate trade organizaother trade organizain establishing and revising rules and regulations in each market tions in in rules tions establishing revising regulations in regard to to ethical ethical conduct of the trade, of the in regard standardization of of trade trade and trade, standardization contract terms, standardization grades and qualities, arbitration of standardization of of grades contract terms, arbitration of qualities, of the disputes arising out of the standard contracts of the trade, and establishout standard of contracts the establishtrade, disputes arising ment of clearing methods to to expedite expedite and reduce reduce the the costs of clearing costs of of deliveries deliveries of merchandise and collections collections of payments under trade trade contracts. of payments contracts. of merchandise These last last functions, however, are are primarily the dealer dealer functions, however, by the primarily performed performed by
Historical Historical
Development Development
of of
Commodity Exchanges Commodity Exchanges
23 23
trade trade associations associations in in each primary primary and central central market; in order order market; but, but, in that they they may may be successfully successfully performed, perfonned, there that full and conthere must be full con-
tinuing among the the various various organizations at the the several several tinuing co-operation organizations at co-operation among levels of trade. levels of the the trade. Dealers' Trade Associations. Associations. In every every primary primary as well as Dealers' as well as every central every central a trade market in in each commodity commodity trade trade there there is such as is a trade association, as association, such the Cotton Cotton Dealers' Association of of New Orleans, the Green Coffee Assothe Dealers' Association the Coffee AssoOrleans, ciation of New York City, City, and the the Rubber Trade Association ciation of Association of of New York. Sometimes the the brokers brokers and commission agents organize their own York. their agents organize in each market, association in market, but more frequently they constitute merely association constitute frequently they merely a a division the trade trade association, association, such such as the Rubber Trade Association Association division of of the as the of New York, York, which includes includes these these agencies agencies as well as of the dealers. as well as the dealers. Establishment of of Self-Regulation Self-Regulation by Dealers' Trade Associations. Establishment Dealers' Associations. by Members of these associations, in addition to being addition to to common of these associations, in being subjected subjected to federal statutes, pertinent to to their law and state state and federal their trades, are bound statutes, pertinent trades, are by the ru·les and regulations established by their associations the for the by the rubles regulations established by their associations for ethical and orderly orderly conduct conduct of of their their business. regulations are are ethical business. These regulations the developed by the themselves, acting according to their conmembers to their conthemselves, acting according developed by all present stitution or by-laws, by-laws, and are are thereafter thereafter binding present and subsubstitution or binding on all the sequent of the association and on all other buyers and sellers members of association all other sellers buyers sequent in voluntarily contract contract to by such rules. rules. The rules rules are to abide in the abide by the trade trade who voluntarily are enforced under penalty of suspension or expulsion from the associaor the associaenforced penalty of suspension expulsion tion-which usually usually means the the end of of the the violators' violators' activities in the the trade. trade. activities in tionwhich These codes codes are never static, static, but are to change as new techniques are subject to as are never change subject techniques is being being constantly improved develop. The "law merchant" is revised and improved constantly revised develop. so similar as those of codes are similar to are so to those the exchange as conditions conditions demand. The codes of the exchange markets that not consider consider them here. here. They will be discussed will in that we need not discussed in markets They more detail detail under exchange exchange operations. operations. Arbitration of of Disputes. Disputes. The regulations regulations of trade assoArbitration of the the dealers' dealers' trade assoall disputes ciations usually provide provide that that all disputes between members, members, as as as well ciations usually well as non-members, arising those between members and non-members, of the the standard standard those arising out of contracts of the trade (which (which require require arbitration prothe trade arbitration under association contracts of association probe arbitrated at the headquarters and rules of the cedures) at the must be arbitrated under rules of the cedures) headquarters are inexpensive, trade association. association. The procedures procedures are efficient, trade swift, and efficient, inexpensive, swift, and decisions decisions are by trade trade members who are in their fields. in are experts their are made by fields. experts Provision is adequate appeals appeals from an original arbitration comis made for for adequate arbitration Provision original mittee to to an appeals mittee appeals committee. Standardization of Perhaps the the most important Contracts. Standardization function of Contracts. Perhaps important function of dealers' associations is that of trade and conof standardization is that standardization of dealers' trade trade associations of trade of contract terms establishment of not only but several several uniform conof not tract terms and establishment conone, but only one, general acceptance acceptance in in both domestic and international tracts for for general international trade. tracts trade. In performance performance of of this this function, close co-operation prothe part of proIn function, close co-operation on the part of
24
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
ducers', dealers', and manufacturers' manufacturers' associations has been essential associations has essential in in ducers', dealers', order to to secure general acceptance in the trade. the trade. secure general order acceptance in in the This development does not that in the hide hide or trade, for mean that not does or coffee This coffee trade, for development or or standardized instance, one or or standardized contracts are in use throughtwo uniform in contracts are use instance, throughIt does mean, out the the entire entire hide hide or world. It mean, however, whereas or coffee coffee world. out however, that, that, whereas in past-before the trade trade associations effective-each probefore the in the the past associations were fully effective each fully producer, dealer, converter attempted to buy and sell on his own conand converter to consell his ducer, dealer, buy attempted in each central tract form and terms, terms, now in central market there there are contract are uniform contract forms (relatively in number) which are used almost exclusively in are tract few used almost number) (relatively exclusively in it. it. in that that market by by all all who trade trade in in Although the the uniform coffee coffee contracts contracts of PauIo or of Rio and Sao Sao Paulo the or the Although Batavia contracts of of Singapore and Batavia may vary somewhat uniform rubber contracts Singapore may vary of New York, from one another another and from those those of or London, York, Liverpool, London, Liverpool, or in coffee nevertheless every every trader trader in coffee or or rubber, rubber, whatever his hios status, nevertheless status, knows what obligations obligations he assumes and what rights or accrue when he sells sells or rights accrue contract of buys under any of these standard contract forms (copies of which are of these are buys any (copies freely available available on request request by by the the various various trade trade associations in made freely associations in but each market). Slowly, surely, each world-wide commodity trade is each trade is each surely, commodity market) Slowly, will steadily working toward the point where there will be only a limited there the point only a limited steadily working in each each commodity trade, with each concontracts in with number of of uniform contracts contrade, commodity tract markets and each serving a specific function-for it all markets a for all function for tract standard standard for it serving specific will probably probably never never be possible possible to to reduce reduce trading in most commodities will trading in to a single contract. contract. uniform to a single For instance, instance, there there will will always always be a need to to distinguish a uniuniFor distinguish between a form or delivery" contract -a contract "arrival or or delivery" contract and ·a contract for for "shipor standard standard "arrival form "shipment." buys from S on a contract for "arrival and/or contract calling for "arrival ment." When B buys and/or calling delivery" the month of May, B requires requires and in New York during of May, of silk silk in during the delivery" of in order S undertakes to to make delivery in May, May, even though to make order to S undertakes S, in delivery in though S, in the delivery, buys from J in Tokyo the necessary quality and quantity for Tokyo necessary J quality delivery, buys quantity for in shipment by fast steamer, is scheduled to arrive in May, but sinks which is scheduled to arrive fast sinks steamer, May, shipment by in or does not arrive arrive until until June. June. S, does not in transit transit or S, under such circumstances, circumstances, must still deliver to to B under the the contract, he must enter enter still deliver contract, even though though the buy silk out of warehoused silk from a competitor of the New York market and buy competitor S will stocks (at aa much higher higher price price than S will receive receive from B) B) and may may be be stocks (at silk bought a loss the at for compelled later to resell at a loss the silk bought from J for shipment. resell to later J shipment. compelled the other other hand, hand, if if S had sold to B aa "shipment" sold to S could could On the contract, S "shipment" contract, B B to complete his contract contract with with by delivering the insurthe shipping by delivering to shipping and insurcomplete his from ance documents covering covering the the shipment bought J, even. though even, ance documents bought shipment J, though late. B's the ship the silk silk sank sank in in transit transit or arrived late. B's only remedy the only remedy carrying the ship carrying for loss under this contract is the insurance company loss of the is against of the this contract under against the company for for the cargo or possibly against the steamship company for delayed arrival arrival or steamship company delayed cargo possibly against cause of the cause (if he can prove prove negligence negligence or or willful willful action action as as the the loss he can loss of the (if .
Historical Historical
Development of of Commodity Exchanges Development Commodity Exchanges
25 25
Except for for aa few major major contract major concontract classifications, based on major conclassifications, based Except siderations, it may be possible in time to eliminate the multiplicity in it be to eliminate the of time siderations, may possible multiplicity of trade contract forms and terms terms and to the trade trade to contract forms in contrade to permit to deal deal in conpermit the require no substantive substantive changes in the standard form, but tracts which require in tracts the but form, changes merely the filling in of dates, quantities, qualities, price, of the in the of names of the dates, merely filling quantities, qualities, price, buyers and sellers, time of delivery, with all the other contract terms all and time of the other contract terms sellers, buyers delivery, with and conditions definitely standardized. conditions definitely standardized. We shall however, that that with with respect respect to it shall sec see later, to exchange contracts it later, however, exchange contracts of contracts is possible to reduce the the number of to aa single one and limit is possible to reduce limit contracts to single the changes changes necessary necessary in in each each contract merely to to the date, the the contract of of sale the sale merely the date, buyer and seller, the price. the buyer names of of the seller, and the price. Standardization of the important Standardization or Grades. of the Grades. Another of of Qualities Qualities or important functions of of the the dealers* dealers' trade trade associations, associations, in with the the functions in co-operation co-operation with other in each each commodity commodity trade, other associations is the of associations in the standardization standardization of trade, is grades or qualities-that is, the establishment of uniform grades within that of the is, grades qualities grades the general classification classification of of standard standard and non-standard. non-standard. Prior the general Prior to to this this and development, each each producer producer was forced forced to to grade grade his his own product product development, develop his own qualities qualities or or typeswhich types-which he frequently develop his frequently covered with a trade name, as as is is generally generally done in goods trade name, in the or consumer goods the finished finished or field. result, there there were were literally literally thousands thousands of and qualities field. As a result, of grades grades qualities of the various various commodities. buyer could ever that he ever be certain commodities. No buyer certain that of the receive anyone quality in in sufficient would receive sufficient quantities for the the any one uniform quality quantities for continued manufacture of quality of goods. a uniform quality of his his finished finished goods. of a Gradually, however, however, the the various various grades of each product slowly grades of product were slowly Gradually, in most trades reduced in trades to even less) narrowed down and reduced or fifty to forty forty or fifty (or (or less) . grades then then became the the recognized recognized uniform qualities qualities and all all Those grades producers to them, and type samples or specifications (repreto conformed them, producers type samples specifications (repreavailable on request. senting each grade) grade) were were always request. always available senting each These uniform grades grades were were then then so that a certain so organized certain one organized that all the basis basis (sometimes (sometimes also also called standard) grade called the the standard) became the grade and all other grades were were classed as either either superior or inferior to this basis grade. this basis or inferior to classed as other grades grade. superior the The basis basis (standard) (standard) grade is that that grade usually represents represents the grade which usually grade is .
largest proportion proportion of of the the total total largest
If it at production of it sells sells at of each commodity. commodity. If production to relation fifty cents per pound, all other types or grades are in relation to all are valued or cents fifty grades types per pound, inferior this base base price, price, the the superior grades bringing this bringing premiums premiums and the inferior superior grades grades taking discounts either above or the current base price, price, as as the current base or below discounts either taking grades for each grade. determined by by the the law of supply and demand for of supply grade. in staple the same The standardization of grades grades in standardization of staple commodities had the effect the standardization of finished producfinished goods-larger-scale as did the standardization of effect as goods larger-scale producalso deliveries also in raw material tion and lower unit costs. Uniformity in material deliveries costs. Uniformity tion lower unit for converters permitted uniformity in the qualities of finished goods. for converters finished of in the goods, qualities permitted uniformity their raw could now be assured of 3a steady could assured of steady supply grades of their supply of uniform grades
26
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
materials-and they could could reduce reduce their their prices to the the public public as materials and they result as a result prices to of large-scale production production in contrast to to job-lot job-lot production. production. in contrast of large-scale This standardization reduction in not of and reduction in the standardization of the number of of grades This grades not only greatly expanded the of trading and sharply speeded it up, it the volume of only greatly expanded up, trading sharply speeded but it the important result of bulk of tradbut it also also had the of shifting the tradthe vast vast bulk of the important result shifting the in the ing in the physical physical or or cash markets from spot merchandise, ready ready cash markets sales of of merchandise, ing spot sales delivery to to the the buyer, buyer, to to trading trading for for for immediate delivery for forward deliveries. deliveries. Previously, both both dealers dealers and converters positively refused refused converters had hesitated hesitated or or positively Previously, to buy until until and unless unless the the merchandise merchandise was at be to buy at hand and could be carefully sampled, inspected, and analyzed. That meant that producers that carefully sampled, inspected, analyzed. producers had to to assume all all market, market, transportation, transportation, and other other risks risks (except (except where they could insure with casualty companies) up to the point insure with the to they casualty companies) up point and time when they they had delivered delivered their their products products to the primary, to the often the the and, often primary, and, central, markets markets where the the larger larger dealers dealers and manufacturers manufacturers could inspect central, inspect and sample. Before standardization, speculative dealers who did from standardization, sample. speculative dealers time to to time time buy buy for for forward delivery delivery assumed much larger larger risks risks than they need assume today. today. they of grades With the the standardization grades and the standardization of the development official of official development of and certified type samples, established by the trade associations certified type established the trade associations and by samples, available to to anyone, anyone, it it now became possible possible for merchants, available for producers, producers, merchants, in and factories factories to to sell sell and buy buy for forward delivery in full confidence full for forward confidence delivery that, in the absence of occasional bankruptcy, fraud, or unintentional that, in the absence of occasional bankruptcy, fraud, or unintentional error, they they would receive receive the the specific specific grades for. As a a conseconsecontracted for. error, grades contracted quence, not only did the tempo of trade expand sharply, not did the volume and of trade only quence, expand sharply, tempo but, thereafter, thereafter, more and more contracts contracts were made for delivfor forward delivbut, less and less less merchandise merchandise had to be consigned markets eries and less eries central markets to be to central consigned to and be be sold after arrival and inspection. sold only arrival after only inspection. trade associations, associations, however, however, have have not never will be able not been and never The trade will be able to reduce reduce grades grades to to aa single type. It not suit the purposes of either It suit either to would not the of single type. purposes the producer or or the the converter to do so. be made for converter to so. Allowance must be the producer for the the converters' for various various grades grades of difconverters' demand for of each commodity, commodity, based on differences in price and such such elements varying tensile tensile strength, chemical in price as varying ferences elements as chemical strength, make-up, the uses uses to to which each grade to be be put. put. Nevertheless, Nevertheless, is to grade is make-up, and the the the commodity as we shall shall see, to reduce able to reduce see, have been able commodity exchanges, exchanges, as a to exchange trading to a single grade or, at the option of the trader, to aa at the of the to or, trader, exchange trading single grade option contract many, if if not not all, all, standard are deliverable contract under which many, standard grades are deliverable grades exchange contract; contract; for for the the purpose under a single function of of trading single exchange purpose and function trading on the the exchange exchange market is not to to deliver take delivery of the actual or deliver or or take of is not the actual or delivery physical merchandise, to offer insurance against market and credit but to offer insurance credit against physical merchandise, risks to desire to to shift risks. As will later, shift such risks. risks those who desire to those will be explained explained later, has also the commodity exchange has also able to perform other functions been to the able other functions commodity exchange perform which were not not possible possible for for trade trade associations associations on the physical markets. the physical markets.
(
CHAPTER
CHAPTER
II 11
)
The Economic Functions Functions of of Commodity Commodity Exchanges Exchanges
Fairs in the Fairs and market places, places, as as we have have seen, existed in the Middle Ages. seen, existed Ages. until they established in England and on the Not until were in established the Continent did Continent did they England
trade trade between nations nations spring spring into into full full flower. in form, flower. The fair, form, fair, changed changed in has has continued to to the the present present day. Its original major function was to to Its day. original major contribute to to place place utility; utility; that that is, is, it to which goods goods it constituted a center contribute constituted a center to
flowed from distant distant parts parts and foreign foreign lands-goods without the flowed lands goods which, the which, without fair, would never never have been shipped shipped from their production centers. their production centers.
fair,
is not direct ou of the commodi ty exchange exchange is not aa direct tgrowth of The modern commodity the outgrowth fair, but it it serves the same purpose purpose and function with regard to time to serves the regard that that the the medieval medieval fair fair served served with with regard regard to place. In In medieval society to place. society in job job lots, lots, largely prices, for goods were manufactured in at fixed fixed prices, for goods were largely on order at industrial society both the producer of staple trade. In modern industrial of custom trade. the society producer staple the manufacturer to to aa great extent produce standardcommodities and the great extent produce standardized products for large domestic domestic and foreign before sale. sale. Although Although for large ized products foreign markets before large~scale production manufacturing for such markets greatly and for have scale manufacturing greatly large production raised living standards provided better better and better at lower at better qualities standards and provided lower raised living qualities lower prices prices to to the the consumers, have introduced introduced risks risks arising and lower consumers, they they have arising factor. When from the time factor. any commodity, durable, is chiefly however time is the durable, any commodity, chiefly for into produced for later sale or purchased for conversion into consumer goods later or sale for purchased goods produced there is in aa free free economy economy an inevitable inevitable risk risk of unfavof an unfavis in months later, later, there are being orable price price change change during the time time the the goods being produced produced or or orable goods are during the are held for for later later sales sales in in converted converted form. are held have already already considered considered the the constructive the constructive developments of the We have developments of in organized commodity markets in staple commodities before the advent before markets the staple organized commodity of the the' commodity exchange. This institution to satisfy satisfy institution was designed of designed to commodity exchange. certain needs of these markets: markets: to to make them more efficient efficient and effective; of these certain needs effective; in markets primarily, to afford to all in the physical markets-the farmer, all operators to the afford to farmer, physical operators primarily, manufacturer means which the dealer, and the converting manufacturer-means by they the the dealer, could, by they could, converting effects of price disastrous effects if they they so chose, insure against the the disastrous insure against so chose, if fluctuations; price fluctuations;
fair,
j
27 27
~8 28
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
to assure the operators that, when they price, the the and to or sell at a sell at a price, assure the buy or operators that, they buy fail and fail at at the the contract contract price price
merchandise will will be delivered without delivered without merchandise
in full that all all deliveries will be be paid paid for for in without risk risk that full at at contract deliveries will contract time time without of default by by either either buyer buyer or or seller, seller, regardless regardless of the insolvency of default of the of either either insolvency of party after the making of the contract. of the after the contract. making party
The Exchange Exchange Market. Market. To effect these fundamental objectives, effect these the objectives, the exchange is organized (in addition to, and not in replacement market is addition in not to, exchange organized (in replacement of, the physical physical market) market) to to provide provide a new auxiliary the market. In the of, the auxiliary market. exchange market the the operators their agents or their at a a comexchange actually meet at operators or agents actually center and, through the machinery of the exchange, trade excluof mon center the the trade excluand, through machinery exchange, for future future delivery sively (as aa rule) rule) in in contracts contracts for of the in the commodity sively (as delivery of commodity in specific months. specific the physical In the physical market the the great of transactions, since the the transactions, since great volume of in contracts standardization of qualities qualities and contracts, contracts, is forward standardization of is also also in contracts for for forward It will delivery commodity. It will be recalled, that operators of the the commodity. recalled, however, however, that delivery of operators in the at a in physical market as a rule rule do not not meet at a common trading trading center. the physical as a center. Their transactions are made mostly mostly by telephone, telegraph, cable, or transactions are by telephone, telegraph, cable, or mail, mainly through brokers brokers or or commission agents. they trade trade mail, mainly through agents. Although Although they in both in both spot forward deliveries, the details of their transactions are and of forward details their the transactions are deliveries, spot not publicized, for for they they are not be disclosed without are confidential confidential and may not not publicized, be disclosed without may consent of both both buyer buyer and seller. seller. consent of The two markets markets have have interlocking many dealers dealers and interlocking memberships; memberships; many converters who operate operate on the the physical physical markets converters are also also members of the markets are of the exchange market. In the exchange market, however, there are in addimarket. In there are in the addihowever, market, exchange exchange tion many professional professional risk-bearers risk-bearers or into or speculators, a great tion a great many speculators, brought brought into the to make possible possible the the transfer transfer of of credit credit and market risks risks the market to to insure them to others are willing insure against to who are from those others those who want to against willing ,iV and able assume them them-the in the ~I' 'n I~.I: I control in the who control able to to assume the speculators speculators large capital funds funds and are are geared machinery for for into the the exchange geared into exchange machinery large capital that purpose purpose as as risk-bearers. risk-bearers. that two markets markets are are distinct performs distinct The two distinct and separate. distinct separate. Each performs and separate functions, through similar yet different techsomewhat similar different techyet separate functions, through niques, and each is is necessary necessary to to the the other in order the producer, producer, order to to serve serve the other in niques, the public interests efficiently. the and the interests the consumer, consumer, efficiently. public Place of of the Exchange in Distribution. The commodity in Distribution. Place the Commodity Commodity Exchange commodity exchange is not a direct link in the distributive system. In the flow in a direct link the is the distributive flow of of not system. exchange goods from from the the fields, mines, and forests the the consumer and from the forests to to the fields, mines, goods the producer to the converting manufacturer, the exchange does not serve does not serve to the manufacturer, exchange converting producer as aa conduit. is rather rather an auxiliary auxiliary organization, to facilitate It is conduit. It facilitate as organization, designed designed to the operations of the distributive of the physical markets in distributive system of of the the the operations in markets system physical several important respects. several important respects. ;i
<
Functions of of Commodity Exchanges Economic Functions Commodity Exchanges
29 29
In trade trade parlance, parlance, the the exchange is known as as the the exchange, conexchange market is exchange, conor futures market, whereas whereas the the physical market is confusingly called tract, or futures market, is called physical confusingly the spot or cash cash market. market. Though Though both both deal deal extensively the in forward delivforward delivspot or extensively in markets trade in eries markets trade in spot transactions, most exchanges eries and some exchange transactions, exchange spot exchanges offer facilities facilities only for futures trading. Grain exchanges offer futures trading. offer both. both. only for exchanges offer The chief chief services of the the commodity commodity exchange in its its affording services of lie in a exchange lie affording a of insurance against the the risk risk of of adverse price fluctuations, in insurinsurmeans of insurance against adverse price fluctuations, in ing deliveries deliveries at at contract time and payments contract time at contract contract price ing payments at price against against in making default, making stocks of commodities both liquid and mobile, stocks of default, and in mobile, liquid thereby rendering rendering financing lower. It easier and costs of distribution costs of It distribution lower. financing easier thereby services by a broad and continuous performs these by affording these services continuous market performs affording a the commodity or on which the commodity may may always be bought or sold for be for future future delivery sold always bought delivery at at aa moment's notice notice at at aa relatively relatively stable linking together together stable price. price. The linking of the the principal principal world world markets markets by by telephone, telephone, telegraph, radio, and cable of cable telegraph, radio, in market all focuses in these central places all available economic factors focuses these central available factors and places other influences bearing on prices. prices. other influences bearing of the The breadth breadth of the market and the the close the of the close interrelationship interrelationship of in the exchange physical markets, markets, dealing dealing in the same commodity exchange and physical throughcommodity throughout the the world, world, make certain that every every factor certain that out factor which can be reasonably reasonably in the the current current prices prices of anticipated will be be reflected reflected in of the the commodity. commodity. Wideanticipated will of commodity commodity prices, prices, registered various futures spread publication of futures registered on various spread publication all exchanges and reflecting the best opinion of many traders of all kinds, the of best of traders kinds, exchanges reflecting many opinion serves guide in in the the establishment both spot a guide of prices of both serves as as a establishment of prices of spot and forward deliveries the physical physical markets; markets; the the wide range range of of grades deliverable deliveries on the grades deliverable all supply exchange contracts contracts makes exchange exchange prices prices representative of all on exchange representative of supply their trend trend is indicative of is indicative of current current opinion and demand factors; factors; and their opinion regarding the future outlook. outlook. the future regarding Finally, the the exchange regulates organized to prevent prevent so as as to Finally, exchange regulates organized speculation speculation so abuses and assure assure that that it it will will be conducted conducted under just just and equitable equitable abuses rules to serve the public public interest. Its standardization standardization of of contracts contracts and interest. Its rules to serve the of grading, weighing, inspection promotes uniformity in methods and of promotes uniformity in inspection grading, weighing, of the the exchange trade dealings, the regulatory regulatory function function of is reflected reflected trade exchange is dealings, and the in its its self-imposed rules regulations, which are enforced by disciplinenforced are and in rules by disciplinregulations, self-imposed in its arbitration of ary action, and in of exchange of disputes out of its arbitration arising out exchange disputes arising ary action, contracts. contracts. the exchange of the the economic functions of the at functions of A general exchange at general description description of this will be be aa sufficient indication of the advantages advantages which proof the this stage sufficient indication prostage will its existence. existence. ducing; distributing, consuming groups obtain from its and consuming groups ducing, distributing, in detail later. detail later. These various various advantages advantages will will be considered considered in These of commodity commodity exchanges may be summarized functions of The economic economic functions exchanges may be five heads: heads: broadly under five broadly tract,
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
go
1. 1. THE INSURANCE FUNCTION (a) The exchange provides liquidity relative price exchange provides (a) liquidity and relative stability price stability through a continuous market, possible because a broad and continuous made market, through possible because of large funds speculative capital not otherwise available. otherwise of large funds of of speculative available. capital (b) The machinery of the exchange proof the establishes a means of of promachinery exchange establishes (b) tection those desire it) against adverse price changes tection (for those who adverse desire (for it) against price changes through aa process process known as hedging-an that as hedging an insurance insurance device device that through is available to all all producers, producers, traders, traders, and converters. available to is converters. (c) machinery of the exchange clearing house furnishes to all of the all The furnishes to machinery exchange clearing (c) buyers sellers of exchange contracts a sure of a of and of method sellers sure exchange contracts buyers at contract guaranteeing that that both deliveries paydeliveries at contract time and payguaranteeing 1 of therefor at contract prices will be made,l regardless ment therefor will at contract made, regardless of prices in contract is changes in market prices prices after after the the contract is made and regardregardchanges at less the insolvency insolvency of party at time of of less of of the of either either contracting time contracting party under delivery the contract. the contract. delivery
2. 2. THE
FINANCING FUNCTION
(a) the ready ready transferability transferability of standof stand(a) A continuous market and the ardized commodities by by means of warehouse receipts of negotiable ardized negotiable receipts of liquidity. give the commodity commodity aa high high degree liquidity. degree of give the is an encouragement (b) Liquidity Liquidity of of the the commodity commodity is to more encouragement to (b) liberal loans by by bankers bankers and is to them. is a to them. a safeguard liberal loans safeguard (c) Ability to finance commodities readily to insure insure against readily and to against (c) Ability to finance adverse price changes changes or or defaults prodefaults on contracts adverse price contracts enables enables producers, dealers, manufacturers to operate successfully manufacturers to and ducers, dealers, operate successfully on smaller profit margins margins to to the the benefit benefit of the consumer. of the smaller profit
3. THE PRICE REGISTRATION FUNCTION
3.
of markets cable (a) Joinder Joinder of markets by by telegraph, telegraph, telephone, telephone, radio, radio, and cable all price price influences exchange; all focuses all the commodity influences on the focuses commodity exchange; all in (domestic foreign) futures markets in the same commodity and futures markets the commodity foreign) (domestic are thus thus linked linked together together and made one broad world market. are presence of a large risk-bearing speculation (b) of a of risk-bearing speculation large volume of (b) The presence insures that that every every known influence bearing upon upon prices prices will influence bearing will insures be given given careful weight. careful consideration consideration and weight. be (c) Interpretation of by producers, manufacturers, of news dealers, manufacturers, by producers, dealers, (c) Interpretation and speculators assures a degree of anticipation of future a assures of future anticipation of degree speculators trends and events that would not not otherwise otherwise be possible. events that trends possible. (a)
4. 4. THE PUBLICITY AND INFORMATION FUNCTION (a) Exchanges Exchanges gather gather from all all available public available sources sources and make public (a) 1 As will will be be developed developed in in Chapter VIII, under exchange rules, there are certain certain there are J-As exchange rules, Chapter VIII, the deviations exact emergency conditions permit certain specific deviations from the exact terms of terms of which certain conditions emergency permit specific exchange contracts. contracts. exchange
Economic Functions Functwns of Exchanges of Cummodity Commodity Exchanges
31
in in
an unbiased manner statistics potential statistics of of present present and potential supply, transportation, current current consumption, desupply, transportation, consumption, and potential potential demand which are are useful useful in in estimating price trends changes. trends and estimating price changes. (b) Daily publication publication throughout throughout the record of the world of of the the record of volume (b) Daily and prices prices of of all all exchange transactions in in contracts contracts for for future future exchange transactions informs all delivery informs all interested parties, not only of present interested not of delivery parties, only present prices, but also of the the future trends. also of future trends. prices, On the (c) the basis basis of of widespread widespread publicity of all all futures futures quotations, (c) publicity of quotations, dealers, producers, producers, and manufacturers manufacturers are are enabled to to make dealers, their their purchases purchases and sales higher degree of certainty sales with a higher of degree certainty and confidence. confidence. 5. THE REGULATORY FUNCTION 5. (a) Exchanges gear gear large large speculative their of capital into their (a) Exchanges speculative funds of capital into insurance insurance machinery machinery and regulate regulate speculation so as to prevent to so as speculation prevent for its abuses provide for lines in in the the abuses and provide its conduct along along orderly orderly lines public interest. interest. public or "basis" (b) Exchanges Exchanges develop develop uniform or which, with with "basis" contracts contracts which, (b) their of inspection, weighing, and grading, their standards standards of contribute inspection, weighing, grading, contribute to the the certainty, of to certainty, efficiency, and uniformity of practices in efficiency, uniformity practices in each trade. trade. each (c) Exchanges Exchanges establish enforce, usually usually through establish and enforce, through compulsory (c) compulsory arbitration procedures, procedures, rules rules and regulations regulations governing governing the the arbitration settlement of all all disputes disputes arising out of transactions on the settlement of of transactions the arising exchanges, thus thus providing providing quick, efficient settlesettleexchanges, quick, cheap, cheap, and efficient by experts, without the for recourse to the courts; without the need for ments by recourse the to courts; experts, they to maintain maintain the the ethical busicodes to ethical conduct of of busiestablish codes they establish ness by by their their members and enforce these through through their their own enforce these ness sanctions penalties. sanctions and penalties.
The Risks Risks of of Modern Industrial Industrial Society. The growth the cenover the cengrowth over Society. of the maritime trade, trade, attended by by the the manifold perils perils of the sea, maritime sea, led the development development of by Genoese merchants in in of marine insurance insurance by to the led to the Middle Ages. Ages. This is is the the oldest it oldest form of as we know it of insurance, the insurance, as bears in today, and the marine policy still bears traces of its historic origin in the still traces of the its historic the origin today, policy as modern industrial quaint language of its clauses. Just as society clauses. industrial of its society has language Just quaint in complexity, so risks increased and insurance has spread increased risks have so increased increased in spread complexity, into new areas, moving from fire risks to hail, tornado, hurricane, to fire risks into hail, tornado, hurricane, and areas, moving many other hazards. Casualties were too too remote to to be considered Casualties which were other hazards. many a are now within the as subjects for insurance a generation or less ago are the less insurance for as generation ago subjects that realm of probability to such extent that prudent producers, merchants, to an extent realm of probability prudent producers, merchants, of carrying manufacturers would not not think think of their enterprises and manufacturers carrying on their enterprises is as available. without such protection as is available. such without protection of turies of turies
32 32
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
Yet none of of these these casualties is so so likely to occur as as another more comcasualties is Yet likely to of adverse fluctuation in prices mon form of business riskthe risk-the risk risk of adverse fluctuation prices of of business losses to raw materials materials and finished finished goods, entailing heavy heavy losses producers, to producers, goods, entailing dealers, manufacturers, and others not wish wish to in others who do not to speculate dealers, manufacturers, speculate in such goods. goods. The commodity commodity exchange exchange is not an insurance faciliits faciliis not insurance company, company, but its ties provide provide aa means of of protection protection against the ever risk of of ever present ties against the present risk unfavorable price price changes. changes. The most important function of the exof the exunfavorable important change is the provision provision of facilities for the technical technical for insuring of facilities is the or, in the insuring or, change language of the trade, "hedging" crops, inventories, purchases, sales language of the trade, "hedging" crops, inventories, purchases, or sales of against the the risks risks of of speculative of losses. The subject of a a commodity speculative losses. commodity against subject of hedging is in detail elsewhere, with full explanation of the use in full of is discussed the use discussed detail elsewhere, explanation hedging of the the hedge hedge by by all of market operators. of all classes classes of of operators. The main function of to hedging is to insure normal profits to producers, merchants, and manuprofits hedging is to insure producers, merchants, facturers who do not not wish wish to to speculate losses that that are facturers or to to minimize losses are speculate or already threatening. be by stabilizing the price of the can This be the of the done already threatening. by stabilizing price commodity through hedging hedging operations operations on the the exchange. commodity through exchange. insurance by by hedging hedging is is possible the exchanges Successful Successful insurance possible only exchanges only because the provide a continuous, continuous, broad, broad, and solid solid market. market. In any provide any market where prices might might be subject subject to to sharp changes between sales, hedging would sales, hedging prices sharp changes be impossible. impossible. If thin that large If a a market were so that a a single be so thin order could single large order substantially the price, price, the the placer a hedge hedge would always influence the of a substantially influence placer of always operate under aa handicap. handicap. Because Because exchange prices change operate exchange prices change constantly, constantly, but in small gradations, gradations, and because because futures large aa futures markets focus focus so so large trading that that large large operations exert little influence on price, volume of trading exert little influence operations price, the hedge hedge can be used successfully. the successfully. Furthermore, the the fact fact that that the the market is is continuous continuous is is an insurance insurance Furthermore, the risk of unsold against the risk of inventories of materials. dealer in or inventories of raw A dealer in materials. or against a a converter converter of wheat, cotton, rubber, sugar, and cocoa may not be able of wheat, cocoa not able be cotton, rubber, sugar, may to sell at to sell at aa profit, profit, but his his goods never be left unsold; the left unsold; the exchange goods need never exchange market makes them liquid. liquid. He can at his losses by hedging. hedging. at least least minimize his losses by He has an active, active, ever ready market, market, functioning daily, will not not ever ready which will functioning daily, absorb only as large a stock of goods as wishes to unload, but also as of stock as he wishes to also unload, only large goods for insuring insuring or hedging hedging his afford afford him facilities facilities for his sales sales or or purchases, purchases, already already made for delivery on the the physical physical market. for forward delivery market. The growth, the handling, handling, and the the storage cotton, and the the equalization equalization of cotton, growth, the storage of of of the supply to meet mill mill requirements requirements from month to between crops, crops, to month between supply to involve involve a protracted protracted period period of of financing many variations variations of price and of price financing with many changes of ownership. During this this carrying carrying period the anticipation of future future changes period the ownership. During anticipation of to the prices is is of of almost as as much importance importance to the cotton world as as are are cotton and textile textile world prices as merchant, current prices. prices. The person person whose business business as merchant, as manufacturer, or current as manufacturer, or as as indirect financial financial interest banker necessitates necessitates a direct direct or indirect interest in in spot cotton at at banker spot cotton
Functions Economic Functions
of
of
Commodity Exchanges Commodity Exchanges
33 33
current prices prices may may wish wish to to find find aa means of himself against change of protecting a change against a protecting himself in in price price before before his his commitment terminates. terminates. The person person whose business business necessinecessitates the the making making of involving the the procurement procurement of cotton at tates of engagements of cotton at some engagements involving is likely to be even in future time time is to interested in the future price of cotton more interested future the of cotton likely price than in its present price, and such in its such a person may be eager to protect himself at a to be himself at eager present price, person may protect once (for (for example, example, because because of of sales of textiles textiles for for forward delivery) as regards sales of as regards delivery) the at which his the price price at his future future supply supply of to be be obtained. 22 is to of cotton is
It should be recalled, recalled, however, however, that that operators to aa limited limited degree, can, to degree, operators can, sell or or buy buy forward forward deliveries the physical prices at fixed sell deliveries on the fixed prices physical market at in that limit their price risks. risks. Nevertheless, Nevertheless, in that case there is is no guarand so their price so limit case there guarthat at anty at contract time the the seller will be able to make delivery the able to contract time seller will or the anty that delivery or buyer to to pay pay for for the the delivery contract price. at contract is no protection, buyer delivery at price. There is protection, in either party, as there in other other words, words, against against the the insolvency insolvency of party, as there is is on of either house the exchange markets through through the the exchange clearing guaranty. the exchange guaranty. exchange clearing Furthermore, there there is that sales purchases can be made is no assurance assurance that sales or or purchases Furthermore, in in volume on the the physical physical markets markets at the desired time, for these at the of these desired time, for most of markets are not so active, broad, broad, or or liquid liquid as markets. so active, as the the exchange markets. are not exchange The Exchange Exchange Market as as aa Guarantor of Deliveries (at Contract Time) of Deliveries (at Contract Time) All of Payments Payments for for Deliveries Deliveries (at Contract Price). All sales and purand of sales (at Price) purchases made on the chases the modern exchange exchange market and cleared cleared through the through the exchange clearing house, an institution institution affiliated with, but but operated as affiliated with, exchange clearing house, operated as independent corporation, corporation, separate separate and distinct the exchange, an independent distinct from the exchange, are guaranteed by the the clearing house. In other words, the are other words, the clearing clearing house guaranteed by clearing house. guarantees to every buyer on every that he will, if he so contract that cleared contract so will, if guarantees to every buyer every cleared desires, receive the the merchandise merchandise contracted the proper proper contract for at at the contract contracted for desires, receive time and in in like fashion guarantees to every that he will receive like fashion will receive time seller that guarantees to every seller payment at at the the contract price when he makes delivery. as contract price guaranty, as payment delivery. This guaranty, in our our later later study of the clearing house system, is so prois of so shall see the we shall see in study system, clearing protected that that there there never never has has been and in will be be aa all probability in all tected never will probability never default on such guaranties. guaranties. They by various various devices default are safeguarded devices They are safeguarded by and sanctions default as as anything can in as be in sanctions which make default as impossible anything impossible this uncertain world. this uncertain world. insures the exchange clearing house, therefore, therefore, in effect, effect, insures the buyer buyer The exchange clearing house, and seller of all contracts, cleared through the exchange all exchange seller of cleared the clearexchange contracts, through exchange clearing house, against the subsequent insolvency of either buyer or seller seller ing house, against the subsequent insolvency of either buyer on all all cleared cleared contracts. contracts. Contrast this this invaluable protection with the invaluable protection the or sell risks by those those who buy buy or sell for on the physical risks assumed by for forward delivery the delivery physical markets. a farmer sells at $2.00 bushel to to a flour flour mill sells wheat at mill for markets. If If a for $2.00 a bushel delivery six later, it is quite possible that before the delivery that six it before months is the later, delivery delivery quite possible date the mill may may become insolvent insolvent and unable to pay for date to pay the mill for the the wheat a loss at time. The farmer then then may may be forced to resell resell at loss on forced to at a at delivery delivery time. It
.
22
1st Session, The Cotton Trade, I, p. p. 103. Part I, 68th Congress, Senate Document 100, 103. Session, Part 100, 68th Trade, Senate Congress, 1st
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
34 34
the market, market, which has has declined declined meanwhile the
to, bushel. The a bushel. to, say, $1.50 a say, $1.50 reverse situation may also the farmer delivery situation may also arise; reverse farmer may default on delivery arise; the may default at thereby forcing the mill to rebuy the on aa rising rising mill to the at contract wheat contract time, the time, thereby forcing rebuy market at higher price and hence at a loss. at a a substantially at a loss. hence substantially higher price Exchanges Make Commodities Liquid. Liquid. A distinguished distinguished authority authority on Exchanges produce markets has aptly described one phase of the work of commodity the markets has described of of commodity produce aptly phase 3 exchanges by saying that they give commodities the element of mobility.3 that of commodities the they give mobility. exchanges by saying of fixed definite grades has introduced greater fixed and definite The establishment establishment of grades has greater certainty uniformity of qualities in commodity trading. The existence in and of existence uniformity certainty commodity trading. qualities of warehouses, which store the goods of licensed licensed and bonded warehouses, store the issue goods and issue negotiable receipts, receipts, provides provides buyer buyer and seller seller with with an instrument which negotiable hand passes title to without actual delivery goods. from hand actual of the title to without the goods. delivery of passes is Although the exchange alone is not responsible for the standardization alone not the for the standardization exchange Although responsible of contracts or for the the development of grades or for instruof negotiable grades and contracts negotiable instrudevelopment of ments, as have seen, broad and swift-moving stimulates its broad market as we have stimulates seen, its ments, swift-moving in turn their widespread widespread use; use; this this in turn encourages trading of trading their encourages a larger larger volume of and makes for for a greater greater liquidity liquidity of of commodities. to which market, to producers, manufacturers, and A 'large market, dealers, manufacturers, -large producers, dealers, makes contract unit speculators converge, a contract for a unit of aa commodity that is for is of commodity that speculators converge, dealt in on aa futures futures market comparable to a stock a coupon stock certificate certificate or or a dealt in comparable to coupon in respect respect to to the the readiness readiness with with which title title can be be transferred or transferred or bond in loans can be be readily readily secured. secured. On liquid liquid stocks traded of commodities traded loans can stocks of exchange markets markets the the commercial banks naturally lend aa greater greater on exchange naturally lend than proportion of their value on those which are less liquid their market value those are of less proportion liquid because they are not subject to exchange trading. to are not because they exchange trading. subject As security for aa loan, the value value of with less less of liquid as compared loan, the security for liquid as compared with liquid commodities is the as the relative value of 100 shares much the same as the relative 100 is of commodities value shares liquid of Corporation stock, stock, listed listed on the Steel Corporation the New York Stock Stock of United States States Steel Exchange, 100 unlisted shares of a small and little-known unlisted shares a small 100 of and little-known manuExchange, facturing company. company. The small corporation may may be as financially small corporation as sound financially facturing as the industrial giant, but, because its shares do not possess because its shares a ready as the industrial giant, but, ready possess a market, the of its unlisted stock is unable unable to to borrow as a its unlisted stock is as high the owner of market, high a the value of proportion of its current value as can the owner of States Steel as United States current Steel its of proportion in the stock. parallel is is found in the real real estate estate field. field. Loans on apartstock. Another parallel apartbuildings, and residences residences in good locations ordinarily locations office buildings, ment houses, houses, office good ordinarily are made for for aa higher higher proportion proportion of of their than loans loans on their market value than are theaters, garages, garages, clubs, clubs, or similar special-purpose special-purpose buildings buildings which have have or similar theaters, aa more limited limi ted and restricted restricted use. use. Profit Margins Margins in in Distribution Distribution Are Reduced. In any field of of business business any field Profit in higher the risk risk element results in higher prices prices to the consumer. In In corto the element always corthe always results BS. 8S.
s. S.
in American Produce Exchange Huebner. in Exchange Markets (Philadelphia: Huebner, (Philadelphia: American
11. Academy of of Political Science. 1911). Social Science, Political and Social 1911), p. p. 11. Academy
Economic Functions Functions of Exchanges Economic of Commodity Commodity Exchanges
35 35
porate finance finance the the first first mortgage mortgage bondholder assumes relatively relatively little little porate risk and may may obtain a fixed fixed return return of 4 or per cent. cent. Second-mortgage or 5 5 per risk obtain a of 4 Second-mortgage investments involve involve greater risks to to lenders first-mortgage money money lenders than first-mortgage investments greater risks and command larger larger returns. returns. The holder holder of preferred stock shares the stock shares the of preferred risk of though he he enjoys enjoys precedence holder of the holder of over the of ownership, risk and, though precedence over ownership, and, stock in the payment payment of of dividends dividends and the the distribution of assets, in the distribution of common stock assets, the fixed fixed rate rate of of the the preferred preferred dividend dividend may may yield yi~ld aa higher the higher return than that of bondholder. The owner of of common stock stock assumes the the highest that of the the bondholder. highest a degree of risk, and his profits-if the enterprise is a successful one-may if is successful his of the risk, onemay degree enterprise profits be unlimited. unlimited. be Similarly, in the the commercial field, the greater risk of the dealer, dealer, of the the risk field, the Similarly, in greater the producer, or manufacturer, the wider be his margin of profit. or must be his of the wider manufacturer, margin producer, profit. Let us assume that, that, in in business business A, A, experience over the years has shown that has that us the over years experience an average average of of 25 25 per per cent of goods, goods, stocked resale, will unsold will remain unsold cent of stocked for for resale, at cut at the end of of the the season season and must be cleared In enterprise cleared at at the cut prices. prices. enterprise cent of of its It requires B, 100 per per cent its stock stock is is sold. sold. It mathematical demonB, requires no mathematical stration to indicate indicate which proprietor, proprietor, in in order to avoid bankruptcy, bankruptcy, stration to order to unit he must obtain aa larger margin of profit on each unit sells. In every of sells. larger margin every profit the or mercantile field, the margin of profit on perishable goods or goods affected of field, margin goods affected profit perishable goods of style by changes wider than than the the profit profit margin margin on staple by style must be wider changes of staple articles. articles. The operator rid himself himself of the risk to price price change of the risk incident incident to operator who can rid change can afford to do business business on aa far far smaller margin of profit than than one who afford to of profit smaller margin cannot shift that risk. risk. In every every phase phase of the sugar of the or grain shift that market, where sugar or grain market, insurance by by hedging hedging is is widely widely employed, this condition exists. insurance this condition exists. The employed, elevator owner or or the the miller miller or or refiner refiner can protect hedging elevator himself by by hedging protect himself his purchases purchases of sugar or his forward sales his of wheat or or raw sugar or his sales of flour or of flour or refined refined much is a smaller spread here between the sugar. Consequently, there is a smaller there here the spread sugar. Consequently, price paid paid by by the the consumer and the the price price paid the producer producer than than is is to to price paid the be found in in any line hedging is not possible. Similarly, the price be line where is the any hedging possible. Similarly, price received by by the grower is nearer the paid by by the the textile textile cotton grower is nearer the price the cotton received price paid if cotton manufacturer than than would be be possible, possible, if not proprocotton operators manufacturer operators could not the tect themselves themselves by by exchange operations from the and credit market tect credit exchange operations risks involved in price changes. changes. in price risks involved A statement before the the Joint Congressional Committee on the statement before the EcoEcoJoint Congressional Report (December 1947) expresses clearly the many benefits to nomic Report the benefits to (December 1947) expresses clearly many farmers' co-operatives to to be be derived derived from the use of exchanges farmers' co-operatives the use of the the grain grain exchanges purposes: for insurance for insurance purposes: is Roy D. My name is My position position is General is that that of of Secretary My Roy D. Crawford. My Secretary and General of the Union Manager of the Farmers Jobbing Association-a terminal co-operative Association a terminal Manager Jobbing co-operative marketing purchasing agency by farmers. 250 controlled by farmers. Some 250 marketing and purchasing agency owned and controlled local co-operative local associations comprise these local local assoassoco-operative associations membership, and these comprise our membership,
36
Commodity Exchanges and Futures Trading and Futures Trading Commodity Exchanges
ClatlOns are are in in turn turn ciations
owned and controlled themselves. controlled by the producers by the producers themselves. My interest, and that that of of my my organization, organization, is behalf of of farmers is to to secure secure on behalf farmers My interest, the lowest possible possible marketing marketing cost cost for their products. products. We are the lowest for their interested in in the the are interested it affects as it the marketing marketing system the grain grain industry industry grain futures futures market market only only as affects the of the grain system of the public and the public welfare. welfare. We have have no interest interest whatsoever whatsoever in in the the futures futures market handling speculative from the the standpoint of commissions received for of commissions received for from accounts. handling speculative accounts. standpoint Our Association does not not accept such accounts. The futures market of the such Association does accounts. futures market of the accept in grain exchanges-in our case principally Kansas City and to some extent case Kansas to extent grain exchanges City principally in the Chicago-are vital cogs cogs in the marketing marketing machinery machinery of present distributive of the the present distributive Chicagoare vital use in disposing of the farmers' grain .... which we use in system of the farmers' grain. system disposing Future Future markets markets meet meet aa vital vital need need in in the the marketing marketing of of farmers' farmers' crops. crops. To function efficiently efficiently as hedging medium, medium, it it requires volume-constant volfunction as a a hedging constant volrequires volume umeto for hedging ume-to permit permit its use for hedging or or price price insurance by either producers or its use insurance by either producers or It consuming interests. It is almost universally agreed that our present marketing is almost interests. that universally agreed consuming present marketing machinery puts our our farmers' the channels of a farmers' grain of distribution distribution at at a through the grain through machinery puts but than any other commodity or merchandise-but I lower distribution cost than other or merchandise I lower distribution cost am any commodity in the fluid and liquid such in the absence of a fluid futures convinced that that it it would not not be be such of a liquid futures market. ever been which market. No substitute has ever offered could promise a near near has offered substitute system system promise a in to its a market. a approach to its in a free market. Our marketing system requires a marworth free marketing system requires approach all times times to to absorb wishes to ket which stands stands ready ready at the farmer wishes to sell, ket which at all absorb what the sell, he wishes wishes to to sell sell it it-not just when flour happen to to be in in the the not just flour mills mills happen whenever he market. Conversely, the the flour flour millers millers want aa fluid price protection protection fluid market for for price market. Conversely, at given moment moment-not just when the the farmers in aa selling farmers are are in not just at any selling mood. Such any given and selling properly to reflect sustained year-round buying reflect sustained to volume year-round demand selling buying properly must be be able to marshall marshall all elements and categories of our economy all elements able to of categories economy which bear in in taking taking aa share share of this risk burden. . . . can be be brought brought to risk burden. of this can to bear It the speculator gives to to our markets markets breadth breadth and liquidity. is the It is liquidity. Animated speculator who gives risks his to his judgment judgment on by the profit motive, the speculator risks his money to back his money by the profit motive, the speculator the future course of of prices, prices, and in in doing the gap this he voluntarily the future course bridges the doing this voluntarily bridges gap in a buying demand in way that achieves between selling selling demand and buying a way that no one else else achieves between . . If it is necessary that find some one interest, interest, or for the market. market. .... that we find If it or some is necessary for the at few interests, ,that may be be willing willing to to sell hedges) to us sell these these futures futures (or to us that may few interests, at our (or hedges) with a interest price-if have to try to up our buying interest a specific selling match our to if we have to buying try up specific selling price find it it difficult difficult or impossible interest on the the other side-we may well well find impossible to to accomother side we may interest be if trade at any given time. This be the case frequently, if in the pUsh this the case time. would trade in the this at frequently, any given plish in like futures markets were confined to those, like ourselves, engaged in specific operto confined futures markets those, ourselves, engaged specific operwaiting for ations against of wheat. wheat. If If we had to stand by, to stand ations for by, waiting against specific specific quantities quantities of quantity of hedges to Ito be be available available at the right price, we should the right right quantity at the of hedges should either either the right price, the opportunity to do the stand the chance the business, of losing or we stand the chance of business, or losing entirely entirely the opportunity to that should be forced forced to to quote a price for our that sufficierutly high wheat would be a for should be quote price sufficiently high to protect protect us us against against the the risk risk of any foreseeable foreseeable market movement. In In ~uch of any such an to event the distributive in the Ithe grain cost in distributive cost event the business, which II mentioned earlier, earlier, grain business, increased tremendously. would immediately immediately be be increased tremendously. Where we now do business business on margins margins of of onetwo- and three three cents cents per per bushel, then be forced forced one two bushel, we should then cents per to compensate or fifteen cents to margins of of five five- tenor fifteen the ten for the take margins to take per bushel to compensate for .
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Functions of of Commodity Exchanges Economic Functions Commodity Exchanges
37 oft
risks involved. A futures of that that character be of to futures market of character would be of little little service service to 4 4 those II represent. represent. those
risks involved.
The statement of Herman F. F. Skyberg before the the same Joint Skyberg before Joint Committee on the the Economic Report Report shows the the value of the exchange to the the small of the small exchange to country grain elevators of the country: of elevators the country grain country: of the President of .... . . II am President the Farmer Co-operative Co-operative Marketing East Association at at East Marketing Association Grand Forks, Forks, Minnesota. Minnesota. II have have been been aa member of the Board of Directors of of the of Directors of that Association for twenty-five of its that Association for twenty-five of years, and its its president president its twenty-seven twenty-seven years, seventeen years. seventeen years. frequently own the the elevator grain on top During the harvest harvest rush rush we frequently elevator full full of of grain During the top in of that is that is in the cars its way to market, which is as the grain box cars of the on its as much as the to which as is market, grain way at some times. times. We cannot with aa capital capital of another bushels at another 30,000 cannot afford, of 30,000 bushels afford, with take chances to take chances on the the price price going of wheat. wheat. $50,000, bushels of 100,000 bushels $50,000, to going down on 100,000 If it it would wipe out it If it went down 25 cents aa bushel, bushel, it half our capital, and, if it 25 cents half out wipe capital, and, if went down 50 50 cents cents aa bushel, bushel, we should should be be broke broke on 100,000 bushels. 100,000 bushels. With the the present present marketing marketing system to have protection not have have to system we have protection and do not fast as as our our manager manager buys buys grain from members, he sells futures carry risk. As fast this risk. sells futures members, he grain from carry this in the Minneapolis Exchange of that we have have in the of a a like like amount. This This means that Minneapolis Grain Exchange the in sold in the market, and, whether the the grain bought from the farmer from farmer and sold the the whether the and, market, grain bought or we are affected. or down, are not affected. This gives us security and insurmarket goes up not insurus down, goes up gives security ance.... ance. If not have have ,this market, we could could buy buy grain farmer members this market, our fanner If we did did not grain from our sell from day to in the it might take us only could sell the amounts which we could us day to day, day, and it might take only in our harvest. harvest. many months to to dispose dispose of of our many Suppose no hedging hedging market. market. We would not not dare buy wheat, that we had no dare to to buy wheat, Suppose that not get get to to market market for for aa month or three or which might might not or even three or four which four months, months, in order without taking taking aa much wider wider margin margin in order to to protect without ourselves against the against the protect ourselves when it got there. possibility that prices might be lower it there. be lower that got prices might possibility association handles Besides wheat wheat and other other grains, grains, our association handles potatoes. potatoes. The potato potato Besides the is spread out longer than the wheat marketing season, marketing season is much season longer marketing season, marketing spread and we do not have have very very· many many potatoes potatoes on hand at at anyone time. Even so, do not and so, any one time. us much more worry worry than than grain because we have have to to be hunting potatoes give give us grain because hunting potatoes for markets all the the time, time, prices prices fluctuate rapidly, and frequently frequently fluctuate much more rapidly, markets all for hard to find. have quick and positive way of hedging buyers are find. no have to We of hard are quick hedging them positive way buyers and so have aa heavy heavy risk risk on potatoes potatoes which does does not wheat. not exist exist on wheat. so we have and .
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Exchanges Expedite Expedite Marketing. Marketing. The influence of the the commodity commodity Exchanges is manifest exchange on orderly marketing is particularly case of of the case orderly marketing particularly in the exchange grains, cottonseed oil, oil, coffee, coffee, sugar, commodities, cotton, cottonseed sugar, and other commodities. grains, cotton, the production of is seasonal. The wheat crop is harvested and seasonal. is is harvested which of the production crop is picked and ready time. Cotton is to market within a few months' time. moved to picked ready 4
80th Congress, Hearings Before the the Joint Joint Committee on the Economic Report Report-80th Congress, First First Hearings Before
Session-December, 1947. Session December, 1947.
38
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
for the fall fall of the year. year. To bring the economic of the in the the market in for the bring out clearly clearly the function of the commodity exchange, it to suppose it is is but necessary of the function necessary to commodity exchange, suppose a in in with facilities society with such institutions in existence and facilities in existence no with no such institutions society to any way parallel to those they offer. The crop comes to market, to which offer. those market, they crop any way parallel in of pouring into the terminals by trainload and shipload in millions of millions the terminals trainload into by shipload pouring bushels or millions of bales. The harvesting harvesting is heavily concentrated, is heavily or millions of bales. bushels concentrated, but the demand for for wheat or or cotton cotton is is widely widely spread the year. the throughout the year. spread throughout The country country does does not not eat eat its its bread solely the fall, in the as it it eats eats its its crancranfall, as solely in the demand for for cotton cotton goods the year. year. berries, and the is spread throughout berries, goods is spread throughout the Some agency store the material and absorb the attendant risks. must store the raw risks. the material agency It be either the producer, producer, the the dealer, the manufacturer. Whoor the It must be either the dealer, or it. More important, however, ever stores the commodity also finance it. must finance stores the also ever commodity important, however, is the risk of of price price change change until until the the accumulated stocks stocks are sold. is are sold. the risk protection against against price price fluctuation fluctuation and without means of protection Without means of of stored commodities liquid collateral, it virtually aa of making stored it would be virtually collateral, making liquid but financial impossibility impossibility for crops to to be be absorbed at ruinous financial for crops at anything ruinous anything prices to producer; in fact, the the warehouseman, warehouseman, the the converter, the in fact, to the or the the producer; converter, or prices his as dealer buy only only as the commodity as his own capital of the dealer could buy as much of commodity capital force him to permitted, and the the price price risk risk would force to pay pay to to the the producer producer permitted, lower prices prices than than the the exchanges exchanges now make possible. possible. much lower as they they exist, exist, the the hedging hedging dealer dealer or or converter, Under conditions conditions as converter, who is able to to finance finance himself himself readily readily through through well-secured well-secured bank loans, loans, is now able his capital far more quickly othercan turn his often than he could could othercapital far quickly and more often wise he can carry his business with smaller capital. can wise do; he on his business with smaller do; consequently carry consequently capital. the hypothetical hypothetical regime regime we have imagined, it is is probable that, Under the imagined, it probable that, if price price stability introduced at at all, be by by growth of huge huge if it would be all, it stability was introduced growth of in resources financial institutions, comparable in the greatest greatest of to the financial resources to of our our institutions, comparable industrial corporations, corporatlons, or or by by arbitrary price controls maintained by industrial arbitrary price controls maintained by ruthless governments. The competition thousands of of totalitarian governments. of thousands ruthless totalitarian competition of small disappear, and, and, although although prices prices might be stasmall merchants would disappear, stamight bilized, they they would be stabilized stabilized at at public public expense prices, taxes in prices, taxes bilized, expense in and freedom. freedom. Under the the exchange exchange system, the world's harvests flow flow to world's harvests to system, the market under free, free, competitive competitive conditions short conditions in in a a comparatively short comparatively time, are are absorbed in in orderly orderly fashion, fashion, stored, distributed in in accordaccordtime, stored, and distributed ance with the the needs needs of consumption. The spread in price between the of consumption. ance in the spread price is harvested season when the the crop crop is harvested and marketed and the the seasons seasons when it is so so slight slight as to be negligible. negligible. it is as to is consumed is of their their lack of appreciation of Farmers, because because of lack of or understan"ding Farmers, appreciation or understanding of and the benefits benefits of of the the exchange its and techniques of operation, its methods the of exchange techniques operation, with some exceptions, have failed failed-with exceptions, of of course-to take full full advantage courseto take of advantage of the the insurance insurance facilities facilities of of the the exchanges. This is due, in part, to their is in to their due, exchanges. part, lack of familiarity available methods of their exchange lack of of financing familiarity with available financing their exchange
Functions of Exchanges Economic Functions of Commodity Commodity Exchanges
39 39
operations. recent and widespread widespread development of farmer farmer operations. The more recent development of co-operatives resulted in in federal sponsorship has resulted co-operatives under federal subsidy has sponsorship and subsidy education in regard education of regard to to the possibilities of of of more and more farmers in the possibilities the exchange insurance device. rapidly the as an insurance device. In fact, are rapidly fact, co-operatives exchange as co-operatives are becoming members of of the the exchanges representing the in the farmers farmers in becoming exchanges and representing their hedging practices. co-operatives, through their high credit their The their credit hedging practices. co-operatives, through high standing, based on crop mortgages, which they may readily obtain from standing, based crop mortgages, they may readily obtain their members, their members, can now safely safely finance finance the farmers' exchange the farmers' exchange operations operations through liquid loans. bank loans. through liquid In the trade the the use use of to permit permit the cottonseed oil trade cottonseed oil of insurance insurance by by hedging hedging to the orderly absorption of the seed, as it comes to market, has been told the it told to market, has orderly absorption of the seed, as very simply clearly in the testimony testimony of in the of William A. before A. Storts Storts before very simply and clearly the the Committee on Agriculture Agriculture and Forestry Forestry of of the the United States Senate. States Senate. In response a question question as to how the markets help help the the to a the exchange as to response to exchange markets cottonseed trade, Mr. Storts or trade, cottonseed oil oil market or Storts said: said: It as any It helps helps it it the the same any other movement of in the the same as other commodity. of seed seed in commodity. The movement the year four months. fall of of the year is is very very heavy heavy for for three three or or four months. Nobody Nobody would would buy buy that that if you seed if did not seed you did not have have aa market market where where you you could it. The seed could hedge seed against it. hedge against as A moves, as you know, during the busy cotton season. vast volume goes the vast cotton season. volume moves, you know, during busy goes on the market. you did did not not have have aa hedge hedge market to protect protect you you or insure you market. If If you the market to or insure you again8t loss, loss, that seed would would remain remain with with the the farmer. not be be bought bought farmer. It It would not that seed against by anyone, unless it was at at aa very, very, very very low refiner ... buybuyit was with the low price. the refiner by anyone, unless price. But with ing the crude and hedging it with the future contracts, we have established a it with have established a the future contracts, ing the crude hedging 'this seed market which permits the the movement of of this at comparatively comparatively high high prices seed at which permits market prices the crude not use in contrast what formerly formerly prevailed. prevailed. Many mills do not use in with what of the crude mills contrast with Many of the market as aa hedge. hedge. Some of them do. do. The proper proper operation of aa crude crude mill, mill, of them the market as operation of the in my my opinion, opinion, when the the market market is used for purposes, is is to to sell for insurance sell the is used insurance purposes, in 5 market when he he buys buys his his seed. seed. That is his hedge. is his market hedge. s fall
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all Exchanges Form aa World Market. Market. The linking together of of all linking together Exchanges in different exchanges operating in the same commodity commodity but in in the different central central exchanges operating and foreign foreign markets markets makes for for aa uniformity uniformity of price (in terms of gold) terms of of price gold) (in if throughout the world that otherwise be difficult, if not impossible, not that be would otherwise the world difficult, impossible, throughout to attain. Over the the course a year's year's trading, trading, prices of a course of of standard grades to attain. grades prices of on the various cotton cotton exchanges in the States and elsewhere in the United States elsewhere the various exchanges for differences transnormally move together, together, and except to costs differences due to of transcosts of except for normally are portation, tariffs, tariffs, and handling handling charges charges from market to to market, market, they they are portation, of uniform. So the price price of the same quality of wheat (in terms of gold) in of terms of the So the uniform. (in gold) in quality Europe at Chicago, Minneapolis, and Winnipeg holds the same the at and Winnipeg Chicago, Minneapolis, Europe
under normal normal conditions, the only being those those incident to to differences being under conditions, the only differences 56
Regulation of Oil Futures Futures (Washington: Cottonseed Oil of Cottonseed (Washington: U. Regulation
p.
Office, 1928), 9. Office, 1928) , p. 9.
S. Government Printing S. Printing
40
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
to another and existing the cost of of transporting the wheat from one center center to the cost existing transporting the tariffs. tariffs. The commodity in normal times is not not so times is so much an individual exchange in commodity exchange as it it is is aa division division or of a countrywide of or world-wide or department market as countrywide or department it serves. commodity which it of serves. Throughout market for for the the commodity every hour of Throughout every each trading trading day, every quarter of the globe, having a direct a from the news of direct each globe, having every quarter day, or indirect indirect effect effect upon upon prices prices of of the the commodity, is being received and commodity, is being received weighed by by all all types types of traders who are of traders are expert expert in analysis. analysis. The mere weighed it can be presence of such a body of gives assurance that, so far as as it of of men assurance so far that, body gives presence accomplished by foresight, the events of the future will be human the events of the will be future foresight, accomplished by as reflected in price as soon as they can evaluated. Superior movements as be reflected evaluated. Superior they price financial resources or superior superior knowledge knowledge of to financial resources of conditions conditions do not avail avail to over seller or an give any buyer an advantage over any seller-or any seller advantage seller any any advantage give any buyer advantage forces greater over any any buyer. buyer. The price price movements are result of greater than of forces are the the result the knowledge trading capacity buyer or seller. the seller. They any one buyer They knowledge or trading capacity of anyone all all epitomize all the knowledge, all the beliefs, all the hopes, and all the all all the the the beliefs, knowledge, hopes, epitomize brains fears operators, including the best brains in the world's fears of of thousands of of operators, the best the including markets. this function function be discharged will perhaps perhaps It will Could this any other way? way? It discharged in any best to to rest rest with the the opinion of a Congressional Committee on this of be best this Congressional opinion phase of the activities: the commodity commodity exchange'S exchange's activities: phase
Only the futures market possesses possesses the the facilities futures market facilities for all the for bringing transacthe transacOnly the bringing all . . . . In the very nature of things, the spot tions of the into focus In the country into the focus. nature of the tions of ... very country things, spot is unable unable to to develop develop any such highly unified institution of price making market is market unified institution such of any highly price making and price price registration registration-spot trading necessarily necessarily being being conducted vast number a vast conducted at at a spot trading and sold. it of points, wherever wherever actual actual cotton cotton is of scattered to be scattered points, is to be bought sold. Thus it bought becomes clear clear why why the the highly highly developed developed futures market must tend becomes futures market tend to a to have have a very considerable influence in determining cotton prices, whatever the locality in cotton whatever influence considerable the very determining locality prices, is bought bought and sold. market conditions, in which spot cotton is in sold. General General market conditions, expressing spot cotton expressing in a the themselves a broad broad market market rather rather than prevailing in than the themselves in the conditions conditions prevailing in the as particular locality, largely determine the value of cotton in that locality determine the value of in that cotton particular locality, largely locality as well as as elsewhere. elsewhere. 66 well Professor Alonzo Taylor, Taylor, of of Stanford University, Professor University, a Canadian legislative legislative commission said: said:
ill testifying before before in testifying
The various various wheat futures futures trading trading exchanges world ought ought to be of the the world to be exchanges of common system: system: they are international rather than international rather than they are national these various various exchanges national in in the the broad view. view. Operations are interinterOperations on these exchanges are inter-dependent~they represent points of connection on a liquid related and inter-dependent related of connection a they represent points liquid world market. It world market. is to to be be regarded regarded as as aa significant of the the present present system It is defect of significant defect system that facilities facilities for for trading futures on established lacking that trading in in wheat wheat futures established exchanges are lacking exchanges are a as members of of a regarded as regarded
Senate Document 100, 6e The Cotton Trade, Part I, I, pp. pp. 68th Congress, 1st Session, 100, 68th Trade, Senate Session, Part Congress, 1st 103-104. 103-104.
Functions of Exchanges Economic Functions of Commodity Commodity Exchanges
41
in Australia. Also, in Australia. Also, despite the irregulariiy irregularilY of wheat, it is not of Asiatic Asiatic imports of wheat, it is not despite the imports of to be to be doubted that, that, if the establishment of a grain it were technically feasible, if it the establishment a of feasible, technically grain at a exchange at a central point in in Asia, Asia, such such as as Hong Hong Kong, Kong, would be central point be an advantage exchange advantage to exporting to countries. exporting countries. According to this view of of grain grain exchanges exchanges and trading trading in as in wheat futures, futures, as According to this of parts of an international system of marketing, the interests of surplus producing international the interests of parts system marketing, surplus producing countries as those countries are as important important as those of importing impol'ting deficiency deficiency countries. countries. are quite quite as is is is exceedingly complex, is surrounded by many cross currents, This system cross currents, system exceedingly complex, by many and exposed It is, exposed to to abuses. abuses. It however, impressively superior to the system to the of is, however, impressively superior system of cash of without futures-either by auctions, by exporters' cash merchandising of wheat without futures either auctions, merchandising by by exporters' disposition of supplies in importing countries, or by importers' collection of or by of disposition of supplies in importing countries, importers' collection in supplies in exporting countries. countries. supplies exporting If one will contrast the If will contrast the iii\o*!iii.iiioiit jll\(·':;:,:.lliolh into trading in in importing into futures futures trading importing and in for example, ( \|>i;:ii'.> '(1"1: :II~( countries countries-for in Great Britain and in America-it Britain in North America it example, of the clear that, that, with the the acceptance acceptance of the view view ,that becomes clear 'that the the system of futures futures system of narrows the between trading the spread producer and consumer, the question the consumer, trading spread producer question arises, to whom does the the saving, saving, the the gain accrue? Consumers in in Europe arises, to gain accrue? Europe have feared (that (that apart apart from the the participating participating traders) gain would accrue feared accrue to to traders) such gain have producers. Producers the over feared that (apart from the particithe world that the producers. (apart participating traders) traders) such such gain accrue to to the the consumers. In each instance, instance, gain would accrue pating the is felt felt that thaot most of of the the gain gain would accrue to the intermediaries. When, fear is the intermediaries. the fear accrue to When, however, one contrasts contrasts the the range range between consumers' price and producers' price however, producers' price price with the inclusive cost cost of of taking taking the the wheat from the producer and delivering the inclusive the producer with delivering it in ,the country, it it becomes clear that the gain repreit to clear that the gain to the the consumer in the foreign foreign country, represented in narrowing narrowing the the spread spread between producer have sented in producer and consumer must have accrued largely to producer or or to both. Economic reasoning or to both. to consumer reasoning on largely producer it that incident enters enters here. here. We take take it that the the orthodox answer would be that that the the incident gain is the producer and the consumer, not equally, but is always divided divided between the the consumer, gain always producer equally, and not not in in the the same proportions proportions from year year to the world to year. is, when the year. That is, market bears bears the the complexion market, producers producers are likely to of a a sellers' sellers' market, are likely to wheat market complexion of when has receive the the larger larger proportion proportion of the gain; the market has the complexion of the the receive gain; complexion 7 7 of buyers' market, market, consumers consumers are to receive receive the the larger larger proportion_ are likely a buyers' of a likely to proportion. (
Exchanges Level Level Prices Prices between Markets. Markets. The focusing focusing through the through the Exchanges full exchange of all factors influencing prices, with full publicity of all of all all factors of influencing prices, publicity exchange means prices and quantities of all exchange contracts, necessarily that all that of exchange contracts, necessarily prices quantities local or world markets will the prices prices of of commodities commodities on various various local will be kept the kept in close with another. another. in close alignment with one alignment transactions made on The continuous continuous price price quotations quotations derived from transactions of determining the floors floors of futures exchanges ready means of afford a ready the of futures determining exchanges afford prices in in different markets are are out of such aa of alignment. When when prices different markets alignment. of "arbitrageurs" condition exists, large large operations operations of promptly serve to to serve condition exists, "arbitrageurs" promptly is accelerate a return to parity. The arbitrageur is an operator who, when accelerate a return to parity. arbitrageur operator who, of for prices between markets are out of parity for temporary reasons, buys buys are markets out between reasons, parity temporary prices to Inquire in Grain Futures 77 Proceedings Proceedings of the Canadian Commission to Inquire into Futures into Trading of the Trading in (Winnipeg: Grain Trade News, News, 19tH) p. 315. 315. . 1931) •, p. (Winnipeg:
42
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
for future in the the cheaper simultaneously sells the sells the for future delivery cheaper market and simultaneously delivery in in for the same delivery in the dearer market, making same quantity dearer the the for his market, delivery making his quantity in profit not from a change in the price level hut from the return to normal but the level the return to change price profit not markets. of the the spread in prices between the markets. The operations of the the the two in between of operations of prices spread arbitrageurs themselves are a major factor in bringing about this return in are a factor this return themselves bringing arbitrageurs major to the normal, for for their their buying buying in in the the cheaper is an influence in to the normal, influence in cheaper market is in raising prices there, while their sales in the higher add to the their sales to while the market the there, higher raising prices pressure against against higher higher prices prices in in that that center. greater the the volume of center. The greater of pressure arbitrage transanctions, the earlier earlier the the return the markets return of of the markets to to normal transanctions, the arbitrage parity. parity. as they markets have have again again returned to to parity, parity, as they must in When the the two markets in is course when the the cause cause of of the the temporary temporary disparity is no longer active, due course active, disparity longer in the the market where he the operator liquidates liquidates his his position position by by selling he has has the operator selling in in market previously bought and simultaneously buying in the he has the has where he previously bought simultaneously buying In one one market market he he may may sustain but the the profit profit in in the previously sold. sustain a a loss, sold. In the loss, but previously other will usually usually more than than offset this loss, net offset this a net other market will loss, giving giving him a in to profit. For at time does the arbitrageur plan to be long or short in at no does be or time the short arbitrageur plan long profit. in of in one market he is is short the balance. What he he is is long long of of short of the market on balance. in to that his in the the other other market. market. He must be be on guard, however, to see that his pursee however, guard, purchases and sales in the the two markets markets are sales in are made simultaneously; otherwise chases simultaneously; otherwise he will find himself himself either or short net balance balance and therefore therefore either long short on net he will find long or as an arbitrageur, does not intend be subject to speculative risks which he, not risks as does intend which be to he, arbitrageur, speculative subject to assume. assume. to alert to presence of such aa body body of of operators, operators, always to take take advanof such The presence always alert in tage of opportunities for arbitrage, also aids in keeping the prices of for also aids the of arbitrage, tage of opportunities keeping prices contracts for all of delivery on the same exchange market all future future months of contracts for the delivery exchange in proper and normal alignment. price of of futures in proper the price futures for for one alignment. Should the rise above above normal normal parity parity with with prices months, or for other other months, month rise or should should prices for the price of one month become depressed depressed below the of one the level level of the price of others, for others, for the same arbitraging (or straddling) operation contemporary reasons, arbitraging (or straddling) operation contemporary reasons, the tributes to to lift lift the the price price of the abnormally abnormally low future pressure future or to exert exert pressure of the or to tributes upon the month which is temporarily too high and so brings back too them is temporarily so brings high upon the parity. to normal parity. to Buyers May Anticipate Requirements. Requirements. The existence of markets existence of markets Buyers May Anticipate or sell sell commodities in in any where operators may at at any any time time buy buy or desired where any desired operators may which not dislocated the quantity and at prices will not be dislocated merely by the execuat will execumerely by prices quantity large orders orders is inestimable benefit, to manufacturers manufacturers tion of is of of inestimable of large tion benefit, especially especially to materials. In the their needs needs for for raw materials. faU of wish to to anticipate anticipate their the fall of the the who wish a supply year, for for example, example, the the miller miller may may wish wish to to make certain supply of of certain of of a year, in the wheat flour he will will produce produce in the spring. To buy the wheat and the the flour for the wheat for buy spring. store it would be undesirable undesirable for reasons. In the the first first place, the for two reasons. store it place, the
Functions of Exchanges Economic Functions of Commodity Commodity Exchanges
43 43
in his miller's capital capital would be be locked up in his inventory for aa period period of of miller's locked up inventory for months. Then, in addition to the the loss loss of his capital, there addition to of interest interest on his there Then, in capital, are storage, are insurance, and other charges, as well as other charges, as well as shrinkage detestorage, insurance, shrinkage and deterioration, to to be be considered. considered. rioration, machinery of of the the commodity commodity exchange provides the the manufacturer The machinery manufacturer exchange provides with a means of of anticipating requirements without without locking his capwith anticipating requirements locking up up his capital or ital or warehousing warehousing the the actual At any time of the year he actual commodity. time of the commodity. any year he for may buy contracts contracts for the the delivery the commodity of as as much of of the as he he may buy delivery of commodity as wishes in in whatever whatever month or or months he specifies. the delivery wishes When the specifies. delivery may take take delivery the commodity he has has bought bought of the month arrives, arrives, he may delivery of commodity he is more likely) he exchange contract-or may have bought on his his exchange contract or (what have bought (what is likely) he may in of wishes the exact of he wishes in the spot market, simultaneously the exact grades wheat he the market, grades spot simultaneously reselling his his purchase purchase contract contract on the the exchange. or is an insurance insurance or exchange. This is reselling hedging operation performs the service of permitting requirements which of the service hedging operation performs permitting requirements to be anticipated anticipated at at prices prices satisfactory satisfactory to to the miller and without without risk risk of of to be the miller likewise may may use use the the exchange default of of the seller. Producers default the seller. Producers likewise for a a exchange for their or similar purpose, selling their products before they are harvested similar purpose, before are or harvested selling products they produced. produced. in Fair Continuous Prices Prices aa Factor Factor in Fair Dealing. Dealing. Caveat Emptor Emptor (let the (let the the buyer beware!) is of the widely of legal maxims. It is one of most known of It legal widely buyer beware!) presupposes that that the the buyer buyer realizes realizes that that the the seller goods seller will will present his goods present his presupposes in the the most favorable favorable light, short of fraud, and that he is not required in of that short he is not fraud, light, required by law law and will will not, not, unless unless specifically specifically asked, reveal circumstances circumstances or or asked, reveal by conditions the buyer from purchasing. There the conditions which would discourage discourage buyer purchasing. a group is no reason reason for attaching any obloquy to to sellers taking sellers as as a is for attaching for taking any obloquy group for They are usually better better informed than than buyers buyers-hence the this attitude. are usually attitude. They hence the this in this form. Where the the knowledge knowledge or the bargaining power of maxim in this form. or the bargaining power of the buyer buyer is however, the the maxim may well become caveat caveat is superior, the may well superior, however, vendor (let (let the beware) . In In a market where price records are not records seller beware) not the seller are vendor price published daily or where markets are local, fair trading ethics depend are local, fair trading ethics depend published daily or well the the buyer buyer and seller seller are are matched with with regard to informainformaon how well regard to tion as to conditions, prevailing prices, and financial resources-in financial resourcesin other other tion as to conditions, prevailing prices, words, on how well well their their bargaining bargaining power power is is equalized. words, equalized. Future markets provide provide aa continuous, record of of sales sales and Future markets continuous, day-to-day day-to-day record their prices, prices, available to all. all. Here, Here, contrary to the in the physical situation in the physical available to the situation their contrary to markets, the buyer, large or small, has advantage over the whether has no the over the small, markets, large advantage buyer, in so far as seller, nor the the seller the buyer, buyer, in knowledge of present as knowledge so far of present seller over the seller, nor is prices or prices for future delivery is concerned. This, of course, concerned. for future of or does This, course, does delivery prices prices to producer, not insure insure that that prices prices will will always producer, dealer, or not dealer, or always be satisfactory satisfactory to manufacturer. does, however, however, insure insure that that prices paid will be representawill It does, be manufacturer. It prices paid representative of supply will be based based on the the actual world-wide actual world-wide tive of supply and demand and will .
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
44 44
in the market at time rather rather than than dictated at the dictated by the chain chain market the time by whatever group group in of production production and distribution distribution happens happens to to have have the the strongest of strongest bargaining bargaining power or inside informaion not available to all. or not all. inside available to power Testifying before before the the Canadian Commission to Inquire into into Trading to Inquire Testifying Trading in in Grain Futures, James E. E. Boyle, of Cornell University, Professor James said. Futures, Professor Boyle, of University, said.
Price Barometer. the wide, wide, open, open, and competitive competitive market furnished by Price Barometer. On the furnished by the ,commodity exchange, buying and selling orders meet and a price modern the commodity exchange, buying selling orders price is registered. registered. The price price is is registered registered by by the the exchange, the is is not fixed fixed by exchange, but is by the exchange; the the exchange merely aa price price barometer. is merely exchange; exchange is The wider wider and more liquid liquid this this market is, is, the the more correct is the price so so the price correct is value, we must remember, remember, is not aa definite, objective, or or registered. Price Price or value, is not definite, objective, registered. fixed fixed thing, thing, but but is is rather rather aa market opinion, opinion, or based on or concensus concensus of of opinion, opinion, based known facts forecasts, and, with new of course, facts and on estimates estimates and forecasts, and, of course, changing changing with estimates the exchange estimates and forecasts forecasts based based on new facts. facts. On the the price price or or value value exchange the is It in is registered, registered, and so so II say say the the exchange serves as a price barometer. It is, in fact, as a barometer. serves is, fact, exchange price all grain It is service to interests best price price barometer. barometer. It is aa highly highly important service to all interests our best grain important values not merely to have, have, each each day, day, definite definite quotations quotations of of grain merely current values, to values, grain values-not but values for the the next next few months of of the the future. of futures tradbut of values for futures tradfuture. The accuracy accuracy I will ing as a price barometer is well to students of the grain trade. I will students of trade. as a to barometer is well known the grain ing price it is cite but one example, example, but it is typical. typical. cite selected ten II have selected ten normal years, years, free free from wars wars or disturbances, because no disturbances, because exchange can forecast a war, which, of course, disturbs prices. question forecast a of disturbs The course, war, which, question exchange prices. asked is, "Do the the buyers buyers who buy buy May May wheat futures futures in in the of December the month of asked is, the delivery accurately forecast the the price price of of May May wheat which is is realized delivery realized when the accurately forecast time comes in in May?" By taking statistics from the Chicago Board of for of Trade for statistics the time comes Chicago May?" By taking ten normal normal years years we wc find find that that the the forecast the future is of later of the the later future is forecast which the ten of the cash price price is is within within less less than than one cent in terms cent of actual price, stated in cash the actual or, stated price, or, Now of per cent, cent, it like 99 per cent correct. these years cent correct. these is something like 99 it is of per years were something per selected because there there was was no great disturbance, such as a war, to disturb the disturb as a to the selected because war, great disturbance, 8 8 take other other normal years, years, we get about the same results. barometer. If results. the If we take barometer. get It has the Exchange Exchange Stabilize Stabilize Prices? Prices? It has come to to be accepted as Does the accepted as by writers writers on commodity that the the machinery almost almost axiomatic axiomatic by commodity exchanges machinery exchanges that at of tends to prices stable or at least to minimize make more stable least or to tends to of the the exchange exchange prices at length It may their subject is is considered considered at elsewhere. It elsewhere. their fluctuation. fluctuation. This subject length may
be noted noted here, here, however, however, that that the the machinery machinery of gives of exchange be exchange markets gives the ample scope for operations on the buying and the selling sides. both the for sides. buying selling operations ample scope that is, existence of breadth of the market market-that is, the the existence of a large of The breadth of the large number of buyers and sellers-is a condition condition which operates sellersis a against sudden and buyers operates against violent upward upward or or downward price price swings. This, of course, of is .relative. violent relative. This, course, is swings. Price changes of great extent extent do occur occur on the the floors floors of of organized of great Price changes exorganized exIf a large changes as as they markets. If all commodity of specularge group commodity markets. they do on all changes group of specuif a lative sellers were not not ready ready to to combat an advancing market, or, a large lative sellers were or, if advancing market, large
127.
8s ibid., Ibid., p. p. 127.
Functions of Exchanges Economic Functions of Commodity Commodity Exchanges
45 45
group of ready ready speculative buyers were not not present of to take take advantage advantage of present to speculative buyers group of price declines, declines, would not not the the movements be more severe prolonged? severe and prolonged? price This matter matter is of proof proof on either either the the negative negative the affirmative difficult of affirmative or or the is difficult side. conservative summary summary at this point point would be that there is is strong at this that there side. A conservative strong evidence, in that contention, the balance of probabilities in support of that of probabilities contention, and the evidence, support of substantially the contention contention rather rather than the the reverse. reverse. favors the substantially favors Price Movements Discount Discount the the Future. Future. Experienced Experienced operators operators on tht:: Price the; stock that stock prices generally, not always, discount stock prices stock market know that always, discount generally, but not potential developments, favorable or unfavorable, by and somefavorable or weeks unfavorable, by potential developments, times months before before the the news of is made public. times of such is such developments public. developments Stocks, accordingly, often often sell sell off off when good Stocks, accordingly, out, and not good news comes out, infrequently they hold firm firm or or rise rise when unfavorable unfavorable news is is published. published. infrequently they in The development development has has been discounted in advance by expert discounted by expert operators. operators. Commodity prices prices can never never discount the future with the prethe same prediscount the future with Commodity in corporate cision. Experienced Experienced traders traders in corporate securities various cision. securities can analyze various analyze of profits a single factors bearing bearing upon upon the the course profits of of a factors course of single company company much more readily readily than they they can appraise appraise the the many many factors factors affecting affecting supply supply for a in world-wide and demand and prices prices for a commodity in world-wide use. Yet, use. as news Yet, as commodity statistical data which aid or statistical aid in in forming forming opinions to hand, hand, prices prices or opinions come to a higher move correspondingly, correspondingly, and the the adjustment adjustment to higher or lower level is to a or lower level is before crops, smaller or larger than normal, combefore smaller or than whether made long normal, larger long crops, mence to to reach the the market. market. In this this way way the the more distant futures serve distant futures serve as aa guide to opinion as to prices will be months in the future, and in to to as what will be the as future, guide opinion prices contracts in the the spot or physical are on the basis of these contracts in market are made the of basis these physical spot expectations. expectations. For example, during 1928, the wheat crop the United in the 1928, although example, during although the crop in States gave no promise promise of being large, large, reports came forth of aa bumper of of being forth States gave reports bumper in a crop in Canada, of a large production in the Argentine, and of larger the Argentine, of larger Canada, of large production crop in Europe yields in Europe and Australia. Australia. Europe, Europe, the the great for wheat great market for yields fill more of its exports, evidently be able to fill its own requirements, to of would be able evidently exports, requirements, while time larger larger export in at the the same time while at available in surpluses would be available export surpluses the the exchanges countries. Prices Prices on the of the the world began the exporting exchanges of exporting countries. began immediately-quite time before the crop-moving some time before the season was at at immediately quite crop-moving season hand-to decline, thus thus reflecting reflecting the the expectation hand to decline, of lower prices. expectation of prices. Such a situation, or its its reverse, reverse, is is constantly developing on exchange markets. situation, or constantly developing exchange markets. all exchanges both security exchanges-both security and commodity-there is generally On all there is commodity generally an are moving ascertainable trend trend of of prices. prices. They They are moving upward upward or downward, or ascertainable downward, or in they are'halting or oscillating in a area, preparatory to a major are or a narrow a to area, oscillating they preparatory 'halting major or minor movement. The effect of favorable favorable or is effect of or adverse adverse developments or developments is of time, thus spread out over aa considerable time, and both advances thus considerable period advances spread out period of are more orderly would be possible in a "thin" marthan in and declines a declines are "thin" orderly possible ket-one in there relatively few buyers or sellers. Although in which there were sellers. ketone relatively buyers Although
46
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
or because because the discounting of of future future events by price price movements in in the the the discounting or events by not markets commodity may not approach the exactness of the stock market, commodity may approach the exactness of the stock market, the fact fact remains that that market opinion never unanimous. The mere the is never opinion is of presence of groups of traders have formed conflicting as of traders who have presence groups conflicting opinions opinions as to the of prices to the future future of prices and will will buy buy or with their beliefs or sell in accordance sell in accordance with their beliefs is a constant assurance of orderly adjustment adjustment of to the is constant assurance of orderly of prices the probable. prices to probable. The Exchange Exchange as as a Source Source of of Trade Information. Information. From every part every part of the the world the the commodity exchanges gather of crop conditions of news of conditions commodity exchanges gather crop various statistical statistical data data bearing bearing on the the existing and various existing supplies, supplies, both foreign foreign and domestic, stocks on hand among among dealers or converters, dealers or domestic, stocks converters, shipments shipments in in transit to market, market, production, production, prospects production, transit from market to of production, prospects of in other prices in other world markets, markets, increases in consumption, or decreases increases or decreases in prices consumption, and similar material of of value value to to exchange exchange members and the similar material trade. The stastathe trade. tistics are are published published daily or weekly summarized in detail in monthly tistics or in and in detail daily weekly monthly or yearly reports. reports. In seeking regisin regisor yearly sources of of information and in seeking out new sources the news tering promptly the to the exchange by telegraph, which the comes to tering promptly exchange by telegraph, telephone, radio, radio, and cable, the commodity further than cable, the exchanges go go further telephone, commodity exchanges to act act merely merely as as clearing centers of information for the to for trade. They the trade. They clearing centers of act as as barometers barometers for for the the trade, trade, publishing publishing the the news and simultaneously act simultaneously interpreting it in price price movements. The record record of is given given it in of quotations interpreting quotations is out by the exchanges daily for the benefit of the press and radio, the out by the exchanges daily for the benefit of radio, and press in each transaction throughout day the the quantity quantity involved involved in transaction and the the the day throughout the price at it is is flashed immediately by private wire, ticker is at it made is flashed ticker which wire, immediately by private price system, radio, all all over over the the country country and the the entire world. This, This, it it or radio, entire world. system, or should be noted, noted, is is not not possible possible on the the physical physical markets, markets, where should again again be each price and quantity-is and cannot be is confidential confidential transaction its price each transaction-its quantity the contract. disclosed by by the broker without without the the consent consent of of both parties to the contract. the broker disclosed parties to in addition to The price price record record of the exchange, value to to of the to being of value exchange, in being of those in futures, futures, is is an aid trade in With the aid to to the the trade in general. the deal in those who deal general. contract to to deliver, market's appraisal appraisal of the price price for for which, which, under a contract of the market's deliver, a unit of of the during some month in the the future future should sell, the commodity unit sell, commodity during the markets prices for delivery in other or on the physical may in other months for physical may be delivery prices intelligently. made more intelligently. field of of business Exchanges Regulate Regulate Speculation. Speculation. In every business where every field Exchanges buying selling is done, speculation plays a major part, though the the is and done, major part, though speculation plays selling buying that much of it is public appears not to realize that of it The builder realize not to is speculation. speculation. public appears to sell at a profit erects aa house house which he expects expects to profit is is a speculator; sell at who erects speculator; lot may it much the man who sold the builder builder the the lot may have bought it mucb earlier earlier sold the the bought residential because he foresaw the extension of residential building and wished to of the extension to he foresaw wished because building gain by his his anticipation of the the event. event. The dealer who purchases purchases stocks stocks anticipation of gain by market of aa commodity in the physical assumes a speculative risk. in risk. the When of speculative commodity physical the farmer plants his his crop, is speculating the price price farmer plants the weather, the crop, he is speculating on the weather,
Functions of Exchanges Economic Functions of Commodity Commodity Exchanges
47 47
at maturity, of his his crop crop at maturity, and aa dozen or or more casualties casualties which may may damage damage or destroy it. it. Risk-bearing speculation in upon or destroy in substantial exists upon substantial volume exists Risk-bearing speculation is essential essential to to every every exchange. exchange. Speculation on the exchange is reguis and is the exchange reguSpeculation lated by by the the exchange exchange and must be be carried with estabin accordance with lated carried on in established rules designed designed to to make speculators speculators as possible equal as nearly as possible lished rules nearly as equal 99 in in opportunity, opportunity, however they they may may differ and resources. in ability resources. differ in ability the exchange regulated; it is also is speculation on the it is Not only also harnessed exchange regulated; only is speculation to serve function as as a risk-bearer. risk-bearer. In the the of the to the description serve an insurance insurance function description of hedge in Chapter XI, emphasis is laid on its primary purpose-removal laid in is its removal XI, hedge primary purpose Chapter emphasis of risks for for dealer, dealer, producer, producer, or manufacturer. The hedge lifts of speculative or manufacturer. hedge lifts speculative risks the risk from the the shoulders the man in the trade, trade, but it in the it does not abolabolthe risk of the shoulders of ish assume it, and the chance of gain or loss ish it. it. Somebody else must else the of or loss it, Somebody gain through price fluctuation is transferred to the speculator. It is he It fluctuation is transferred to the is who through price speculator. the hedging hedging or insurance transaction transaction possible. possible. He is is an underundermakes the or insurance writer of the risks inherent in price fluctuations. Organized writer and spreader of the inherent fluctuations. risks spreader price Organized speculation insures that that there there will will always ready market for for every always be a ready every speculation insures at any purchase and every sale and, and, therefore, therefore, a market ready of every sale ready at any time of purchase the trading day to the risk the hedger wishes to pass on. the trading to the risk the wishes to assume which on. day hedger pass Although the protection afforded afforded by by the hedge is not absolute, it is is not the protection is the hedge absolute, it Although as certain certain as as most other of insurance. value of the hedge as forms of of the other "forms insurance. The value hedge varies-depending circumstances-in the degree to it in varies on circumstances the it affords to which affords degree depending protection, but the the opportunity opportunity to to secure major measures of protection secure major of protection protection, is ever present. present. is ever Exchanges the course its in the the Trade. Trade. In the course of of its Exchanges Promote Uniformity Uniformity in operations, the commodity exchange must establish its own standards establish its standards operations, the commodity exchange of contracts contracts and of of inspection inspection and grading or else adopt methods or else of those grading adopt those by the physical markets markets or, certain circumstances, by fixed by under certain fixed the physical law. or, circumstances, by law. Where there there are legal standards, standards, the the purpose the exchange is to to are no legal of the purpose of exchange is and adopt grades standards are in the general use in the standards which in the in are most use the adopt grades general physical trade, trade, as as well well as as to to make its with existing its practices conform with physical practices existing trade usages. Not infrequently the exchange to play play a leading leading trade usages. is able able to exchange is infrequently the in part in the improvement of trade practices. Its efforts are always directed of the trade Its efforts are directed part improvement always practices. in rules toward securing uniformity in rules and customs. Standards of customs. Standards of securing greater greater uniformity contracts of weighing, weighing, inspection, inspection, and '!I ad:II'!. whether established contracts and of established ",i;i<1:ir>. directly or merely adopted improved by the exchanges, or and the insure directly merely adopted improved by exchanges, insure in orderly dealing in the futures markets and create another close point the futures markets close create orderly dealing point of the futures the physical markets. of contact contact between the futures and the cash) markets. physical (or (or cash) Excha·nges as Regulators of Consumption. Price is the prime reguas Price the is Exchanges Regulators of Consumption. reguprime lator of lator production and consumption. High prices tend to stimulate of production tend to stimulate consumption. High prices production and to to discourage discourage consumption, whereas low prices prices operate production consumption, whereas operate conversely. regulatory effect of prices is in evidence in phase in The effect of in any evidence is conversely. any phase regulatory prices 99 For a a
detailed discussion, discussion, see see Chapter Chapter Ill. more detailed III.
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
48
of life, whether or not there there are markets. It It are organized of our economic life, organized markets. cannot be said, said, therefore, therefore, that that the the commodity as function as commodity exchanges exchanges function regulators of the rate of consumption or production. They do, however, the rate of do, however, regulators consumption production. They exert important stabilizing stabilizing influence. influence. Prices the exchanges exert an important Prices on the are exchanges are sensitive. They register register almost immediately the force the many sensitive. They force of of the immediately the many and varied factors factors which influence influence prices prices throughout the world. world. Because the throughout prices thus are brought into close relationship supply and demand with into are close brought prices relationship supply to a greater and because price price movements discount to lesser degree greater or lesser degree what it may the future future may may hold in in store, may be said the machinery machinery of the said that that the of the store, it exchanges enables prices to as regulators of the rate of conto function as regulators of the rate of conprices exchanges and volume sumption the of production the of production more efficiently efficiently than would be sumption the case case without organized organized futures futures markets. markets. the A Henry H. Gate, Cate, president president of Flour Mills Mills of America, A statement of Henry of America, Inc., of of Kansas City, City, Missouri, before the the Joint Congressional Committee Missouri, before Inc., Joint Congressional 10 the Economic Report Reporpo (December 1947) on the will in conclusion serve serve (December 1947) will to to illustrate illustrate effectively clearly the the practical practical economic benefits benefits of of effectively and clearly futures futures trading to millers, merchants, and producers: to millers, merchants, trading producers: Mills of mills located •.. Flour Mills of America, America, Inc., Inc., operates operates mitIs in Kansas, Kansas, Missouri, located in Missouri, .
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also operates operates thirty in the the and Oklahoma. Our company elevators located located in company also thirty country country elevators states of Kansas, Missouri, and Illinois, buy wheat wheat direct direct states of Oklahoma, Missouri, Kansas, Oklahoma, Illinois, where we buy In addition, addition, we operate terminal grain located in from farmers. farmers. In in Kansas from Kansas elevators, located grain eleva
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assure you that to not be be fully realized. Let me assure to men in in the the business business the may not the you that fully realized. may through price changes looms as one of the biggest factors in the as of in looms factors the the through price changes biggest business. The great quantities of held by by modern businesses businesses of of grain of this this kind business. grain held great quantities and the very considerable of price price fluctuation possible over the period period in in fluctuation possible over the size of the very considerable size which grain grain must must be be carried carried make the the risk risk so that it could easily wipe so great that it could which great easily wipe out the the entire entire capital capital investment investment of of an an operating out company. . . . operating company. Wheat comes the market as as producers producers elect to sell merely as as millers millers elect to sell it, not merely comes on the it, not of merchants may may wish wish to to buy buy it, the volume of grain bought may be and and merchants it, and the grain bought may be frequently is is very very large large in in relation relation to to any any demand existing the time, that at the so that time, so existing at frequently very amounts must be accumulated without knowledge knowledge of of when, when, where, where, large amounts very large what price price it it will will be be sold. sold. and at at what
risk of of loss loss risk
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10 This This Committee Committee had had under under consideration consideration aa proposal atlministrathe Truman administraby the proposal by be empowered to determine tion that the the Commodity Exchange Authority Authority be determine the the margin tion that margin Commodity Exchange empowered to to the by commodity exchanges to protect the exchange contracts from contracts requirements imposed protect exchange requirements imposed by commodity exchanges this to control default. Administration was was seeking this authority to control margins as a method as a method default. The Administration seeking authority margins is a a major major cause cause of of regulation regulation of on the the assumption assumption that that speculation of speculation, of of speculation is speculation, on inflation and deflation. deflation. inflation
Economic Economic Functions Functions
of Exchanges of Commodity Commodity Exchanges
49
price of of wheat is is aa world world price, price, and, the period period of The price of storage, harvest and, during during the storage, harvest on in is going in some part of the in every month of the year, with wide of the world in the of with going every part year, in swings in price frequently a result. a result. swings price frequently entire process process of of the the handling handling of the Covering the entire flour from the of wheat and flour Covering the to the consumer producer to the of flour, 'the coverage of risk in the absence of hedging of the flour, producer coverage of risk in the absence of hedging would constitute constitute an important part of of the for the the distributive distributive and the charge important part charge for processing services. services. But the the modern device hedging transf.ers device of of hedging transfers practically all processing practically all the risk risk and cost cost of bearing it it to to others, others, and the the community community is is thereby relieved the of bearing thereby relieved of of the the expense. those who delight in taking pay for are those risks and will will pay for delight in taking risks expense. There are the the privilege. privilege. But most men refuse refuse to to take take risks risks in with their their usual in connection connection with usual business ventures ventures and, them, insist which make business if they must assume them, insist upon and, if they prices which upon prices an ample ample allowance allowance for for these these risks. risks. Futures Futures markets markets afford opportunity for business men, afford an opportunity for business men, through through hedging, hedging, to transfer a a part to transfer part of of their their risks risks from their their own shoulders the shoulders to the shoulders to shoulders of of are more willing those who are in those willing to carry in the hope of gains through price them the of gains through price carry hope fluctuations. evidence to to suggest suggest that market, fluctuations. There is in the is evidence that specu'lators the wheat market, speculators in as the risks of as a group, group, pay pay heavily heavily for for the the privilege privilege of the risks of wheat price of carrying carrying price I changes; so far as I aware, there is convincing evidence that speculators so far that as am there no evidence is aware, changes; convincing speculators in the wheat market, in the market, as a group group and over receive any any large over a as a a period of years, years, receive large period of for carrying the risks they assume. Whether speculators in the the reward for the which assume. risks carrying they speculators in of markets, in in fact, fact, do pay pay for for the the privilege of carrying the risks of price wheat markets, the risks of carrying privilege price is clear changes or do receive receive some remuneration remuneration for for their their risk-carrying, that it is clear that risk-carrying, it changes or they carry the risks for a smaller charge than would be exacted for the same be for the than exacted risks for a smaller the charge they carry service by elevator operators, millers, millers, and the the like like.. . . . service by elevator operators, In every year there is a large of to is farmers' hands to a wheat from farmers' In movement of large every year there market following following the the harvest. harvest. . . . This is is what is known in the trade as the in the trade the as is "01« I. •••. : period" because because of of the the large large quantity which moves at that time at that ";u
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Commodity Futures Trading Trading Exchanges and Futures Commodity Exchanges
50
it is is acquired, sell wheat becomes becomes available the market, market, and, the futures as it futures available on the wheat and, as acquired, sell out the This again is a familiar and used of hedging contract. much used is a familiar method of contract. This hedging which again protects the miller against price changes. Whether the wheat goes up up market miller the the goes against price changes. protects or makes no difference difference to to the the miller, miller, because because in in either either case there is is an or down makes case there offsetting operation operation in the futures market which keeps price. . . . the price. in the futures market keeps him even on the offsetting as price II have have discussed the usefulness usefulness of insurance futures markets as of the discussed the the futures price insurance the of free through the process of hedging, the benefits of a free and liquid but benefits of futures the hedging, liquid futures through process market to to the the trade trade and 'and to to the the public public extend beyond beyond the risk. the avoidance of risk. avoidance of market a Operators of business enterprises figure a return on the capital invested return the must invested of business figure capital enterprises Operators as aa part part of of their their costs costs of of doing doing business. business. It therefore, that that the It follows, the greater as follows, therefore, greater the investment required, the greater the margin of profit be. By By the the must be. of investment the capital margin greater profit capital required, reason of of the the availability availability of hedging market, market, millers are ahl'e men are able of a a hedging millers and grain reason grain to operate operate on substantially substantially less capital than than they they would otherwise require, with otherwise require, less capital to risk of market corresponding benefits to the public. The elimination of ,the risk of elimination of the the benefits to corresponding public. men it possible for for these business to borrow changes through hedging it these business to makes changes through hedging possible of their from the banks on the the basis basis of of 90 per cent value of their grain the banks cent of of the the market value 90 per grain as low as as 11 inventories and at at rates rates of of interest interest as H per per cent currently. it inventories currently. Were it maintain not for this hedging hedging protection protection it a working it would be necessary to to a not for this necessary working is a capital 3~ to to 55 times times that that which is there is a satisis now required. Unless there satisrequired. capital from 3J faotory futures market, such basis of credit as now prevails could be granted of credit as futures no basis market, granted factory prevails to to millers millers and grain grain men. In order the greatest order for for the the futures futures market to to be of usefulness to to millers millers in in of the greatest usefulness protecting against price changes, it is that ,the be broad them it is important that the market broad protecting against price changes, important and liquidin liquid-in other other words, words, that that there there be be sufficient trade in in the sufficient trade the market to to make it possible possible for for the the miller miller to buy buy or or sell with minimum price price fluctuations. sell with it fluctuations. A thin thin market-one with with aa small small volume of trade-makes makes it it difficult for ,the marketone of trade difficult for the miller miller to to execute his hedges hedges and subjects subjects him to to wide fluctuations result fluctuations which may result execute his may in losses. losses. in . . . Some have have thought thought that that the the futures futures market should be be confined to those those confined to wish to to hedge hedge grain; grain; that that is, is, [it should function] solely as an operation against who wish should as function] solely operation against [it specific cash grain. in the the market know that that it it could be could not not be grain. Men experienced experienced in specific cash maintained under such such conditions for the the reason reason -that a comcomthat there conditions for cannot be a there cannot plete coincidence coincidence in point of of time time or or in in volume. There must be others others in the in point in the plete market ready ready at at all all times times to to trade trade against against any hedging transaction. Such transaction. men any hedging are also the are called called speculators. speculators. They the men who carry the risk. risk. are also They are carry the A large of trading is essential to a good hedging market. A large is of essential to volume good hedging market. large trading large is necessary to obtain a true trading in the futures futures market is true expression expression volume of of trading in the necessary of values. Large results in in minimum fluctuations, thin market of values. a thin fluctuations, whereas a Large volume results causes fluctuations. Obtaining Obtaining and expressing the true value of grain grain is is the true causes wide fluctuations. of expressing important public public function, jealously guard. the exchanges an important function, which the exchanges jealously guard. to express, Speculators because they they have come to are important there is is express, where there Speculators are important because aa bona fide market, the the best best judgments judgments of the world on the the value value of the 'commodifide market, of the of the commodiin which they ties in they deal. deal. • . . ties .
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of the After the practical practical benefits benefits of the exchange, it is After this this testimony is testimony on the exchange, it of function appropriate that consider the function of speculation in futures consider in that we the futures speculation appropriate trading. trading.
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CHAPTER
CHAPTER
III I ll) J
Speculation-A Constructive Economic Speculation A Constructive Activity on Commodity Conunodity Exchanges Exchanges Activity
Not infrequently infrequently commodity (or futures) as distinguished commodity (or distinguished exchanges, as futures) exchanges, from the the physical physical (or cash) markets, are referred to as speculative are referred to as markets, (or cash) speculative markets. The term is not incorrect, if its application is clearly underis not if its is incorrect, clearly underapplication If it stood. If is used to a vehicle stood. it is to imply that the the futures is solely futures market is vehicle imply that solely a for speculation, is the for the phrase is merely a demagogic catchword. If it is used it catchword. If is used merely speculation, phrase demagogic and understood to to mean that that speculation speculation is vital and integral part is a vital integral part of the the work of of the of the futures futures markets, markets, the the definition less faulty. definition is less is faulty. The commodity are of benefit to to of direct direct and inestimable inestimable benefit commodity exchanges exchanges are the physical physical markets markets in in affording affording facilities insurance or facilities for for insurance or "hedging" "hedging" purchases and sales-insurance sales-insurance that that cannot be be effected in any way effected in other way purchases any other in our modern society. society. Through Through the the transfer transfer of risks from producers, producers, in of risks merchants, and manufacturers manufacturers to to speculators, the price to the consumer the to the merchants, speculators, price is to the the producer producer is higher than would otherwise prevail. or that that to is higher is ,lower lower or otherwise prevail. exchanges and the the speculators operating here are consequently here are The exchanges speculators operating consequently performing economic functions vital to the public functions vital to the interest. public interest. performing in the the Distribution The Function Function of Speculation in Distribution of of Staples. of Organized Organized Speculation Staples. The statement statement of of Mr. Harry Harry Shere the Joint Congressional Shere before before the Joint Congressional Committee on the the Economic Report Report (December (December 1947) 1947) emphatically emphatically illustrates the practical necessity necessity for trading and the the economic for futures illustrates futures trading the practical functions organized speculation the distribution grain: of grain: of organized distribution of functions of speculation in the ... II am vice-president vice-president of of the the Van Dusen, Dusen, Harrington Harrington Company Minneof MinneCompany of apolis, Minnesota. conduct a general grain, milling, and feed business, in a feed We conduct Minnesota. business, in general grain, milling, apolis, connection with with which we operate terminal elevators. . . . terminal elevators. connection operate All of us us agree is in the direct direct interest producer and consumer alike alike in the it is interest of that it of producer All of agree that that have in this country a marketing system is efficient and operates which a is this efficient we have in that marketing system country operates 'a't the the lowest lowest possible possible cost. I,t follows follows that that any confeature of of operation cost. It at any feature operation which conbenefit of tributes efficiency and low cost is also the direct producers to the direct benefit also to of producers cost is t6 that that efficiency tributes t6 is futures futures trading. feature to to which II refer refer is trading. It It is is the the foundaconsumers. The feature foundaand consumers. to it to tion of the the whole whole grain marketing system. look to it to absorb the We absorb stone of tion stone the grain marketing system. of the vast risk of of price price change change inherent inherent in the ownership of the vast quantities of grain in the of risk ownership quantities grain buy. The futures futures market market enables us to to perform perform our specialized enables us we buy. functions, specialized functions, .
SI 51
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Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
52 52
the pw< (',~illg of of grain, grain,. with with maximum efficiency at a a minimum the storage storage and processing efficiency and at of price price difference difference between the the net net return return to to farmers the net cost to to conconof farmers and the net cost sumers sumers.. . . . .
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In this this country country aa very very small small proportion proportion of the grain which leaves leaves the of the the grain crop crop which in the is consumed in the area area where where it of grain it is farm is is produced. The gathering of gathering grain produced. in production in production areas areas and its its distribution distribution to the areas are most to the areas of of consumption consumption are important functions of of our our marketing marketing system. system. The farmer finds finds an immediate immediate important functions at the local country elevator. The country elevator, market for for his his grain grain at the local country elevator. country elevator, howfor local sell for local consumption but an insignficant proportion of of its purever, can sell its purever, insignficant proportion consumption but chases from farmers. farmers. Furthermore, Furthermore, country country elevators have aa limited limited storage chases elevators have storage capacity. At harvest harvest time time huge huge quantities producing areas areas of grain the producing quantities of grain from the capacity. for this are delivered to to the the local local country have aa market market for this are delivered elevators, which must have country elevators, grain in in order to accommodate farmers farmers who wish wish to order to their grain. to sell or store store their sell or grain. grain from consumers develops over the the entire year. It not constant. constant. entire crop It is is not Demand from develops over crop year. accordingly, periods periods when mills mills and processors processors are in the There are, not in the are not are, accordingly, at such a It is elevator operators vital is at such times times that that terminal terminal elevator a vital conmarket. It market. conmake operators tribution uninterrupted market. market...• to a a smooth, tribution ,to smooth, uninterrupted Terminal merchants merchants and elevator perform two major major functions. elevator operators functions. operators perform to They provide storage capacity to carry large quantities of grain cannot of which cannot carry large quantities grain They provide storage capacity be consumed immediately, immediately, but but must be be held held against future demands as these as these be future against crop year. They further provide equipment develop over over the the entire entire crop further demands develop year. They provide equipment the many in their terminal elevators to process process grain for the varied consumer in elevators to their terminal grain for many and varied requirements. total storage capacity of all terminal elevators in the United United of all terminal elevators in the The total storage capacity requirements. States million bushels. bushels. In Minneapolis Minneapolis alone there in excess of seven seven hundred million alone there States is is in excess of in 91 million bushels of storage space; in Kansas City, 61 million; in Buffalo, are in Kansas 61 bushels of million 91 are million; Buffalo, City, storage space; 57 million; in 50 million; 46 million; million; and in in in Chicago, in Duluth and Superior, 57 million; million; in Chicago, 46 Superior, 50 Omaha, 28 million--to only of the larger centers. Most of these some of centers. of to mention million the these Omaha, 28 larger only are ,the public and, as such, the physical physical grain elevators the depositories of the are public elevators are and, as such, are grain depositories of are federal is delivered futures contracts. licensed by a state state or delivered on futures contracts. They or federal which is They are licensed by a thereby qualified qualified to to receive, receive, for handling, grain agency for storage are thereby storage and handling, grain agency and are which they they themselves themselves do not not own. They They must must post bonds as the as dictated dictated by which by the post bonds licensing agency. Their Their warehouse warehouse receipts receipts are or federal are regi$tered with a a state federal state or registered with licensing agency. commission, and they they are are subjected to inspection inspection at regular intervals to satisfy at regular intervals to commission, subjected to satisfy the authorities authorities that that the the grain grain represented represented by warehouse receipts receipts is their warehouse is actually the by their actually of a proper in store is of proper grade. grade. in store and is with modern machinery machinery which constantly constantly These terminals terminals are are equipped equipped with with the the to keep pace with the changing demands required of
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Speculation Speculation
53 53
of other other industries industries which convert numbers of convert whole grain into human and animal animal grain into food and other other industrial industrial products. products . . . . food It is is generally conceded that It that terminal terminal elevator handle these these enorelevator operators enorgenerally operators handle quantities of grain economically economically and efficiently from crop year to crop mous quantities of grain to efficiently crop year crop well year. What is not so well understood is the fact that these competing terminal is the that not so understood is fact these terminal year. competing .
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their maximum contribution to the the marketing marketing process process enterprises contribution to enterprises can make their because because the the marketing marketing machinery, machinery, so highly developed in the United States so highly in the States developed over the the past past seventy-five seventy-five years, years, provides provides hedging hedging facilities, that is, insurance facilities, that is, insurance against the the risk risk of loss through through price price change. futures market which It is the futures of loss is the against change. It enables enables the the terminal terminal operator, in common with with all the distributive distributive all segments in the segments in operator, in to transfer system, to transfer this this price price risk. risk. // If speculation speculation is sufficient volume, is present in volume, system, present in sufficient the the futures futures market market is risk is readily transferred. If, on the is liquid and the other is readily the other the risk transferred. If, liquid ;w r* hand, speculation speculation is is driven driven from from the the market, market, hedging r"';':',:;i:. hand, hedging becomes i'oI a development difficult seen such a trade narrows. narrows. [Italics ours.] We have have seen development as the the trade difficult as [Italics ours.] function, that is, to to insure insure the the financial financial recently. Margins, which which have have only that is, recently. Margins, only one function, integrity of of the the futures futures contract, have recently beyond the the increased beyond contract, have recently been increased integrity has measure necessary as a result. that purpose. purpose. Speculation has diminished as a result. necessary for for that Speculation the placing Concurrently, trade trade has has narrowed and the placing and recovering recovering of of hedges hedges Concurrently, in As is case all fields against the grain buy sell has difficult. is the case in all fields the and sell has difficult. we become the against grain buy the smaller the risk to of insurance, the greater the of underwriters, the smaller the risk to the the number underwriters, insurance, of of greater each. each. So it it is speculation in in grain grain futures. futures . ... is with with speculation If the futures futures market were not not permitted permitted to provide If the to function function freely freely and provide elevator operators with with the the means of protecting themselves price themselves against elevator operators of protecting against price change, change, would their ability to serve the farmer efficiently be impaired. impaired. The their be serve the farmer and consumer to efficiently ability price difference difference between between producer producer and consumer would inevitably be widened. widened. inevitably be price At harvest harvest time, time, when many many farmers grain in large volume, the farmers are are delivering large volume, the delivering grain in the result would be be aa lower lower net net return return to to the the producer. producer. Later the crop crop year, year, as Later in as result penalty fall largely upon the consumer by way supplies decrease, the fall the would the by way largely upon penalty supplies decrease, of aa higher higher price price to to him. him. of of bank credit operators require require very very large to finance Terminal operators credit to finance large amounts of the grain they buy, buy, store, store, and process. process. Terminal elevator receipts the elevator warehouse warehouse receipts grain they are highly regarded regarded as for loans loans by by banks. banks. They regarded because becau5e collateral for are so are highly as collateral so regarded They are the terminal terminal operator, operator, who borrows borrows against has hedged the grain the grain, the against the hedged the grain and grain, has thereby protected himself himself against the risk risk of loss through change. If this If this of loss against the through price price change. thereby protected to restrict were not not possible, possible, the the banks banks would be be obliged obliged to loans, since restrict their their grain since were loans, grain they would be be secured secured by by collateral fluctuating value; value; it it would become difficult, collateral of of fluctuating difficult, they if not impossible, impossible, to to finance finance the the movement of crops. As a matter of a of fact, if not of grain fact, grain crops. of it is conceivable that, without adequate hedging facilities, many of the it without is entirely conceivable facilities, that, many adequate hedging entirely bank credit smaller elevator operators, operators, finding finding it it impossible to secure sufficient credit secure sufficient to smaller elevator impossible If that unhedged grain, grain, would be be forced to discontinue discontinue business. that should occur, occur, business. If on unhedged forced to the final result result could easily be be that that only only aa comparative few financially strong the final could easily strong financially comparative elevator interests interests would remain in this field. field. in this elevator ;>*>:.:;/;.
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Without Speculation Exchange Exchange Markets Could Not FuncWithout Organized Organized Speculation
tion. Providing aa medium for for insurance transactions is is the the principal principal insurance transactions tion. Providing
as a a economic the commodity commodity exchanges. function of of the alone, as economic function Hedgers alone, exchanges. Hedgers
54 54.
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
class, however, are not sufficiently sufficiently numerous, numerous, even with with all producers, all the the producers, are not class, however, manufacturers who constantly constantly use the exchange dealers, use both the dealers, and manufacturers exchange and the physical physical markets markets for both hedging hedging and non-hedging non-hedging operations, to for both the operations, to maintain the broad liquid exchange markets necessary for the perand for the the perliquid exchange markets necessary of the the insurance insurance function. function. Another group of traders be formance of of traders must be group harnessed into the the exchange exchange marketa market-a large of speculators, number of harnessed into large speculators, with , capital capital funds, willing and able are willing able to to absorb absorb with immense funds, who are credit risks risks which the the hedgers hedgers want to to shift to other other shoulders. market and credit shift to shoulders. distinction between between the the speCUlative trades and the trades The distinction the hedging speculative trades hedging trades If the of the the trader. trader. If intent of the is to in the the intention intention of the intent is to be found solely of the solely in at the operator at the time of the sale or purchase on the exchange is to protect time or the is to of the sale exchange operator purchase protect an existing in the or market position contract or position in the physical risks existing contract physical market from risks might otherwise long or of price price changes changes which might of otherwise develop or existing long develop from existing short positions-as in in the the case case of of aa farmer, of his growing crop, short positionsas of his farmer, long long growing crop, or or short short of of the the raw material material which it it converts converts into into a factory, or a factory, long long or finished products-it is a hedge; hedge; if the operator, whether if the of the is a intent of finished productsit the intent operator, whether a potential it is for a a he sells or buys, buys, is merely to to trade trade for profit, it is a speculation, is merely sells or he potential profit, speculation, but both both the the (long) purchase or (short) sale but or (short) sale of of the the speculative trader (long) purchase speculative trader for some non-speculative usually will will serve insurance hedge hedge for serve as as an insurance non-speculative operator. usually operator. In this this connection, it should should be be noted that the volume of that the actual of actual In connection, it deliveries of of aa commodity commodity on any exchange furnishes indication of furnishes no indication of deliveries any exchange the relative volume of hedges and speculative trades. The hedger hedger usually of hedges the relative usually speculative trades. elect to to deliver deliver or to take take deliveries contracts. does or to not elect deliveries on exchange contracts. does not exchange Neither does the speculator, a rule. rule. When the the need for insurance no for insurance as a Neither does the speculator, as longer exists, the the hedger hedger undoes his his 'hedge or buying longer exists, "hedge by by selling selling or buying what he had previously previously bought bought or or sold; sold; the does the same thing the speculator he does the speculator thing fix his wishes to to take take his his profit profit or or fix his loss, as the case may be. The the as when he wishes case loss, may be. important to remember is is that that both the the hedger fact to the speculator hedger and the important fact speculator insist on delivery of the actual commodity, can always always deliver deliver or or insist of the actual can if they delivery commodity, if they so choose. To assume, as is sometimes done, that the extremely small proas is that so choose. the small assume, done, extremely proportion of actual deliveries deliveries to to total total volume of of annual sales of actual sales on each each portion all that practically all trades are speculative exchange necessarily indicates that indicates trades are practically exchange necessarily speculative is to proceed proceed on aa false premise. It It would be be as to reason reason that that the the as logical false premise. is to logical to of facts facts means that that nearly nearly all all trades hedges, for both specusame state trades are for both state of are hedges, speculative trades and insurance insurance (or (or hedge) hedge) transactions transactions on the the exchanges as aa lative trades exchanges as rule are are closed closed out through the the clearing house without deliveries. house out through deliveries. rule clearing It is is our purpose purpose here here to to ascertain reasons for highly organized ascertain the the reasons for highly It organized in commodity futures, to examine carefully the speculative activities in to activities futures, commodity carefully the speculative many attacks which have been directed against speculation, and to analyze directed have been attacks which to against speculation, many analyze are made from time the various defenses time to to time. of speculation defenses of the various time. speculation which are not attempt attempt to to prove prove aa case case for for or speculation as such, or against We shall as shall not such, against speculation attacks and defenses but shall the validity validity of of these these attacks defenses and explain shall consider consider the explain ,
Speculation Speculation
55 55
vital and essential the vital essential economic functions functions which which risk-bearing risk-bearing spec. specplays in in the the workings workings of the futures markets in in staple of the futures markets plays staple commodities. commodities. Attacks on Speculation. Speculation. Speculative Attacks Speculative activity activity on commodity commodity exchanges exchanges has been and even has long long now (in a subject is a of frequent (in 1948) 1948) is subject of frequent and assaults from various violent assaults violent various quarters, quarters, including the federal federal government including the government at at times. times. Paradoxically, Paradoxically, speculation comes under attack from prounder attack from both both prospeculation ducers and consumers, the fires fires of the two two groups of the are generally consumers, but the groups are generally leveled during drastically different phases of the business cycle. leveled different of the business during drastically phases cycle. When are low at commodity prices are at the of a depression, the producer the bottom a of the commodity prices producer depression, is is the the most vehement critic critic of of speculation. speculation. It that the the It was no coincidence coincidence that exchanges the heavy fire of producing interests in the early came under fire of the in interests the exchanges heavy producing early the nadir 1930's, nadir of of the the last last major major downward spiral prices; of commodity 1930's, the spiral of commodity prices; a mere coincidence that nor is it a is it that agitation interests agitation from producing producing interests to a dwindled to a whisper whisper as as commodity prices swept upward to the highest to the commodity prices swept upward highest in in the prices in history in the major inflationary spirals from 1914 to 1920 and 1914 to 1920 history prices major inflationary spirals the powerful powerful influences from 1939 to 1948, of the 1939 to influences of the First First and Second Second 1948, under the If and when another downward swing in World Wars. Wars. If in commodity prices swing commodity prices the highly highly inflated inflated levels the Second World War period occurs, from the levels of of the period occurs, may again again expect expect violent violent attacks attacks from producers producers upon upon organized we may organized speculation's alleged depressing influence on commodity price influence levels. commodity price levels. speculation's alleged depressing government in in (October) (October) 1947 vigorously attacked The federal federal government 1947 vigorously attacked specuspeculation the wheat exchanges the country the prevailing prevailing of the of the lation on the because of country because exchanges of high prices. prices. Harry Harry S. Truman, President President of the United States, States, in public in a S. Truman, of the a public high statement placed the the blame for these high high prices speculation for these on statement placed prices speculation and demanded the the doubling doubling of the cash the exchanges. of the cash margins margins required by the exchanges. required by there are of of preventing are more effective As we shall shall see, effective means of abuses of see, there preventing abuses speculation, where they exist, than an arbitrary increase in margin in than increase where they exist, arbitrary margin speculation, requirements-a device which penalizes penalizes the the innocent the innocent along along with the requirements a device guilty, reduces trading volume, and destroys the breadth and liquidity breadth the reduces volume, destroys guilty, trading liquidity of exchange markets markets at the very very time time when these these characteristics characteristics are are most at the of exchange needed to prevent violent and disastrous fluctuations. fluctuations. disastrous needed to prevent violent In this connection connection an editorial editorial of the New York Times under date of of of the In this October 17, 1947, is decidedly in point, as follows: in as follows: is October 17, 1947, decidedly point,
ulation ulation
.... . . At aa press press conference conference at yesterday, President President Truman at the the White House yesterday, the expressed satisfaction with the progress of the food conservation program, of conservation with satisfaction the program, progress expressed which he. he .found signs of success. even as he making this stateas was stateof success. But this found showing which making showing signs as at were as ment in in Washington, futures M Chicago soaring a's high as $3.05 wheat futures $3.05 soaring high Chicago Washington, at between $3.02 a bushel bushel for for December delivery, dosing at a $3.02 and $3.03. $3.03. Now, delivery, and closing the government's the food program is not merely merely a question government's is not conservation program food conservation the question of the wheat for relief. It of acquiring 100 million bushels of additional wheM for European relief. It is is aa bushels additional million 100 European acquiring without serious to question of acquiring that serious disturbance to that wheat American question of acquiring
56
Commodity Futures Trading and Futures Commodity Exchanges Exchanges and Trading
is that prices. And the the unpalatable unpalatable fact that its begun to to justify justify itself itself fact is its policy has not begun policy has not in the to to date date in the latter latter respect. respect. On the the Saturday before the President launched his before the President launched his Saturday December wheat at program, wheat closed at $2.80. At the end of nine trading days yesclosed the At of nine $2.80. program, trading days yesit stood stood more than 'terday, than 22 22 cents cents aa bushel bushel higher. But an greater source even greater an even source terday, it higher. But of is that of concern is that Mr. Truman, Truman, instead instead of the situation, of facing the realities realities of of the situation, facing the still in the the commodity markets as as the the major major factor behind still stresses stresses "gambling" factor behind "gambling" in commodity markets the in food prices. the rise rise in food prices. It seems seems to to us It us that that it it is is time time for for some some plain plain speaking this issue issue of about this of speaking about "gambling." the President President began began his food-saving campaign his food-saving ten "gambling." When the campaign some ten his first first steps steps was was to to demand that that trading trading margins the days of his ago, one of days ago, margins on the commodity exchanges be raised from 17 per cent to 33~ per cent [of the value be raised cent from to cent the 17 value 33i commodity exchanges per per [of of of purchases purchases or or sales]. sales]. This was, we believe, believe, aa mistaken mistaken one, This course course was, one, stemming stemming volume of prices, on on the the from confusion confusion between between volume the one hand, hand, and prices, of activity, activity, on the in the other. The fact that wheat wheat prices prices in the United have been been the the other. United States are and have fact is is that States are is no futures In Canada, where there there now is market (and, lowest in the the world. world. In futures market lowest in Canada, where (and, is selling at therefore, presumably, no "gambling") wheat is cash wheat than $3.25 therefore, presumably, $3.25 selling at more than "gambling") cash a bushel; bushel; in Argentina it in the the neighborhood neighborhood of Truman's it is is in of Mr. Mr. Truman's of $6.00. a in Argentina $6.00. Those of persuaded him that that raising raising grain margins would reduce reduce advisers who persuaded advisers grain trading trading margins latest available available speculative were entirely correct on that that point. entirely correct activity were speculative activity point. The latest failed to it has has fallen 53 per per cent. they failed to realize figures show that it fallen 53 cent. What they realize was show that figures of thinned-out that, pricewise, the impact of government purchases on a thinned-out market the that, pricewise, government purchases impact a of was bound to be far more severe than on a market of large volume. of this kind than far severe market volume. to be more of this kind was large far in in the as far as they That explains explains why why prices prices have have risen risen 'as the past nine days they did did That days as past nine first week of of October. over
prices.
in grain In connection with the the charge that speculation grain was was the the cause cause In connection with charge that speculation in S. Vaile, of Economics, of high prices in in 1947, Professor of of R. R. S. a statement statement of of Vaile, Professor Economics, 1947, a high prices
the Joint University of before the of Minnesota, Minnesota, made before Congressional Committee Joint Congressional University is particularly interesting: on the Economic Report Report (December (December 1947) the Economic on 1947) is particularly interesting: of individual individual commodities It is common knowledge, knowledge, of that prices of course, It is course, that prices of others are other. Some are rising, rising, others are are continually changing in relation to each other. relation each in to are continually changing the falling, and still others are remaining constant. or constant. Generally, Generally, the dispersion dispersion or falling, and still others are remaining the several of the several commodities from one differences in the the movements movements of prices of of prices differences in in the has been true true in the 'post-OPA year's end to the next is considerable. This has post-OPA year's end to the next is considerable. the indicated as 1, 1 946-0ctober, 1947), as indicated clearly by the price history period (July clearly by price history period (July 1, 1946-October, 1947) of following 18 important basic basic materials: materials: 18 important the following of the ,
Speculation Speculation
57 57
RELATIVE PRICES RELATIVE Pcrcenlflf.!/.· Increase Increase of High the October 1947 1947 High of the Percentage the June over June 1946 Prices over the 1946 Prices
% %
% %
2 Rubber 6 6
Cotton
Zinc 21 21 Zinc 34 Sugar 34 Sugar 48 Copper Copper 48 54 54 Tin 60 Wheat
69 69
Steers Steers 72 Corn
Lard Lard Coffee Coffee Lead Rice Rice Cottonseed Cottonseed Oil Oil Hogs Hogs Steel Steel scrap scrap 140 Hides Hides
75 75 81 81 82 82 85 85 86 86 99 99 115 115
500 500 Cocoa
Average 90% Average 90% The average average increase increase for range from is 90%, with for the the 18 18 commodities commodities is 90%, with a range If the first and last are 2% to to 500%. the first last commodities commodities (both of which are imported) of 500%. If imported) (both are omitted, omitted, the the remaining remaining 16 a 70% 70% increase price, with with a range 16 show a in price, increase in range from to 140%. 6% to 140%. Wheat and corn prices at prices showed increases respectively, at of 60% increases of 60% and 72%, 72%, respectively, or just just below the the middle middle of of the the range range of of increases. bought and sold sold increases. Cotton, also bought Cotton, also on commodity commodity exchanges, exchanges, -showed is explained showed an increase increase of of only case is only 6%. (This case 6%. (This explained in in large part by the fact that there was OPA price ceiling cotton in June, June, in the fact on that no there was cotton large part by price ceiling 1946, in other words, the the price price already already had risen risen in response -to other words, in response to economic 1946, or, or, in demand before before June, June, 1946.) 1946.) relative price price increases negate the the charge These facts facts concerning increases appear to negate concerning relative charge appear to that operations that operations on grain grain exchanges in and of themselves have influenced in in in of themselves have influenced exchanges any major degree the price increases that have occurred. least it is apparent the have At least it that occurred. increases is any major degree price apparent that the increases in wheat, wheat, corn, corn, and cotton prices between June, June, 1946, that the increases in cotton prices 1946, and October, are less, less, rather rather than than more, more, than than average average increases increases among October, 1947, 1947, are among raw material prices. material prices.
only only
if established or monopoPrices, if markets, without without monopoly monopoestablished on free free markets, Prices, monopoly or listic practices and without interference by government with listic practices without interference by government with supply, supply, demand, or prices, prices, are determined by by the the free of supply of are determined free interplay demand, or interplay supply and demand. Professional Professional speculators merely anticipate market movements; market movements; speculators merely anticipate in anticipation they not cause cause them. them. They merely buy of rising buy in They merely anticipation of they do not rising of on their analyses of various supply and demand factors, prices, based based their various factors, analyses supply prices, in anticipation anticipation of of declining prices, when they they believe believe that that supply and sell sell in declining prices, supply will outrun outrun demand. When they they buy buy they increase total total will they temporarily temporarily increase demand,' and when they they sell they temporarily temporarily increase but total supply; increase total sell they demand, supply; but in due course course they they must sell buy and buy what they sell. sell what they sell. in due they buy buy they increase run neither nor in decrease in the long they neither increase nor decrease the Consequently, the the they long Consequently, supply or the or the demand. supply Usually professional professional operators able to to anticipate are able anticipate market movements Usually operators are
58
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
buy before before the the prevailing prevailing supply-demand prices up, factors put and buy put prices supply-demand factors up, or they sell before these these same factors factors put put prices prices down. Later, Later, when the the sell before they made general public is finally fully aware from subsequent developand is fully finally subsequent developgeneral public ments (which (which the the speculators speculators have have anticipated) that prices decline ments prices must decline anticipated) that the professional is of excess vice versa) versa), the professional speculator because of excess supply because speculator is supply (or (or vice ready to to buy buy what he has has sold sold earlier higher prices prices (or vice earlier at at higher vice now ready (or in the at the the very very time time when others the market, by current versa) at influenced by others in current market, influenced versa) news, are are selling heavily (or vice versa) versa) , thus transthe offsetting thus leaving news, leaving the offsetting trans(or vice selling heavily in of the the speculator as the only stabilizing factor in the at actions of factor market at as the the actions only stabilizing speculator overthe time. In other words, organized organized speculation, according to the overother words, to the time. the speculation, according of experts, experts, in in the the long whelming consensus consensus of long run prevents whelming prevents markets from rising as high or falling as as they otherwise the as otherwise would without the as or low as they falling rising high of leveIing influence of organized speculation. influence organized speculation. leveling angle of of attack has been that is gambling attack has that speculation Another angle gambling and speculation is therefore be abolished as morally morally pernicious. Coupled with abolished as therefore should be pernicious. Coupled with as a attacks on speculation as gambling, but deserving consideration as as consideration attacks deserving gambling, speculation is the the fact fact that that speculators relatively small separate complaint, is of relatively small means speculators of separate complaint, ill may lose relatively large the exchanges and that the ill effect lose sums on the that the effect relatively large exchanges may in afford of these losses on those who cannot afford them must weigh heavily those of these losses weigh heavily in the scale the acknowledged benefits which commodity the scale against commodity exchanges against the acknowledged benefits exchanges confer. confer. of Speculation. Speculation. Speculation, Defenses of as a a beneficent beneficent economic factor, factor, Defenses Speculation, as as being in the divers grounds grounds as being in the public interest. has been defended on divers interest. has public It is is claimed that, by by bringing bringing about a gradual gradual adjustment prices to of prices It claimed that, to adjustment of the contingencies which the speculator foresees, sudden and drastic rises the speculator foresees, drastic rises the contingencies in prices prices are are substantially substantially cushioned declines in cushioned and therefore and declines less therefore are are less abrupt disastrous, less injurious to producers, converters, and conless and to condisastrous, producers, converters, injurious abrupt they otherwise sumers than they otherwise would be without speculative speculative activity. activity. second defense defense is is that that organized organized speculation steadies prices; that A second steadies that speculation prices; in markets where organized speculation does not exist price changes does in markets not exist organized speculation price changes are whereas in fluctuations more ermtic, in organized are wider and fluctuations erratic, whereas organized speculative speculative markets prices prices move within within a much narrower narrower range; range; that that speculation markets speculation both the the peaks peaks and the the valleys smoothes out of price fluctuations. out both valleys of price fluctuations. third defense de£ense is is that that speCUlation welds markets markets together together by by keeping A third speculation welds keeping at it is at a normal parity. Finally, it is advanced prices between different markets different markets between parity. Finally, prices in defense in commodity commodity markets the risks risks incident incident of speculation that the in defense of markets that speculation in to price price changes changes may may be be shifted in the the public the shoulders to shifted in interest from the shoulders public interest of producer, producer, dealer, manufacturer to to an organized body (jf profesof df dealer, and manufacturer organized body professional risk-takers-the voluntarily accept them. the speculators, who them. sional risk-takers speculators, voluntarily accept Speculation and Gambling. In considering any controversial controversial subject Gambling. considering any Speculation subject it well to to have have clear-cut definitions at is clear-cut definitions at the the start. start. When speculation it is is well speculation is gambling, the the contention that speculation and gambling contention is branded as as gambling, is that speculation gambling ,
,
Speculation Speculation
59
are the that the the poker poker player player is the speculator, are a speculator is a the same; same; that speculator and the speculator* trader is is a trader a gambler, or vice vice versa. versa. There is howis an obvious obvious distinction, distinction, howgambler, or the poker poker player player and the the speculator between the between occur speculator which must occur and clear-thinking clear-thinking observer. observer. The speculative speculative trader on a a commodity trader exchange finds present economic condifinds an ever ever present condicommodity exchange
ever, ever,
at once to every fair-minded fair-minded at to every
tion fluctuating prices, prices, based based on existing existing risks, risks, and endeavors take tion of of fluctuating endeavors to to take it it by anticipating the trends of prices. The poker player, advantage of of the trends of by anticipating advantage prices. poker player, joins with with other other gamblers gamblers in creating situon the the contrary, in deliberately situcontrary, joins deliberately creating ations out out of of which risks risks develop artificially, for the express purpose or for ations the develop artificially, express purpose or of hope of effecting a hazardous gain. Speculation thus differs fundamentally a hazardous differs thus effecting gain. Speculation hope fundamentally from gambling gambling in in this this important important particular: particular: the his own the gambler creates his gambler creates risk, whereas whereas the the speculator speculator merely merely assumes assumes existing risks, arising of out of risk, risks, existing arising out natural or or economic forces, forces, which presumably presumably he he analyzes scientifically natural analyzes scientifically before he he assumes assumes them. them. before distinction, however, however, does not go to stop That distinction, does not far enough. If we were to go far enough. If stop with this differentiation between speculation and gambling, should this differentiation we should gambling, speculation be compelled compelled to to meet the the more serious serious objection be of the the more analytical analytical objection of speculation the critic who draws his his analogy gambling between and critic analogy gambling speculation from the rather than than from the the poker poker table. table. He points out that the layel race track rather race track out that the points layei of bet on aa horse horse race race creates risks and merely profit a bet creates no risks of a endeavors to to profit merely endeavors uncertain factors factors inherent inherent in horse racingthe racing-the relative relative speed in horse from the the uncertain speed of aa number of short answer, of course, is that the layer of of animals. The short of animals. of is that of the layer answer, course, bet creates creates aa financial financial risk, risk, which would not otherwise while the bet otherwise exist, the exist, while the commodity speculator may be merely accepting the transfer of a be the transfer the of a merely accepting commodity speculator may previously existed. existed. risk which which had previously risk does the the speculator speculator in in commodities differ from the Wherein does commodities differ the man who bets-and presumably bets bets scientifically-on a horse race, considering and presumably horse bets race, scientificallyon considering of the entries, the conditions carefully the comparative past records of carefully the comparative past records of the entries, the conditions of the track, track, the ability of of the the riders, riders, and othcr other 'known the ability known factors? factors? A comparithe compariit is son of these these two two transactions transactions :>llgg(',h that it is necessary son of to go further Miyyc^ that necessary to go further than merely merely to to distinguish bctween creating risks and accepting accepting existing than distinguish between creating risks existing the nature nature of of the contract entered risks. consider the the risk risk itself. itself. Every risks. We must consider contract entered Every into by by every trader, speculative or non-speculative, sells or buys or into who sells or trader, speculative non-speculative, every buys on aa commodity commodity exchange exchange is is an obligation, by law, law, to to deliver enforceable by deliver obligation, enforceable for a a stated stated quantity or accept and pay pay a definite definite price price for of the comof to accept or to the comquantity modity at a definite time. Each purchase or sale temporarily adds to the time. or a definite sale at adds to the purchase modity temporarily total demand or supply of the commodity. of the commodity. or supply total buyer or or seller a commodity the instant of a seller of at the instant he The buyer he makes makes future, at commodity future, an of is the the purchase purchase or is integral part of the marketing machinery of or sale, the sale, integral part marketing machinery of some commodity commodity trade. trade. He increases increases either the supply either the of or or the the demand supply of at the for commodity at the moment. Whether he buys or sells-his purthe commodity sells his purfor the buys seller be from a hedging seller and his sale may be to a hedging his sale chase may be chase may hedging may be to a hedging
60 60
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
buyer-he performs an insurance insurance function. function. He may, may, at at his his own option, he performs option, buyer actually deliver the commodity or receive it; or he may step out of the the or receive deliver it; may commodity step actually transaction by counterpurchase counterpurchase or or countersale, countersale, as as the the case case may transaction by be, and may be, of the never receive receive or or deliver deliver aa single single bushel bushel or pound pound of the commodity. commodity. never Nevertheless, at time and for for aa time, time, he is the distributive is part of distributive at some time Nevertheless, part of the system useful economic function. function. is performing a system and is performing a useful Contrast the operations with those the man who bets bets of the those of Contrast the speculator's speculator's operations horse race race or bets the that the the or of of two gamblers, of whom bets the other other that on aa horse gamblers, one of price of rubber will be, say 5 cents per pound higher or lower at the end cents at of rubber will 5 or lower the be, say price per pound higher of day, week, week, month, month, or or year year and agrees basis of the the bet bet on the the day, to settle settle the the basis agrees to of such a wager of prices prevailing prevailing on the the Futures Futures Market. The layer wager of prices layer of clearly has place in the channels of distribution, performs useful in of no useful has no the distribution, performs place clearly in courts function, and for courts of of law. for that that reason reason has no standing law. economic function, standing in The speculator, because he performs performs a useful useful economic function, function, acquires acquires speculator, because duties. aa commercial commercial status status and legal right, but assumes corresponding but corresponding duties. legal right, increases supply The gambler gambler acquires acquires neither, neither, for he neither neither increases or demand; or for he demand; supply in the he renders service in the public public interest. interest. he renders no service Furthermore, every gambling gambling transaction transaction there in every there are are two or or more Furthermore, in must win others lose. parties; some one or more must and others lose. Speculation, or Speculation, parties; however, does does not not necessarily necessarily involve involve like us assume losses and gains. like losses however, gains. Let us that January to to May May the the price price of delivery for May rises cotton for that from January of cotton May delivery rises from 20 28 cents a pound, pound, advancing the even rate rate of at the of 2 cents a cents a to 28 2 cents 20 to advancing at in pound per Smith, a speculator, in January buys May cotton a cotton month. on Smith, pound per speculator, January buys May in the exchange at 20 cents; sells (or closes out) his contract in February closes contract at he sells his the 20 cents; out) February exchange (or by aa sale 22 cents cents to to Brown. Brown closes his contract 24 in March at contract in at 24 closes his sale at at 22 by cents by by aa sale to Jones, Jones, who in in turn turn takes takes aa 2-cent-per-pound profit in sale to cents 2-cent-per-pound profit in April by a sale to at 26 cents. in May closes out his a at Robinson his cents. sale Robinson closes to 26 May April by purchase by by aa sale to a converter converter of of cotton, to manufacture sale to cotton, who buys buys to purchase the price of cloth (which (which he he sells sells simultaneously) simultaneously), the of which was based on cloth price 28 cents for May cotton. for cotton. cents 28 May four speculators, speculators, everyone has made a profit profit of are four of whom has Here are of 2 2 every one of certain that pound. It It is that only only one person person could possibly have lost cents a pound. is certain lost cents a possibly If Smith's trades. 1£ in the this chain of of speculative purchase had Smith's purchase of this in the course course of speculative trades. been made from aa short the short but, if if seller would have lost; short seller short seller, been seller, the lost; but, Smith's purchase in January had been made from a liquidating holder in January holder Smith's purchase liquidating of speculative who was taking a profit, profit, we should have a series trades with with series of taking a speculative trades all profits and no losses. losses. Of course, the original producer of of the the all profits course, the original owner or producer for' if he chosen to speculate by holding the cotton for" a higher cotton, to a if chosen had he cotton, speculate by holding higher price, would have have made aa greater greater profit profit than he did did by by selling to Smith. Smith. selling to price, lose? He does not, cloth does he lose? of the of the purchaser of the cotton cotton cloth-does not, the purchaser What of in the the delivery month, May, the price of the May cotton future because in the of because future May delivery month, May, price the price price of of spot spot or or current deliveries deliveries come together together at, at, say and the 28 cents, cents, say 28 ,
Speculation Speculation
61
his purchase for cotton. Consequently purchase of cloth is is for Mayor of cotton cotton cloth May or spot spot cotton. Consequently his the current current price price of spot spot cotton. cotton. based on the After pointing pointing out that that legal legal distinctions distinctions between speculation speculation and gambling cannot properly by legislation so long distincbe made as the the distincgambling by legislation so long as properly tions are the subject subject matter or the the form of transaction, Dr. Dr. tions are based on the of the the transaction, Hadley, president of University, comments on speculation former of Yale Hadley, University, president speculation as follows: follows: as
difference between between legitimate in The difference lies neither neither in legitimate speculation gambling lies speculation and gambling nor in the subject matter in the form of the transaction, but in its intent and the matter the of the transaction, but in its intent subject purpose. Legitimate Legitimate speculation speculation involves involves anticipation the needs of the of the the market needs of purpose. anticipation of and aa power power to to assume risks risks in in making making contracts contracts to to meet meet these these needs. needs. 11
The law, as we shall shall see see later, later, enforces speculative the contracts where the law, as speculative contracts the he speculator (and the party to sells or from he buys) to whom sells whom is speculator (and party buys) is entitled under the the contract to to insist insist on delivery, or on delivery being entitled delivery, delivery being taken, if he so so chooses. chooses. taken, if States Industrial The United States Industrial Commission, Commission, in it') its extensive extensive Survey of Survey of Economic Condition of of the the United States, summed up the distributive the distributive States, up function of of speculation p. 28) 28) as as follows: follows: 6, p. (Vol. 6, speculation (Vol. of speculative in distributing Economic services speculative agencies, agencies, engaged services of distributing farm engaged in
products, are are threefold: threefold: products, They industrial risks risks among among aa commercial localize industrial class whose special commercial class They localize special places in in such is to distribute supplies over is to distribute surplus over deficit deficit times such times and places surplus supplies to lessen the uncertainty uncertainty of of producers producers and consumers. a way way as as to lessen the consumers. a 2. They relieve producers producers and consumers from carrying year's a whole year's 2. carrying a They relieve convert his into cash stock, enabling the the farmer farmer to to convert his crop promptly into cash capital stock, enabling crop promptly capital and the to supply supply himself, himself, as as his his periodical periodical needs may may require, require, without without enenlatter to the latter the rate of risk hancing prices beyond the ordinary rate of risk and returns of such capit:;tl returns of such ordinary hancing prices beyond capital investments. investments. 3. Competition dealers tends tends more than any force to to of speculative other force 3. any other Competition of speculative dealers a minimum unit of reduce profits profits of of these these agencies to a per unit of commodity handled. to handled. reduce agencies per commodity it is is to to their their interests Released functions, it interests to to seek other economic functions, seek to reduce to reduce Released from other distribution to to aa minimum. By By expert acquaintance with the conthe risks of with the of distribution conthe risks expert acquaintance ditions that involve risks, risks, the the hazardous hazardous elements limited, if not are gradually elements are if not that involve ditions limited, gradually entirely eliminated. eliminated. entirely 1. 1.
function function
in a speech speech delivered in the the Senate on July 22, 1892, White in Edward D. 'Vhite 1892, July 22, discussed the benefits of futures trading to the cotton planter as follows:to as of futures follows: discussed the benefits trading planter It gives a wider", wider: safer, safer, relatively relatively higher, higher, and less market. It less fluctuating It It fluctuating market. gives him a the cheapens the rate at which the producer obtains the money to make his the obtains to at his crop money producer crop cheapens the rate all who deal with the the producer to sell sell by producer to by futures by enabling enabling the the factor factor and all futures by is to the product product with with which which the the producer producer is to pay pay them, them, thus thus diminishing their the diminishing their the producer. risk to reduce reduce their their charges to the producer. risk and and enabling charges to enabling them to in The Functions 1 Twining Hadley, Functions Of Legitimate i Arthur the Legitimate Arthur Twining of the "Speculation," in Hadley, "Speculation," Exchanges (Chicago: Hartzell, Lord Company, p. 229. 1910) p. 229. Company, 1910), (Chicago: Hartzell, Exchanges ,
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
6s
It has has diminished diminished the the charge the middlemen by by drawing drawing the producer the producer of the It charge of sell for for future future delivery and consumer together, by by enabling enabling the the buyer buyer to to sell delivery and and consumer together, buy the the producer's producer's crop to fill fill his his future future sale, sale, already already made. crop to buy It has multiplied multiplied sellers sellers and brought brought them to to the the door of the consumer. of the It has consumer. It It them to has multiplied multiplied investors investors by by enabling to buy actual cotton and sell futures actual cotton sell futures has enabling buy against it at small advance advance to to cover cover interest thus making making the the interest and charges, a small at a charges, thus against it investment investment
safe. The investor, investor, having having sold his purpurfor future future delivery sold for safe. against his delivery against to no chase of actual cotton, is absolutely safe, is submitted to risk of fluctuation is risk of is fluctuation chase of actual cotton, absolutely safe, in the market, market, and, and, therefore, therefore, can can afford afford to to pay a better better price to the the producer. in the pay a price to producer. make better It has enabled the spinner to a better price to the consumer. buys the to the It has consumer. He buys spinner to price his cotton for consumption by means of a future contract, thus obviating the a of future contract, thus obviating the his cotton for consumption by the goods risk of a decline in the the market. market. He sells sells the he is is to to make from the the risk of a decline in goods which he cotton by aa future future contract, contract, thus thus insuring insuring a profit, profit, and thus thus enabling cotton by the spinner enabling the spinner to his business business on aa narrower, narrower, because because aa safer, profit. It to do his of profit. It has has brought safer, margin margin of brought centers of the cotton fields fields of the South nearer nearer to to the the great of American and the cotton of the great centers European consumption consumption by by diminishing diminishing the the risk, thus reducing the difference difference risk, thus reducing the European in price which formerly existed between cotton the producer producer in price in the the field cotton in field of of the formerly existed and that that cotton cotton at at the the door of of the the consumer. consumer.22
Professor Weld, says: Professor Weld, says: The functions of speculation speculation may may be be summarized under the three following the three functions of following heads: First, it largely makes possible the of risk the shifting of risk from the actual heads: First, it the actual mermershifting largely possible of commodities commodities to to aa body body of of professional risk-takers; second, it aids chandisers of chandisers it aids risk-takers; second, professional in in the price level and in regulating the rate at which the year's crop in steadying level the rate at the the regulating steadying price year's crop in adjusting is consumed; consumed; and, and, third, third, it it aids aids in prices between between different is different markets markets adjusting prices and hence hence in in regulating regulating the the flow commodities from producing producing to flow of of commodities to consumconsuming regions. 3S ing regions.
C. Emery Emery sums up up the the function function of of organized H. C. as follows: follows: organized speculation speculation as of fluctuating To relieve relieve trade trade of of the the risks risks of values, by by providing providing aa class class always fluctuating values, always ready to take or or deliver deliver aa property property at at the the market price to take in so so doing, to and, in price and, ready doing, to direct commodities to to their their most advantageous the investment investment of of direct uses, and the advantageous uses, for commodities capital the most profitable profitable channels, channels. by into the commodities and securisecurifixing for by fixing capital into 4 4 ties comparative prices prices for for delivery delivery at at different different times times and places. ties comparative places. The United United States has emphatically the States Supreme out the emphatically pointed Supreme Court has pointed out Chicago Board of Board of Chicago in the an Trade, the Court, in opinion by Justice Oliver Holmes, said: Oliver Wendell Trade, Court, Holmes, said: opinion by Justice
social benefits of speculation. speculation. In In aa case case concerning the social benefits of concerning the
This Chamber of of Commerce is, in the the first great market, market, where, first place, a This is, in where, place, a great is its hundred transacted a through its eighteen members, is transacted a large part the grain of the members, through eighteen large part of grain in a a modern market, and provision provision business business of of the the world. world. Of course, contracts course, in market, contracts are sales for are not not confined confined to to sales for immediate delivery. People will will endeavo~ to foreendeavor to foredelivery. People Congressional Record, Vol. Vol. 23, p. 6,565. 6,565. 23, p. Congressional Record, L. D. H. Weld, Weld, Marketing Marketing of of Farm Products Products (New York: The Macmillan MacmilIan Company, Company. (New York: 1916) , pp. 336-337. 336-337. 1916) pp. 4* H. H. C. Speculation on the the Stock Stock and Produce Produce Exchanges Exchanges of of the C. Emery, the United United Emery, Speculation States (New York: Columbia University University Press, Press, 1896) p. 113. States 113. (New York: 1896) , p. 2 2
8 8 L. ,
,
Speculation Speculation
63
cast future and to to make arguments arguments according according to to their their prophecy. prophecy. Speculation the future cast the Speculation is the of kind by by competent competent men is the self-adjustment of society the probable. probable. of of this this kind to the self-adjustment society to Its value is well known as as aa means of of avoiding or mitigating catastrophes, Its value is well avoiding mitigating catastrophes, equalequalizing prices, providing for periods of want. It true that the success of of want. It is and for is true that the success of periods izing prices, providing the that the induces imitation by the weak, and that incompetent persons bring imitation the strong weak, strong by incompetent persons bring in their themselves to to ruin ruin by by undertaking undertaking to to speculate their turn. turn. But legislatures themselves legislatures speculate in courts gt 11t·1.111y have recognized recognized that that the the natural a complex IK r, illy have natural evolutions and courts evolutions of of a complex be with cautious society are to touched only with a very cautious hand, and that such coarse touched that are to such coarse hand, very only society attempts at a remedy for the waste incident to every social function as a simple incident to a for the waste social as a at function every remedy attempts simple prohibition and laws to stop being are laws to its being are harmful and vain. vain. stop its prohibition <;<
Speculation Make for for Lower Prices? Prices? Many Many vigorous vigorous complaints Does Speculation complaints arise against speculation arise agricultural and other producers, inspired from other agricultural producers, inspired against speculation their by the inadequate prices their products sometimes bring on world-wide the world-wide products bring inadequate prices by markets as as compared compared with with the the heavy heavy toil toil and risks production. risks involved in production. markets involved in deal here There is intent to to deal here with problems of farm depressions of is no intent problems depressions and farmers. governmental subsidies to farmers. When speculation by to is attacked subsidies attacked by speculation is governmental as an influence producers or or demagogic demagogic politicians politicians as influence which lowers lowers prices, prices, producers of its there is is too often an imperfect imperfect understanding understanding of role; there its role; too often there is is perhaps there perhaps cost of of production more than than a tinge tinge of of the the fallacy fallacy that that the the cost production of of a a comits market price, in reality modity in a a free free price, when in modity should determine its reality in for a competitive for a staple commodity it is the economic law of market it is the law of staple commodity competitive supply and which, regardless of costs or other conditions in any demand of costs or other in conditions which, regardless supply any one locality or country, determines the price. determines the or country, one locality price. that Speculation Phases of Speculation Lowers Prices. Prices. Although Although the Contention that Phases of the it seems a the proposition proposition is is not not capable capable of of exact proof, proof, it reasonable supa reasonable the supa depressing exerts a if position that, if speculation exerts influence on prices, they influence that, depressing speculation prices, they position is rampant. Various should lowest when speculation of price price should be lowest studies of speculation is rampant. Various studies of volume in trends and of of the the accompanying of trading in different commodidifferent trends accompanying trading ties show no such correlation. correlation. ties for illustration. One single example 55 will will be sufficient sufficient for In 1891, the illustration. In 1891, the single example in States averaged price of in the States $1.08 for the year. In that the United for wheat the In of that averaged $1.08 year. price year, 1,604,450,000 bushels were traded traded in on the the New York Produce Produce 1,604,450,000 bushels year, Exchange. The following year the the price cents, following year price of wheat averaged averaged 891 Exchange. 89f cents, that but the of trading on that exchange declined to 1,079,713,500 of declined volume to but the 1,079,713,500 trading exchange bushels. In In 1893, less than aa billion billion bushels were traded traded in bushels were in on bushels. 1893, when less the prices averaged approximately 17 cents lower than wheat cents 17 lower than the exchange, prices averaged approximately exchange, in the preceding preceding year. year. in the Such -studies, numerous, have only a negative value. -studies, no matter how numerous, only a negative value. It probable that that declining declining prices, prices, coupled with the fact that, in the the fact in It is is probable the that, coupled business was particular periods periods studied, undergoing a severe studied, business generally severe generally undergoing a particular ~ J. G. G. Smith, Markets (New Co., York: Longmans, Green &: & Co., Smith, Organized (New York: Longmans, Green Organized Produce Markets 5J. 1922) p. 129. 129. 1922) • p. ,
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
64 64
depression, were were of of themselves themselves sufficient to restrict restrict speculation. sufficient to the speculation. On the depression, other hand, hand, it is equally equally clear these studies that the volume of it is clear from these the volume studies that futures other of futures trading upon the the price price trend. trend. In In general, to say say effect upon it is is safe safe to general, it trading had no effect with rare exceptions, that is always the case. that, that is rare the case. that, always exceptions, A more extended extended comparison comparison of the volume of of the of futures futures trading trading and in price in the Report of the Commissioner of Corpothe movements was made the of Report of price Corporations Exchanges,6 as as follows: follows: rations on Cotton Exchanges, COMPARISON OF AVERAGE SPOT PRICES OF MIDDLING COTTON WITH VOLUME SALES, NEW NEW YORK MARKET, MARKET, AND WITH COTTON CROP, OF FUTURE SALES, CROP, 1871-1897
Tear ended August 31
Futures Sales New Tork a
Average spot pricea
Cotton Crofl>
1871 1872 1873 1874 1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897
Bales 3,000,000 4,933,700 5,299,700 6,187,700 8,358,000 7,233,650 10,735,400 12,973,300 25,410,600 34,006,600 28,800,900 33,077,400 26,543,600 24,632,100 20,889,700 23,270,600 26,482,100 25,763,900 18,764,800 22,138,200 24,885,900 34,187,200 53,245,400 37,888,400 39,368,500 56,469,000 36,113,000
Cents 16.95 20.48 18.15 17.00 15.00 13.00 11.73 11.28 10.83 12.02 11.34 12.16 10.63 10.64 10.54 9.44 10.25 10.27 10.71 11.53 9.03 7.64 8.24 7.67 6.50 8.16 7.72
Bales 4,352,317 2,974,351 3,930,508 4,170,388 3,832,991 4,632,313 4,474,069 4,773,865 5,074,155 5,755,359 6,605,750 5,456,048 6,949,756 5,713,200 5,682,000 6,575,691 6,505,087 7,046,833 6,938,290 7,472,511 8,652,597 9,035,379 6,700,365 7,493,000 9,901,251 7,161,094 8,532,705
Relation of Futures Sales to Crop Per Cent 69 166 135 148 218 156 240 272 501 591 436 606 382 431 368 354 407 366 270 296 288 378 795 506 398 789 42~
a Compiled Compiled from from Latham, Latham, Alexander Alexander & Co.'s Co.'s Cotton Cotton Movements Movements and Fluctuations. Fluctuations. a b From Census Census Bulletin Bulletin No. No. 100, lOO, on Cotton Production, 1908. crop figures here given given are 1908. The crop are for for Cotton Production, b figures here crops marketed marketed in in the the season season indicated indicated in Thus the 4.352,317 bales bales was grown in 1870, in column 1. 1. of 4,352,317 the crop grown in crop of 1870, crops is on the basis. but marketed marketed In the season diilCuBSion in the folIowing the same basis. in the 1870-71. The discussion in the season 1870-71. following pages pages is but e 6
Chapter VIII, Part p. 173, Part 4, 173, 4, p. Chapter VIII,
Speculation Speculation
65
The report report continues: continues: It will be be seen that the the first first phenomenal phenomenal increase ratio occurred in It will seen that in the the ratio occurred in increase in 1879, the total total sales futures were were 501 sales of of futures actual crop, of the the actual 501 per cent of 1879, when the or, per cent crop, or, to use use aa common expression, expression, the the crop crop was "dealt times over" the to in five "dealt in five times over'* on the New York Cotton Exchange. Exchange. In this this year year of the average average of exceptional activity the exceptional activity price of middling fell fell to to 10.83 with 11.28 preof middling as compared 10.83 cents, in the cents in the pre11.28 cents cents, as price compared with In the the season, season, 1878-79, however, for the first in the the history history ceding year. year. In for the first time time in 1878-79, however, ceding of the cotton trade, trade, the the crop crop exceeded exceeded 5,000,000 bales. In In the next year, of the cotton the next 5,000,000 bales. 1880, year, 1880, future 591 per per cent a materially materially increased Yet the the price price rose rose future sales sales were 591 cent of of a increased crop. crop. Yet from an average it is to 12.02 is not not contended of 10.83 cents to cents. Of course, 10.83 cents 12.02 cents. course, it average of for for aa moment in in this this report report that that the the heavy heavy volume of trading explains of future future trading explains this great this in price. price. It It may may be be pointed out, however, that, other other conconhowever, that, out, great advance in pointed ditions being the the same, same, an increase increase of bales above the previous ditions being of about 700,000 the previous 700,000 bales crop of of 5,000,000 5,000,000 bales bales must have tended to to produce produce aa depression year's record crop year's record depression in the in price. If the theory theory that that aa heavy heavy volume of futures trading the price. If the of futures trading depresses depresses of over any merit, merit, aa decided decline instead of over a cent cent prices has has any decline instead of an advance of prices might, therefore, have expected in 1880. a matter of fact, any depressing have been in As 1880. a matter of therefore, fact, might, any depressing expected influences were evidently influences evidently offset by other other conditions. these probably probably offset by conditions. The chief chief of of these was the improvement in in general general trade resumption the marked improvement the resumption trade which followed followed the of in six of specie payments in 1879. the crop dealt in times over six times over on 1879. In 1882 1882 the crop was dealt specie payments 11.34 cents to the New York Cotton Exchange. Exchange. Yet Yet the the price price advanced from 11.34 cents to 12.16 cents. The explanation undoubtedly is to be found chiefly in the sharp be in is to the 12.16 cents. chiefly explanation undoubtedly sharp reduction reduction of the crop, crop, which fell fell from about 6,600,000 of the bales for for the the season of season o£ 6,600,000 bales bales 1880-81 to to 5,456,000 bales for the season of 1881-82. 1893 the ratio of futures season of In futures for the 1893 ratio of the 1881-82. 5,456,000 sales highest for for any any year year shown in in the the table, being traded traded in in sales was highest the crop table, the crop being nearly eight eight times times over. over. This great great activity adnearly activity was accompanied accompanied by by an ad0.6 cent the average price of middling. However, However, the the crop vance of vance of 0.6 cent in in the of middling. for the the average price crop for season short, falling falling :!,:U:;,OOO preceding of 1892-93 season of bales under that that of of the the preceding 1892-93 was short, iVM.^OOO bales season. season. Thus, it will be seen seen that that pronounced pronounced activity in the market has it will the futures futures market has Thus, activity in in frequently accompanied by an advance in the price of spot cotton instead been the advance of cotton instead frequently accompanied by spot price of by by aa decline. decline. Similarly, inactive futures market has has frequently of futures market been Similarly, an inactive frequently been accompanied by a decline. Thus, in 1883, the volume of futures trading, in a decline. when the of futures Thus, 1883, accompanied by trading, with the the crop, crop, was comparatively price fell over U as compared as the price fell over small, the li comparatively small, compared with cents. For this this season, season, however, however, the the crop showed an increase of nearly 1,500,000 increase cents. For of 1,500,000 crop nearly bales, which brought brought the the total total up up to to nearly nearly 7,000,000 all thus exceeding 7,000,000 bales, bales, bales, thus exceeding all in when previous records. Again, in the season of 1893-94, the of futures records. season of the the volume of futures 1893-94, Again, previous sales fell off the average average price price of middling middling showed aa decline decline from 8.24 off sharply, sales fell 8.24 sharply, the cents to to 7.67 cents. For this this season there was an increase nearly 800,000 800,000 bales season there increase of of nearly cents bales 7.67 cents. in cr.op. For the the season there was a heavy heavy contraction in the the volvolseason of 1896-97 there contraction in in the the crpp. fall in ume of futures trading, and again a fall in the price, namely, from 8.16 cents a the of futures trading, 8.16 cents again price, namely, the increase to cents. The principal principal reason reason undoubtedly undoubtedly was the approxiincrease of of approxito 7.72 7.72 cents. mately 1,:1:,0,000 bales in in the the crop. 1,350,000 bales mately crop. of future The relationship relationship between prices prices and volume of may better better future trading trading may be seen the following following summary: seen from the be summary:
Commodity Exchanges and Futures Trading and Futures Trading Commodity Exchanges
66 66
rears in Which Volume of Futures Trading Decreased
rears in Which Volume of Futures Trading Increased
Price Movement
Production
1877 1878 1879
Declined do do
Decreased Increased do
1881 1883 1884
1880 1882 1886
Advanced do Decreased do Declined Increased
1885
do
Practically unchanged
1887
Advanced Practically unchanged do Increased Declined do do do Advanced Decreased Declined Increased Advanced Decreased
1888 1889 1894 1897
do Advanced Declined do
Increased Decreased Increased do
1890 1891 1892 1893 1895 1896
Price Movement
Production
Declined Increased do do Practically Decreased unchanged
From this this summary summary it it appears that of of the years for the volume the thirteen for which the thirteen years appears that of increases the the average average price price advanced in six and declined declined in in in six of trading trading showed increases seven. the eight years when the the volume of trading showed aa reducreducseven. In In the of futures futures trading eight years tion, there there was only only one in in which the the price price of middling cotton of middling cotton showed an tion, appreciable advance. It is not intended here to leave the impression that there there It is not the advance. intended here to leave appreciable impression that necessary connection between these facts; instead, it is perfectly was any between these it is connection safe instead, facts; necessary any perfectly safe in are to that the changes in price are chiefly attributable to the changes in prothat the to say attributable to the in changes changes say chiefly price production. Thus, Thus, out of the the eleven years in decline in in the the eleven years in which there duction. out of there was a a decline in ten price of middling, there in ten years an increase in production and in there was increase in of in years middling, price production only year a decrease. the other hand, of the seven years in which there a the of one decrease. On the seven other in there hand, years only year in the the price, price, four four showed aa decrease in production, only two two was an advance in decrease in production, only increase, and in in one production production was practically practically unchanged. unchanged. Of the an increase, the three three years for the price price was practically practically stationary, reduction a reduction for which the years stationary, one showed a in the one increase, while in the third year the crop was in and in the the crop, an while third the itself was increase, year crop, crop itself It be practically 1II1l11.lllgCl1. It will be seen, therefore, that a heavy volume of futures will that of futures seen, therefore, heavy practically uiuli.m^cd. transactions has has by by no means usually usually been accompanied by aa decline decline in in the the transactions accompanied by the that in price of cotton. Indeed, the table shows that an increase in the of futures table increase the of cotton. volume of futures Indeed, price in the trading has has frequently frequently been accompanied accompanied by the price. In most most trading by an advance in price. In in the such however, there a reduction in the crop. there was reduction such cases, cases, however, crop. is that the volume of What these these figures really seem to to show is that the is of speculation figures really speculation is of usually greatest in times of higher prices and that this increased probthat in times this increased volume higher prices usually greatest probresult of of advancing advancing prices prices and not not necessarily necessarily aa cause. It is is an accepted accepted ably is is aa result cause. It ably active in times the great of speculators speculators are are more active times of prices fact that that the of high fact great mass of high prices 7 7 than in in times times of of low prices. prices. than "t Report Report of of Commissioner of Exchanges, pp. pp. 273-276. 273-276. of Corporations Corporations on Cotton Exchanges,
Speculation Speculation
67
of the effect of speculation Another aspect effect of the question is the aspect of speculation on prices prices is question are unduly in the whether prices the crop-moving season (and later prices are unduly depressed depressed in crop-moving season (and later so that the a raised) so that the producer always obtains a low price. At the outset it obtains the it outset producer always raised) price. if must be emphasized that, if speculative trading were unknown, it would it unknown, emphasized that, speculative trading be a normal condition for for prices to be lower in the lower in the crop-moving season prices to crop-moving season six at a period later. is simply the than at six months later. This is result of the operathe result the of period simply operaof supply tion of of the the law of tion and demand. When the prices of representative the of supply prices representative commodities throughout the year are examined for for a a period of years, it throughout the year are years, it period of that is an evenness is there is rather greater than might be exis apparent that there evenness rather be exapparent greater might case of of commodities which are in on exchanges, pected the case are traded traded in pected in the exchanges, but sold within are within a few weeks after are sold after harvest, at one the markets markets at harvest, flooding flooding the time, the demand is scattered throughout the year. the is scattered the time, although although throughout year. his book The Value of In his of Organized Organized Speculation, Speculation, H. H. Brace points points in a ten-year that in the out that the average difference between September difference ten-year period, average period, September and May prices of wheat was only 2.9 cents; cents; consequently, only 2.9 May prices consequently, considering considering of interest, loss of elevator charges, a farmer elevator insurance items, farmer interest, and insurance items, a shrinkage, loss charges, shrinkage, little or nothing by holding his wheat through would have gained little his the by gained nothing holding through the in similar comparison is made in winter. is the Report on the Winnipeg winter. A similar the the comparison Report Winnipeg Grain Exchange* to the Exchange 8 submitted by that that body body to the Royal Inquiry submitted by Royal Grain Inquiry as follows: Commission in 1921, follows: 1921, as
The fallacy fallacy of of the the argument argument that, that, when the the farmer has has wheat to to sell, the sell, the he has his and that after sold the is low, that after has sold his wheat, the price is high, is shown price is is is low, wheat, price high, price in in the the following table: following table: PRICES AT WINNIPEG FOR No. ONE NORTHERN WHEAT IN IN RANGE OF PRICES MAy-1908 1908 TO 1914 OCTOBER AND MAY 1914
October Low High c c 96.18 100.00 1908 94.50 99.75 1909 91.75 100.25 1910 97.50 102.00 1911 88.00 94.00 1912 78.00 82.62 1913 Pre-war period-six years
May High c
Average c
98.09 97.12 96.00 99.75 91.00 80.31 93.71
1909 1910 1911 1912 1913 1914
128.38 100.25 96.25 104.75 95.00 96.62
Low
c 120.88 86.50 93.50 102.75 91.38 90.38
Average c 114.63 93.37 94.87 103.75 93.18 93.50 98.88
is between the the cash cash closing closing price price at at Fort Fort William William in in the the The 'comparison comparison is of October, October, as as compared compared with with the the month of of May, May, from 1908 1908 to to 1914, 1914, month of inclusive. inclusive. It would have have paid paid the the farmer fa·rmer to to have held held 'his his wheat in in 1908, 1908, as as there there
It s 8
Pages 42, 42, 43. 43. Pages
68 68
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
was aa difference between the the average average October price price and the the average average May price was difference between May price in the for the the increase of 16.54 cents aa bushel. bushel. There were were two two reasons increase in the price price reasons for of 16.54 cents in the for that year. One was was ,the shortage of of wheat in States and the the shortage the that year. the United States for other was the the influence influence of the "Patten corner." of the corner." other in October was more than the In in 1910 the average average price price in the average 1910 the In 1909 1909 and in average the lost also price in May. farmer lost the difference, and also the carrying farmer would have in The difference, carrying May. price charges on his his wheat, wheat, had he he held held it it those two years. years. In In 1911 in 1912 those two 1911 and in 1912 charges in May. the average average in in October October was was aa little little lower lower than in Had the farmer held the held the May. his wheat those those years, years, the the additional price that in that he would have gained additional price his gained in May would not not have have paid paid the the carrying carrying charges his wheat. In 1914 wheat. In 1914 the the averavercharges on his May in the in the the month of May was was 13.19 previous age in cents more than that that in 13.19 cents the previous of May age October. October. Taking the whole of the six six years, years, the the average cents of the 93.71 cents the whole average October price Taking price was 93.71 a difference of a and the May price 98.88 cents, a difference of only 5.17 cents a bushel, the average 98.88 cents 5.17 cents, bushel, only average May price not have have paid paid carrying carrying charges the wheat. wheat. 99 which would not charges on the
in October for wheat at at Chicago comparison between mean prices prices for A comparison Chicago in for the and in in the the following the period period 1890-1927 has been made, 1890-1927 has made, May for following May Board of using statistics of the Chicago of Trade. The average range of of the statistics Chicago average range of using war wheat in excluding the years, was $0.94.g.-$l.H!, and the in October, the the October, excluding years, |0.94|~$1.11^, in the the following May was $1.05i-$1.27~. beaverage range range in $1.05-$1.27. The spread following May average spread beof May cents. tween the October and the the mean of was 13! cents. of October 13 the mean of tween May J for the cotton prices prices at at New Orleans for the period period 1827-1909 of cotton A comparison 1827-1909 comparison of is interesting in the same connection. connection. During During the years of of in the the first first forty-four is interesting forty-four years this period there there was was no futures futures market, market, but from 1871-1909 there was was this period 1871-1909 there trading in in New Orleans Orleans and New York. York. During organized futures futures trading the During the organized first period, 1827-1871, the highest highest mean prices were recorded recorded in in Sepfirst period, 1827-1871, the prices were Sepin ten years. years. There were were seven in which August prices tember seven years for ten tember for years August prices the highest, highest, five years in in which July prices were the the highest, were five years and< were the July prices highest, and. five years years in in which which October prices prices were were the highest. In only the highest. three of of the five the only three the in forty-four years were May prices the highest, and in only two years were were two were May prices highest, only years forty-four years June prices the highest. During During this this same period, prices were the lowest the highest. lowest prices were period, the June prices in in eight years. In five years December prices were reached five in September reached in eight years. years September prices were November and in four years March and were the two months of of lowest, in four the months lowest, years not reached in lowest prices. Lowest prices prices were not reached in October or June in in any or June lowest prices. any one of of the years. the forty-four one forty-four years. eleven years in which September In the the period, period, 1871-1909, there were eleven In 1871-1909, there years in September in highest, five prices were were highest, highest, six years in which August six years five August prices prices were highest, prices in years in July saw peak quotations, and four years when May which peak quotations, years July years May in this this period were April prices the registered the peak. peak. Only Only once once in the period were April prices registered the of June highest of year, whereas whereas the the months of June and January January were were highest highest of the the year, highest for three of of the thirty-eight years. years. Lowest prices prices were were recorded the thirty-eight recorded in in August for three August in the is really a mean between P The average price in the above above report report is high and low *>The between high and low average price really a all prices for and not not an of all the month, month. an average average of prices for the
Speculation Speculation
69 69
for seven for years and in years. There were were four in November for seven years. four years six years for six years in which which September, October, and December prices were the lowest. the lowest. in September, October, prices were of prices prices in in subsequent years bear out the the same conclusions. Studies Studies of conclusions. subsequent years are These various various price price comparisons are suggestive of an evenness of more of evenness of suggestive comparisons price adjustment throughout the the twelve twelve months than than of of any any marked adjustment throughout price a decline rise at at one season decline in in another. suggest, not that another. They that specuseason and a not rise They suggest, specuthe lation operates to depress prices in the crop-moving season, but exactly to lation operates crop-moving season, depress prices exactly the reverse: reverse: that, that, because because the the dealer dealer and speculator the speculator anticipate anticipate demand at the time time they they buy buy and because because producers producers and converters protect converters can protect at the their positions by hedging, the price realized by the producer is the realized the their positions by hedging, closer by price producer is closer if speculation to the the price price paid paid by by the the consumer than than would be be the the case, to case, if speculation were not the exchange exchange markets. markets. into the not geared were geared into In referring to to the the influence of organized organized speculation prices, thereIn referring influence of therespeculation on prices, that conclusion appears justified that speculation, as such, is not fore, is the conclusion as not such, fore, the appears justified speculation, a material material factor factor in lifting or or depressing price levels. In any case, in either either lifting levels. In a any case, depressing price it appear that that speculation speculation merely merely levels the peaks peaks of levels off off both the it would appear of prices and the the valleys valleys of of depression depression levels. Manipulation will be levels. Manipulation boom prices will be are concerned here with legitimate referred to later; here only referred to later; we are only with legitimate speculation speculation of unlawful and are are not not considering considering the the influence unlawful concerted taken influence of concerted action action taken for the the ulterior ulterior and illegal purpose of controlling prices. of for controlling prices. illegal purpose Steady Prices? Prices? It necessary first It is first to Does Speculation to define define what we is necessary Speculation Steady by "steadying" prices. In any market, oscillations mean by oscillations in in "steadying" prices. any exchange exchange market, prices are more frequent, but smaller than in the physical markets. What than in but smaller the markets. are physical frequent, prices is whether the is meant by by our question, question, then, then, is the range these oscillations of these is oscillations range of is less than it be, if if organized organized speculation were not present. This it would be, were not is less than speculation present. This is another question which does not lend itself to positive statisdoes not itself readily to is another question statisreadily positive tical proof. Various Various attempts the contention to support tical proof. contention attempts have been made to support the it in by these methods, but it should be observed in advance that none of of but should be observed that these methods, by 10 is entirely satisfactory as positive proof.lO these is as these interpretations entirely satisfactory interpretations positive proof. 10 In 10 a case (Board of of Trade of of the the City City of of Chicago, v. Charles F. Clyne, Clyne, et et al., al., case (Board et al., In a Charles F. al., v. Chicago, et in United in 1922, before the States Supreme Court, involving the con260 U.S., 704), before the States the con260 U.S., 704) 1922, Supreme Court, involving stitutionality of the Grain Futures Futures Act, Act, affidavits were filed by twenty-two nationally of the filed by affidavits were twenty- two nationally stitutionality known economists, economists, each of his belief belief that, that, with infrequent infrequent and minor of whom declared declared his exceptions, trading had aa marked tendency to stabilize futures trading stabilize prices. tendency to prices. exceptions, futures These economists economists were: were: T. S. Adams, Yale University; Boyle, Cornell; Cornell; S. Adams, E. Boyle, James E. University; James Charles J. J. Bullock, N. Carver, John Bates Clark, Columbia; Columbia; Bates Clark, Charles Carver, Harvard; Bullock, Harvard; Harvard; T. N. Harvard; John Fred Emerson Clark, Northwestern; Melvin T. Copeland, Rogers FairFred FairClark, Northwestern; Harvard; Fred Rogers Copeland, Harvard; child, Yale; Henry Henry F. F. Farnam, Farnam, Yale; Yale; Frank A. A. Fetter, Fetter, Princeton; Irving Fisher, Fisher, Yale; Yale; Princeton; Irving child, Yale; Arthur Twining Twining Hadley, President of of Yale; Yale; Grover G. Heunber, University University of of PennsylG. Heunber, Arthur Hadley, President PennsylS. Huenber, Huenber, Pennsylvania; Pennsylvania; Joseph Univania; vania; Solomon S. Johnson, New York UniJoseph French Johnson, versity; Edwin Waiter Kemmerer, Princeton; Roswell C. McCrea, Pennsylvania; Walter C. Roswell Kemmerer, Princeton; McCrea, Pennsylvania; versity; Wesley C. C. Mitchell, MitchelI, Columbia; Robert Riegal, Riegal, Pennsylvania; Pennsylvania; E. R. A. E. R. A. Seligman, Columbia; Robert Wesley Seligman, Harvard; and Allyn A. Young, Harvard. Columbia; Abbot Payson Usher, Harvard; A. Harvard. Columbia; Payson Usher, Young, Allyn Jp this same case case quotations, quotations, similar to the just mentioned, mentioned, similar in in meaning affidavits just the affidavits Jn this meaning to ,
7yo0
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
price fluctuA frequently frequently used used statistical fluctuthat of of comparing is that statistical method is comparing price ations in aa commodity commodity before before and after futures trading trading was inaugurated. after futures ations in inaugurated. objection to this is it out of it leaves leaves of account changed that method is that to this The grave changed grave objection the periods transportation and distribution. periods conditions of distribution. Sometimes the of transportation conditions fluctuations as to be ludicrous. Wide price fluctuations compared are so far far removed be ludicrous. as to are so price compared in the the Middle Middle Ages Ages have have been compared the relative relative of of commodities commodities in compared with the steadiness prices in in our our modern economic society, of what value of prices steadiness of society, but of steamof prices in a distributive system, when railroads, steamis a comparison in is a of a distributive railroads, system, comparison prices boats, automotive vehicles, even efficient wagon transportation and automotive even efficient vehicles, boats, wagon transportation were unknown, with with those those prevailing prevailing under modern conditions, entire conditions, when entire unknown, trains and fleets of ships, ships, as as well well as as automotive trucks, loaded with with aa trains fleets of trucks, loaded with aa speed the world today today single commodity, move with single commodity, speed which makes the in the than Great Britain Britain was was in the Middle Ages? is there there a proper proper smaller smaller than Ages? Nor is in of the in parallel conditions in the 1850's and those in any decade of the between conditions the 1850's those any parallel twentieth century. century. The entire entire tempo tempo of markets and transportation transportation of the twentieth the markets their prices and communication facilities prices facilities which feed feed commodities and their into these markets have have changed changed drastically. drastically. these markets into It may be be remarked, remarked, however, however, that that the the many many comparisons It may comparisons which have invariably indicate narrowing in the range range of of price price been made almost a narrowing in the indicate a almost invariably been under futures trading. In this narrowing of the range range it it is fluctuations under futures trading. this narrowing of the is fluctuations possible that futures trading exerts an influence; but, since the method that futures trading exerts influence; but, since the possible is regarded as inherently unsound, such comparisons as such are dismissed is dismissed here here unsound, inherently regarded comparisons are with the observation that their conclusions are rather favorsimply the that their conclusions with observation rather more are favorsimply able futures trading trading as as aa steadying steadying influence than adverse to it. it. influence than able to to futures adverse to A more valid valid method is is aa comparison of fluctuations in commodities fluctuations in commodities comparison of in which futures futures trading trading is conducted with with fluctuations in in other is conducted fluctuations in other comcommodities which have no futures markets. Here again the statistical method futures markets. modities again the statistical is of production and marketing difis imperfect. Methods of conditions for for difmarketing conditions imperfect. production ferent commodities commodities are are so dissimilar that rice prices prices cannot that fluctuations in rice so dissimilar fluctuations in ferent cannot in wheat prices be fairly fairly compared compared with with fluctuations fluctuations in reach aa valid valid conbe to reach conprices to clusion that, that, solely because the latter are narrower, organized futures are clusion latter the because futures narrower, solely organized trading is is the the cause. cause. trading reasonable comparison comparison is that made between between the the prices prices of of A more reasonable is that for the wheat, barley, and oats oats for the period, period, 1899-1916, by Professor Professor James James E. E. wheat, barley, 1899-1916, by oats were Boyle, of Cornell Corn ell University. University. Wheat and oats were subject to futures futures Boyle, of subject to but barley barley was not. not. The following following comparison period trading, for the the period trading, but comparison for from the the writings writings of of four four of of those those economists economists and from the the following econoadditional econofollowing additional mists, were incorporated into the the court court records: records: Paul Paul LeRoy LeRoy Beaulieu, France; Richard Richard mists, were Beaulieu, France; incorporated into C. Emery, T. University of Wisconsin; H. H. C. Emery, Yale; Yale; Benjamin Benjamin H. Hibbard, Hibbard, Wisconsin; Wisconsin; of Wisconsin; T. Ely, Ely, University Paul W. Ivey, Ivey, University University of of Nebraska; Nebraska; Otto Otto Johlinger, Johlinger, Germany; Germany; Louis Paul Louis Perlmann, Perlmann, of Birmingham, Germany; John George Smith, University of England; F. F. W. Taussig, Taussig, Smith, University Birmingham, England; Germany; John George Harvard; L. H. Weld, Weld, Yale; Yale; and George Wermert, Germany. L. D. H. Harvard; George Wermert, Germany.
Speculation Speculation
7711
shows aa higher higher degree degree of barley than of fluctuation fluctuation in in barley than in the other in the other two 11 l l commodities. commodities. Wheat rear Tear
1899 1900 1901 1901 1902 1902 1903 1904 1905 1905 1906 1907 1908 1909 1910 1911 1911 1912 1912 1913 1914 1915
Per Cent Cent Per
24.2 24.2 42.6 42.6 26.6 26.6 41.0 41.0 32.5 32.5 50.3 50.3 59.2 59.2 42.9 42.9 71.8 71.8 31.4 31.4 61.2 61.2 44.7 44.7 40.5 40.5 43.5 43.5 43.1 43.1 70.1 70.1 70.4 70.4
Barley Barley Per Cent Per Cent
Per Cent Cent Per
57.1 57.1 97.6 97.6 73.2 73.2 93.3 93.3 72.2 72.2 103.3 103.3 57.1 57.1 52.7 52.7 175.0 175.0 130.4 130.4 91.9 91.9 114.3 114.3 152.6 152.6 233.3 233.3 102.4 102.4 79.5 79.5 87.5 87.5
46.7 46.7 25.0 25.0 107.5 107.5 103.4 103.4 44.0 44.0 62.9 62.9 38.0 38.0 48.0 48.0 68.6 68.6 31.5 31.5 72.2 72.2 64.7 64.7 65.8 65.8 93.4 93.4 37.1 37.1 52.6 52.6 68.2 68.2
Oats
interesting study study between aa commodity, is subject to An interesting commodity, which is subject to futures trading, trading, and other other commodities, commodities, which are not, contrasts prices are not, contrasts prices futures of onions, with those those of potatoes, and apples, reported in in of wheat with of as reported onions, potatoes, apples, as Orderly a publication publication of of the the Minneapolis of ComOrderly Jlar/(f'lillg, Marketing, a Minneapolis Chamber of merce. all these these commodities commodities are for each month of of all are averaged merce. Prices Prices of for each of averaged for of the crop year for a period of twenty-nine years. The average annual the crop year twenty-nine years. period average fluctuation prices from low to per cent. in wheat prices to high fluctuation in 5.36 per cent. high was only only 5.36 fluctuated more than 10.9 On the the other hand, onions fluctuated cent, and apples other hand, 10.9 per cent, per apples fluctuation of 100 per experienced a price price fluctuation of almost almost 100 per cent. range cent. The annual range experienced a in potato potato prices prices was shown to to be 68 per cent. in cent. per Recalling again that this this method of proof is not positive, positive, nevertheless nevertheless of proof is not Recalling again that it should be observed that it is one of the best methods available that it is it should of the best available and the evidence points points most strongly strongly to to the the conclusion there is is more the evidence conclusion that that there than aa casual casual relationship relationship between futures futures trading trading and price stability. price stability. E. Boyle, in his Professor James James E. Boyle, in his testimony testimony before the Canadian ComProfessor before the mission mentioned in Chapter II, H, says: says: in Chapter mission It is of all all countries It is almost almost unanimously unanimously agreed by economists of futures countries that that futures agreed by the effects trading has two effects on the producer's price: By lowering the has two the middleman trading producer's price: By lowering of money charges, it the amount of money received by the It stabilizes it increases increases the the farmer. received by farmer. It stabilizes charges, the on brake the price by putting the against severe bulges and breaks in price* price. breaks in the price by putting against severe bulges 11 Speculation 11 Speculation
pany) pany)
, p. p. 123. 123. ,
York: The Macmillan Macmillan Comand the the Chicago of Trade (New Chicago Board Of (New York:
72
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
to present Since these two two effects effects are are very very important important to the farmer, I desire desire to present to the Since these fanner, I some supporting evidence. evidence. supporting Raises Price Price to Farmer. Why Why is is wheat wheat now handled handled at lowest cost cost to the the Farmer. at the the lowest Raises insurthe of any any agricultural agricultural commodity? commodity? The answer is, chiefly because the price insurbecause of is, chiefly price the futures market enables enables -the ance feature of to work in comof the futures market the middleman to ance feature paralive safety margin. Contrast Contrast hay wheat. Both are standarda low margin. safety on a hay and wheat. parative ized non-perishable commodities. commodities. Yet the the brokerage brokerage fee charge ized non-perishable fee or or commission charge on selling hay is times that for selling wheat. Mr. P. E. Goodrich, presiis many times that for P. E. wheat. Goodrich, presiselling selling hay many dent of of the the National National Hay Hay Association Association of the United States this of the States comments on this in these these words: words: fact in fact that handles hay hay from the the producer producer to to the "Every the consumer speculates speculates "Every man that his largely takes great chances, as there is no way in which hedge his and he can hedge takes great chances, as there is largely way in few trades. For this reason the fluctuations of the market are large and often a often trades. this reason the fluctuations of the are large days will show aa variation varia·tion of of values values from 25% 25% to to 50% " days will 50%.. . . •." Stabilizes the Prices. The second second effect effect of prices is is Stabilizes of futures futures trading the Prices. trading on farm prices violent flucto stabilize these prices. prices. Futures Futures trading trading does prevent flucto stabilize these prevent sudden and violent in price tuations in price by by putting putting on the the brakes. brakes. Evidence Evidence of various kinds kinds can be tuations of various produced to to prove prove this this statement. statement. produced If we compare If price fluctuations fluctuations under futures with those those before before the the futures trading trading with compare price days of of futures futures trading, trading, we see see at at once once aa vast vast difference. Fluctuations of of ten ten difference. Fluctuations days cents aa bushel bushel in day are are about as common now as of fifty fifty in one day as fluctuations fluctuations of cents about as stacents a bushel bushel in day then. then. Of course, part of greater price price stacents a in one day of this this greater course, part bility is is due to to our better better communication and transportation, transportation, but part part of of it it bility is due to all marketing is to futures futures trading. trading. On this this point point practically all marketing economists practically are agreed. agreed. are Report on Futures Futures Trading by the the United The Garfield in Cotton, Cotton, made by Garfield Report Trading in States of Corporations in 1906 and 1907, the most comprein was the States Commissioner of 1906 1907, compreCorporations that subject subject ever published. Futures trading trading in in cotton cotton and hensive study study on that hensive ever published. futures ·trading in wheat wheat have have exactly the same economic effects price. The effects on price. futures trading in exactly the Garfield Report that futures trading in cotton prevents sudden and violent in cotton violent found futures that Garfield Report trading prevents fluctuations price. in price. fluctuations in We may to the the testimony testimony of economists the the world over who have studied of economists studied may turn to in this and they are in almost agreement on the stabilizing this subject unanimous the almost are agreement stabilizing subject they 12 effect of of futures futures trading trading on price. price. 12 effect .
.
Exchange Trading Levels Prices Prices between Markets. Markets. With modern Trading Levels Exchange methods of communication, the the price price of of communication, of cotton in New Orleans, cotton in Orleans, New other world world markets markets would in maintained York, and other in all all probability be York, probability be maintained in fairly close relationship, or not futures trading were carried in close whether or not futures were carried fairly relationship, trading on. The adjustment adjustment is is far far more certain rapid, however, however, with the certain and rapid, on. the exchange arbitrageur ready ready to to act act instantly instantly to take advantage to take situaof situaexchange arbitrageur advantage of tions when prices prices on the the different different markets markets get of normal relationtions relationget out of ship or parity. futures markets are sensitive and respond rapidly are The or futures markets sensitive respond rapidly parity. ship 12 12 Proceedings Proceedings of Inquire into Futures the Canadian Commission to to Inquire in Grain into Trading Grain Futures of the Trading in (Winnipeg: Grain Trade News, News, 1931). p. 130. 130. 1931) , p. (Winnipeg:
Speculation Speculation
73 73
to to
received from other market places. places. Without advancing the news received other market advancing the proposition that that futures futures trading trading is is the leveling prices prices the only of leveling proposition only means of it is markets, it it may may be stated without reservation that it between markets, stated without reservation that is a most important influence. contributory influence. important contributory The Speculator's Speculator's Assumption Assumption of Risk. Other services by services performed of Risk. performed by be the speculator may regarded as unimportant in comparison with his in as his the with regarded unimportant speculator may comparison risk-taker. Let Let us us imagine vital function vital as a a risk-taker. function as or exchange insurance or imagine an insurance exchange market in in which there there are interare no speculators, only commercial interspeculators, but only ests-producers, dealers, converters-placing hedges. shall assume We shall and dealers, convertersplacing hedges. estsproducers, that this condition condition exists exists in the wheat market. market. Elevators Elevators buy it that this in the as it buy wheat as comes to to the in the the fall fall months. months. They then actively are then the market in They are actively engaged engaged in selling futures as a hedge against their spot purchases. Yet, the their when the in futures as Yet, selling hedge against spot purchases. must be of hedger offers to sell futures, assured of ready purchasers-buyoffers sell he assured to futures, ready purchasers buyhedger ers who will will immediately take his futures at only a narrow price price differfutures at take differhis ers only immediately at which the calculates he can afford sell ence below the level at the hedger hedger calculates afford to to sell the level in light of prevailing spot prices. The large commercial buyers of in the of the light large buyers of prevailing spot prices. futures (as hedges) are are the the millers millers-who futures who do not, concentrate not, however, however, concentrate (as hedges) their purchases in the fall or in anyone short period. in fall or in their hedge one short sales the any hedge purchases period. Their sales are of flour are are spread throughout the the year, year, and their their purchase purchase hedges of flour hedges are spread throughout likewise widely widely distributed. distributed. The flood flood of hedge selling from of concentrated hedge likewise selling the in the the fall, fall, consequently, consequently, would meet with but aa elevators in the grain grain elevators partial response response from the the millers, millers, whose hedging hedging purchases not are not partial purchases are concentrated. of sales the demands sales 'Would would overwhelm the concentrated. The volume of from purchasers, purchasers, and the the elevator hedging market would sink elevator owners' hedging sink beneath it. it. beneath In every every successful successful exchange exchange market the the hedger, therefore, must depend hedger, therefore, depend presence of of professional professional speculators speculators in with in substantial substantial numbers with the presence on the substantial capital funds. funds. The speculator be ever ever present, to substantial capital speculator must be ready to present, ready assume risks, regardless of of season. buys the the elevators' hedging conconelevators' hedging season. He buys assume risks, regardless tracts when other buyers are are few or entirely in sells later other buyers later in tracts absent; he sells entirely absent; the year when the the millers millers are are actively actively buying buying hedges hedges and there there are are few the year trade In that that way way the the speculator speculator is economic is performing a vital vital trade sellers. sellers. In performing function of genuine genuine value. value. He has has been likened to an insurer, insurer, and the likened to function of the correct. likeness, though not not exact, exact, is is correct. likeness, though efficient, continuous, broad, and liquid market that is, An efficient, continuous, broad, is, one where liquid market-that abnormal, erratic, violent price fluctuations are avoided, are fluctuations and violent avoided, despite abnormal, erratic, despite price heavily concentrated seasonal selling or buying-cannot be maintained or cannot seasonal maintained concentrated buying selling heavily and operated successfully with with only the usual interests actively usual commercial interests only the actively operated successfully represented. The presence of organized speculation is the is imperative to of organized speculation presence imperative to the represented. making of a broader, broader, steadier, steadier, and more liquid of a liquid market. making a Speculators Provide a Market. The term "broad market" market" Broad Market. Provide Speculators all in a market market that that is is capable of absorbing absorbing all offerings the course means a course offerings in the capable of
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
74 74
of any without the the price price of the commodity being affected of the affected of commodity being day without trading day any trading appreciably by by mere volume of of sales. sales. Perhaps Perhaps a more descriptive descriptive term appreciably "solid market." for a "solid market." The volume of in a of speculation a this would be a for this speculation in market contributes greatly to its breadth or solidity. On the Chicago to breadth its or the market contributes greatly solidity. Chicago Board of of Trade there there have have been been instances instances when offerings as much as of as as Board offerings of 5,(l(lO,OOO bushels bushels did did not not depress the price than one-eighth of the more of 5,000,000 one-eighth price depress aa cent cent per per bushel. bushel. Such aa broad broad market is of is essential essential for for successful successful use use of the because the the speculator's speculator's presence broader market the hedge, hedge, and because presence makes a broader he is is an invaluable invaluable aid to the the hedger. hedger. aid to he Professor Boyle, in his his testimony testimony before Professor the Canadian Commission, before the Commission, Boyle, in referred to to earlier, referred earlier, says: says:
is just just one question question on hedging hedging II desire to leave leave before the There is desire to the Commiswide aa market is is needed ,to provide ample hedging sion, namely: How wide facilito provide sion, namely: ample hedging faciliat It is is my my conviction here that that a hedging hedging market must be be made up up of of at ties? It conviction here ties? at is use the least 50 per cent pure speculation. is no use to ·shy at othe word speculaleast cent pure There to 50 per speculation. shy speculation. of this this blanket blanket condemnation of is, II am firmly conof all tion. Much of all speculation firmly conspeculation is, Shall on vinced, idle nonsense, bordering cheap claptrap. The question, Shall idle mere nonsense, vinced, question, bordering cheap claptrap. somebody speculate in in farm products? products? has already in the affirmaaffirmaalready been answered in somebody speculate tive. The essence of speculation speculation is risk-bearing. So long as the farmer grows tive. is risk-bearing. the essence of as grows long at one place place at at one time, time, and this this wheat reaches reaches the the consumer's mouth wheat at risks will be risks at other time time and some other place, there at 'Some there are are and always some other other place, always will involved. risks are inevitable economic economic risks. are speculative risks. risks. are risks. They involved. These risks are inevitable They speculative in wheat, wheat, therefore, therefore, may may be be shifted shifted or partly reduced, Speculations or distributed or partly distributed or reduced, Speculations in never can can be be eliminated. but never eliminated. hedging function regard as as the the second second major of futures futures trading. The hedging function II regard service of trading. major service The purpose purpose of of hedging hedging is is to to protect protect profits, profits, limit losses, and safeguard limit losses, safeguard bank credit. Hedging Hedging does does all all three three of it does does not of these these ,things. credit. not insurance, it things. As price price insurance, no furnish 100 per cent coverage, for form of insurance is supposed to do that. furnish 100 per for of insurance is that. coverage, supposed to I I do not not need to to add to to what has has already here .1\'!!..I/(I;lIg the value said here the value j<-i!.ii
Though act strictly in their their own interest, they may may also also interest, they Though speculators speculators act strictly in in a be said said to to serve a representative representative capacity, considers the serve in one when considers the capacity, effect which their effect their combined operations operations exert prices. The bulls, bulls, or exert on prices. or a rise "long" for a rise in price, are market representing, representing, in price, in the are in the market "long" speculators speculators for in effect, effect, the the interests interests of the producers. producers. Their efforts, of the of course, are course, are efforts, of to make for designed to profits for themselves, but the force of their specubut the of their force themselves, designed profits speculative buying lative buying contributes contributes definitely in the the short short term, are term, when .they definitely in .they are toward buying, higher prices for all growers. The bears, or "short" for all or "short" bears, higher prices buying, growers. sellers for sellers for aa decline decline in price, price, on the the other hand, represent, represent, in other hand, in effect, effect, the the converting manufacturers and consumers. Although the the aim of consumers. Although each of each converting manufacturers p.
is Ibid., 18 Ibid., p. 131. 131.
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seller is short seller individual short is aa profit for himself, individual user of of the the commodity himself, every profit for every user commodity at least least in in the the short does benefit, short term, does from whatever benefit, at whatever effect term, from effect the the specuspecuexert lative seller toward seller may the commodity lative exert toward reducing the price of the of the may at reducing price commodity at the time his selling. of his time of when the the the short short seller seller closes Later, when closes out out his his specuselling. Later, specuhe becomes lative position, becomes aa buyer, lative and the the speculative bull becomes becomes aa position, he buyer, and speculative bull seller when when he he closes closes out out his his position. seller position. a In every market considerable In market a considerable part on of the the speculative every part of speculative trading trading on is done done by the floor commodity who has floor trader, or "scalper," trader, or commodity exchanges exchanges is by the "scalper," who has of been the subject of considerable criticism. The volume of his purchases considerable criticism. The volume of his subject purchases sales contributes contributes greatly and sales broad and and liquid greatly toward making making aa broad market, liquid market, the very his operations-buying but the for a quick or selling for a turnvery nature of his operations buying or selling quick turnovermakes him aa negligible factor in over-makes factor in influencing prices in the long term. in the term. negligible influencing prices long influence on the "The scalper the exchanges. is trading for the scalper exercises no influence exchanges. He is trading for the all he is is all is doing. What he next fluctuation; buys this minute, it is fluctuation; that is he this it is minute, doing. buys is going to to sell in the known that he is sell in the next two or three minutes; when aa or three when going minutes; is to man has bought a thing and is going to sell it again immediately, and sell it again bought thing going immediately, and it and sells it back and forth, sells it it cuts he buys cuts no figure and has forth, it has nothing buys it figure and nothing to do with disturbing values from either the farmer's or the consumer's either the farmer's or the consumer's disturbing 14 floor trader fills the trader fills standpoint."14 the "air "air pockets" in the the market-spots standpoint." The floor pockets" in market-spots where there are temporarily temporarily buyers buyers without sellers vice versa) -by sellers (or vice (or versa) by breaking the temporary deadlocks between the regular buying deadlocks between the and breaking temporary regular buying and selling traders. traders. selling of Transactions Transactions on Exchanges. Exchanges. In In the the last last column column of of Large Volume of Large the the table table on page page 65 65 it it will will be noted that that the the total total number of of bales bales sold sold and bought bought annually annually on the the New York Cotton Cotton Exchange Exchange over over aa great great number of of years years ranged ranged from less less than than two two to to almost almost eight eight times times the the total total number of of bales bales produced produced in in the the corresponding corresponding crop crop year. year. This This condition condition is is not not an isolated isolated one. one. In In fact, fact, it it is is typical typical of of every every commodity commodity exchange exchange and of of every every organized organized physical physical commodity commodity market market where where sales sales and and are made for future or purchases are made for future or forward deliveries. In every market forward deliveries. In market purchases every which which deals deals in in such such future future contracts, contracts, whether whether or or not not it it is is an an exchange exchange it is is inevitable inevitable that that the the crop crop be be sold sold and and resold resold in in effect effect many many market, it market, times. Without doubt, doubt, in in sE .me ,me instances instances the the ratio ratio may may be be 10 10 or or 15 15 to to times. Without 1I or even or even higher. higher. This This fact fact alone alone is is often often cited cited as as aa basis basis of of severe severe criticism criticism of of speculaspeculation tion not not only only on on commodity commodity exchanges, exchanges, but but also also on on all all physical physical markets markets in forward forward deliveries. deliveries. The The fact fact that that total total annual annual sales sales on on such such dealing in dealing markets markets .are are many many times times the the annual annual crop crop-or, in the the case case of of imported imported or, in articles, such such as as rubber, rubber, cocoa, cocoa, and and coffee, coffee, many many times times the the total total annual annual articles, imports of of such such commodities commodities-is constantly seized seized upon upon by by uninformed uninformed is constantly imports i* 14 Statement Statement
by John John C. C. F. F. Merrill Merrill before before the the Scott Scott Committee, Committee, quoted quoted in in The The FuncFuncby Exchanges (Chicago: (Chicago: Hartzell, Hartzell, Lord Lord Company, Company, 1910) 1910) , p.p. 251. 251. Exchanges
tions of Legitimate l.egitimate tions of
,
^6
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
or intellectually dishonest dishonest critics of these these markets markets as that gamgamas evidence that critics of or intellectually that unrestrained speculation bling or is rampant or uneconomic and unrestrained rampant and that speculation is bling to the to organized speculators pool together to depress prices to the farmers or farmers depress prices organized speculators pool together the ultimate other producers and to inflate prices for the converters and the ultimate for converters the to inflate other producers prices consumers. consumers. is aa simple one. For example, let us us consider consider an imThe explanation example, let simple one. explanation is portation of coffee the actual or physical market. B, a York dealer, dealer, market. a New actual or on the of coffee B, physical portation in buys 100 tons of actual coffee coffee for for March shipment of actual 100 tons in December buys shipment from with arrival arrival in May. He pays 15 cents per pound pound Brazil with in May. 15 in New York due in cents Brazil per pays market cents for it. Two days later the has risen to, say, 15.75 cents New York has risen the 15.75 it. later for to, say, days the lot to C, also aa New York dealer, who, in turn, sells in turn, sells it it and B sells lot to sells the C, also dealer, who, to D several later at 16.50 cents. The market then eases off and later at cents. then eases off to several days 16.50 days 16 cents, D sells to E at at 16 cents, losing losing |i cent cent per sells to per pound. pound. Between December and May coffee roaster sold to the coffee arrives and is to X, X, a coffee roaster coffee arrives is finally May (when (when the finally sold York in New dealer hands the in Chicago) this parcel may have changed on the dealer this have Chicago) parcel may changed market as often as as ten ten to to twenty twenty times times-sometimes sometimes as often at a profit, sometimes at profit, a loss resale being at loss-none of the the profits profits or purchase and resale at a none of each purchase or losses losses on each being very large. very large. It It is ease with with which parcels is this of standardized standardized comthis condition-the condition the ease parcels of modities may be be bought bought and sold by description without sampling modities may sold by description without sampling and on inspection standardized contracts at slightly varying prices at standardized contracts inspection organized slightly varying prices on organized markets that makes for markets-that for broader, broader, steadier, markets. steadier, and more liquid liquid markets. in what may The same methods of of buying buying and reselling reselling in may be called chain be called chain contracts is is carried carried on even more extensively extensively on the the exchange markets, contracts markets, exchange where not not only only domestic, domestic, but but foreign foreign producers, producers, dealers, converters and dealers, converters large numbers of of speculative operators actively buy and sell. sell. The ability large speculative operators actively buy ability freely is increased on the exchange markets to buy buy and sell to so freely sell so is greatly increased the greatly exchange markets because of of the the presence presence there there of professional speculators with ample funds, because of professional ample funds, speculators with are geared into the the exchange exchange to permit it which are it to to function function more effecto permit effecgeared into as as an insurance institution. speculator'S presence the tively insurance institution. the The makes tively speculator's presence exchange markets broader, steadier, and more liquid than the markets much broader, steadier, exchange liquid than the physical markets-thereby benefiting the producer, the dealer, the conmarkets the the condealer, the physical thereby benefiting producer, the and the consumer. Each speculative transaction may serve as a verter, consumer. transaction serve a as verter, may speculative hedge for than one hedger. buys as a hedge from X, a specufor more than A X, a specuhedge buys as hedger. hedge lator, and, the insurance insurance protection protection is needed, A sells is no longer needed, sells and, when the lator, longer out his his hedge, hedge, possibly possibly to to another hedger, hedger, and so so on from one hedger hedger to another. to another. , of transactions The number and volume of transactions on the the exchange is further further exchange is increased increased substantially by the fact that the speculator never, or rarely the fact that the or substantially by speculator never, rarely or makes delivery delivery on the the exchange he may do so, ever, takes or ever, takes so, exchange (though (though may if he so so chooses) if chooses). Instead, Instead, he he usually usually sells has bought bought-either sells what he has either at at or at and buys a profit profit or at aa loss loss-and buys what he may have sold-either at a profit have sold a either at may profit .
Speculation Speculation
77 ft
at a loss-settling loss settling the or the differences differences either way by paying cash the losses losses or at either way cash for for the by paying or receiving cash for his his profits. profits. or receiving cash for Furthermore, as as will will be be explained explained in producer or in detail detail later, a producer or Furthermore, later, when a converter uses a converter uses the the exchange exchange as as an insurance to hedge, or insure insurance device device to hedge, or insure or credit against price or credit risks risks-whether he insures purchase or whether he a purchase insures by a or by against price by a by a the exchangehe exchange-he seldom, seldom, if if ever, takes or on such sale sale on the or makes delivery such ever, takes delivery exchange contracts. On the the contrary, will sell sell on on the the contrary, he most likely exchange contracts. likely will exchange previously bought there as a hedge, or he will buy, he there what as or he will bought previously exchange hedge, buy, just as as soon as the the insurance insurance protection protection is needed, what what he is no longer soon as he just longer needed, there. sold previously sold there. previously factors and conditions, of these As aa result result of these various various factors that operthe fact fact that As conditions, the operin exchange markets, markets, dealing in future deliveries of the exchange future ators ators on the deliveries of staple dealing staple commodities, buy and sell sell annually annually a volume several times the several times the annual annual commodities, buy surest that is the crop of the commodity is the surest evidence that these organized markets evidence these of the markets commodity organized crop constructive economic functions been successful in performing performing the the constructive have been successful in have functions developed-to serve the public interest by the for which they were to serve the interest for estabby the estabdeveloped public they lishment of an effective effective insurance device against insurance device credit risks. In lishment of risks. In against market and credit fact, were a perfect insurance institution, there would be insurance there if the the exchange were be institution, fact, if exchange perfect no deliveries deliveries at at all, all, whereas whereas deliveries deliveries on commodity commodity exchanges exchanges generally generally in the constitute less than than one one per per cent of the the volume transacted cent of transacted in the course course of of constitute less a crop crop season or aa year. year. The transfer transfer of these risks to speculators reduces of these risks to season or a reduces speculators to producers raises prices prices paid paid to the elimprices to to consumers or raises elimthrough the producers through prices costs of of production, ination of of what otherwise higher costs distribuotherwise would be higher ination production, distribufall upon tion, and conversion, conversion, which without without speculation upon the the tion, speculation would fall run. in producer or the in the long run. consumer the long producer or the Short Selling. The use use of of a futures futures contract contract as as a medium for for short short Short Selling. much criticism selling has perhaps subjected the exchanges to as criticism and attack to as the has attack exchanges selling perhaps subjected is neither other factors here is neither to as to uphold factors combined. The purpose all other as all purpose here uphold nor to to condemn, but rather rather to to examine the the mechanism and uses uses of a of a nor condemn, but is short with a view to showing a short sale is and the legitihow short made to sale a view the with short sale, sale, showing legitiit serves. serves. mate economic functions functions which it mate declares that most quoted short selling that The most selling declares adage about short quoted adage
"He who sells sells what isn't his'n isn't his'n buy it to prison," it back or or go to Must buy go prison." The best best that that can can be be said about this this is that the the is that the law is is as said about as bad as as the and until a modern statute quality of of the the verse. verse. Unless Unless until a statute makes short short quality in selling a: penal offense, short seller is in any danger of prison because seller is of short no because a offense, any danger prison penal selling in commodity of that that act However, short short sales markets have have at sales in act alone. alone. However, at of commodity markets in the past, times been been outlawed by ill-advised ill-advised legislation outlawed by times past, both abroad legislation in the and in in the States. the United States. are much simpler The mechanics mechanics of the short sale of than a commodity of the of a short sale commodity are simpler than
78
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
those of of the the short short sale stocks. of stocks. sale of those
A person person who believes believes that that the the price price of of
in relation its earning General Motors common stock is too too high high in relation to to its stock is General Motors earning it back later at power may sell it short in anticipation of buying it later at a lower of in it short sell buying anticipation power may of price. Nevertheless, all contracts on the stock exchanges of the country all the stock the contracts country exchanges price. Nevertheless, to hours. require delivery on all sales within twenty-four to seventy-two hours. all within sales seventy-two twenty-four require delivery Not Consequently, a short seller deliver promptly. owning any must deliver a short seller promptly. owning any Consequently, number of the shares he stock of General Motors, he the of shares has must he borrow stock of General Motors, of the stock will sold in order order to to make delivery. the stock will lend it it sold in delivery. No owner of without adequate security; therefore the short seller of the stock must short the stock the seller of therefore without adequate security; give the owner cash cash or to secure the loan of of the the stock. secure the stock. or its its equivalent equivalent to give the the lender has short The short has the the lender's the short lender's stock; has the seller now has short seller stock; the seller delivers the lender's the short stock on the seller's lender's stock short sale sale delivers the short seller cash. The short seller's cash. the sales price from the the buyer. buyer. sales price and collects collects the will do later Until the returns the the stock, he will later when the short seller returns short seller Until stock, which he he his short by purchase purchase on the the stock market, he pays pays the stock market, the short sale sale by covers his he covers be declared stock. On lender any dividends which may be declared on the borrowed stock. the lender any dividends may short seller seller interest at the hand, the the lender of the the stock stock pays the short interest at lender of the other other hand, pays the the security the return current rates rates on the the cash cash which forms the for the return of the for of the current security lent the demand for for aa stock the loan supply supply limited, limited, is great and the stock is lent stock. If the stock. If great decline. Loan demand the rate of interest which stock will pay pay may may decline. stock lenders lenders will the rate of interest in for may be be so in relation to supply that the the stock relation to stock lender so great lender for the the stock stock may great supply that "flat." If will pay pay no interest interest at at all. all. The stock then lends there is is aa lends "flat." If there stock then will serious of the stock available for loans, the stock lends at aa available the for the of stock stock lends serious shortage at loans, shortage premium-that is, the borrower not only has to give cash as security, not has borrower to that the cash as is, only give security, premium dollar or or less but has pay aa premium premium of, of, say, say, one dollar but less per share to has to to pay to the the per share lender for for the the temporary temporary use use of of the the stock. stock. lender The short of aa commodity profaces none of of this this complicated seller of short seller commodity faces complicated prohis sale time contract. cedure. He makes his a time contract. He sells for delivery sale on a sells for cedure. in delivery in some distant month; consequently, until the arrival of the delivery until the arrival of the distant month; consequently, delivery month, he he is is required required only only to to keep keep his protected, his short sale adequately short sale month, adequately protected, adverse rise rise in the price the commodity. by cash margins, from an adverse in the cash margins, of the by price of commodity. delivery month arrives, arrives, he must cover his sale purchase the delivery cover his When the sale by by purchase make on the the exchange or delivery the contract. He may, however, or on contract. the delivery exchange may, however, at any time without without waiting for the the delivery make his his purchase purchase at any time waiting for delivery month to arrive. arrive. to is most frequently attacked that it Short selling the ground it artifiartififrequently attacked on the selling is ground that When a a sharp price decline occurs in any comcially depresses prices. decline occurs in cially sharp price depresses prices. any comin dealt on futures in futures markets, the short seller alone is usually modity dealt the short seller alone is markets, modity usually blamed for for bringing bringing about the the debacle, debacle, unaided by by conditions of demand conditions of and supply anything except the alleged weapon of the of the except the alleged all-powerful supply or anything all-powerful weapon sale. The following short sale. declaration short declaration by Senator Capper (of Kansas), Senator following by Capper (of Kansas), made some years years ago in connection with the the introduction into introduction of of a a bill bill into ago in
Speculation Speculation
79 79
the States Senate the United States to limit limit trading trading Senate to
and prohibit short selling prohibit short selling on
commodity exchanges is typical: typical: commodity exchanges is Inasmuch as as selling, nothing but but selling, a decline, forces a decline, and inasmuch selling, and nothing selling, forces also of the also as as 90 90 per per cent of the selling selling is is done by to force short to force a a by gamblers selling short gamblers selling it decline, it follows logically that speculative selling is the dominant factor in follows that is the factor in decline, logically speculative selling
in the the wheat market. forcing market. The market's market's two great great abuses decline in abuses are are short short forcing a decline excessive speculation. selling and excessive selling speculation. first three three days the "bear raid" which started May, the the futures In the the first of the in May, "bear raid" started in futures days of transactions 97,400,000, 90,300,000, and 93,700,000 bushels, respectively, transactions were 97,400,000, 93,700,000 bushels, respectively, 90,300,000, as the or almost as as much wheat as the entire entire crop this year year in in this country's this country's grown this crop grown state. premier sta'te. This hammering continued until on July 23 wheat until was hammering premier July 23 wheat closed at about it through the balance of closed at $1.l8t, about it remained through where balance of the the month, the month, $1.18^, decline of of 52 cents as compared 30 a decline cents a bushel. as compared with with $1.70^ $1.70! on April April 30-a bushel. the gamblers all the gamblers took took advantage advantage of the technical technical conditions Naturally, the of all in the conditions in the Naturally, of market, especially the ancient stunt of "touching off" stop-loss orders placed market, especially the ancient stunt "touching off" stop-loss orders placed behind their their operations operations by by the the optimistic were hoping hoping for advance. for an advance. optimistic chaps chaps who were And they full use, use, too, too, of of bearish bearish propaganda. Finally, there there was aa thorthorthey made full propaganda. Finally, of the the "longs," ough out" of of the the last last of bought at at above $1.30. $1.30. "shaking out" ough "shaking "longs," who had bought if there II am wondering wondering if there is is anyone left who will will have the to pull pull the hardihood to anyone left that time-worn shibboleth shibboleth about the the wheat market responding responding solely that to the the solely to "law of of supply supply and demand." That explanation explanation had whiskers whiskers on it it before before the the present generation generation of gamblers born, and when aa market rigger rigger can artifi· artifigamblers was born, present cially increase the supply of wheat 10,000,000 bushels overnight, the increase the is the 10,000,000 bushels overnight, what is supply of cially use of prating about about aa law of supply supply and demand?15 use of prating law of demand? 15
Six before the the date date of that speculation of Senator Senator Capper's Six days Capper's charge charge that days before speculation prices on the Chicago Board of Trade, the of Trade, Chicago prices Chicago dispatch, told of the establish· told of the establishChicago dispatch, in July of settlement prices for for shorts July corn on settlement prices shorts who were trapped ment of trapped in the Chicago Chicago Board of of Trade. Evidently Evidently heavy heavy short was taking taking short selling the selling was in corn at the very time that short selling in wheat on the place at in time that in the same short corn the very selling place in corn was active. Short was unable unable however, however, Short selling of Trade was active. Board of selling in in the trend of of prices. prices. Thus, very same market, market, even to stem the rising rising trend the very stem the even to Thus, in carried in different grains, carried at the same time, resulted in short selling in different on at the short selling time, resulted in grains, diametrically opposite price price movements. What is the explanation for this? is the this? explanation for diametrically opposite Let us trace trace the the development development of of the the world world wheat crop in 1928. About in 1928. Let us crop the middle middle of of May, May, the the winter winter wheat crop likely to to be as likely the reported as crop was reported x ... "",11,'" ,1 bushels, bushels, or per cent cent below the the -'-':.!,llIlfI,IIII'I·bushel of or 12 12 per Viii,niM),niM-bushel crop ,^.i crop of 1927. outlook was also for aa spring spring wheat crop smaller than that of also for smaller than that of 1927. The outlook crop the preceding year. year. A month later, later, the the official placed official government estimate placed the preceding government estimate at 512,000,000 the winter wheat crop crop at 26,000,000 of 26,000,000 increase of winter wheat the 512,000,000 bushels, bushels, an increase estimate. Private at this estimates at the preceding preceding estimate, Private estimates this time time placed placed bushels over over the bushels was the the cause cause of the low wheat of the was the Journal Journal of of Commerce, in aa the Commerce, in
<
1 1
ii,
1 1
IB Jounial 15 Joumal of of
Commerce. August 18, 1928. Commerce, August 18, 1928.
80 8o
Commodity Exchanges and Futures Trading and Futures Trading Commodity Exchanges
in the wheat crop at 252,000,000 bushels, and growing the spring conditions in 252,000,000 bushels, growing conditions crop at spring wheat were known to to be be favorable. favorable. By By the middle of the federal the middle of July, the federal Canada were July,
was raised government's the winter winter wheat crop to 544,000,000 estimate of of the raised to 544,000,000 government's estimate crop was 32,000,000 bushels bushels over June estimate, bushels, an increase of 32,000,000 over the increase of the June estimate, and bushels, at 256,000,000 the wheat crop crop was was estimated bushels-aa 4,000,0004,000,000estimated at the spring 256,000,000 bushels spring wheat bushel increase. increase. By By the the middle middle of of August, August, the United States total United States crop, the total bushel crop, which in in May May was was expected to be smaller than that of 1927, was estithat to than of be smaller was estiwhich 1927, expected as compared with the 1927 total mated to to be be 891,000,000 bushels, the 1927 total of of 891,000,000 bushels, as compared at 873,000,000 bushels. Unofficial Unofficial estimates estimates placed placed the the Canadian crop 873,000,000 bushels. crop at total revised 500,000,000 bushels. total of the United States crop was again revised of the States bushels. The 500,000,000 again crop upward in September to 901,000,000 bushels, and in October to 904,000,000 in to in to bushels, 904,000,000 901,000,000 upward September bushels. The Canadian crop in September crop in was placed at 550,000,000 was at bushels. 550,000,000 placed September in October as compared with 440,000,000 440,000,000 in Accordingly, in bushels, as in 1927. 1927. Accordingly, bushels, compared with America of the expectation was was for crop in a crop in North America the expectation for a of 1,454,000,000 1,454,000,000 bushels, bushels, as compared compared with with 992,000,000 bushels the preceding year, and for as for an bushels the preceding year, 992,000,000 exportable of 680,000,000 bushels, as compared with with 538,000,000 as compared 680,000,000 bushels, 538,000,000 exportable surplus surplus of a the year before. before. In addition to to these these increases, there was a carry-over of In addition there the year increases, carry-over of 100,000,000 bushels from from 1927, that the the it was known that 1927, and by 100,000,000 bushels by October it in twenty-one European countries approximate 1,374,000,000 crop in countries would 1,374,000,000 twenty-one European approximate crop bushels, as l,:~ ;',,111111,111111 bushels in Australia and the in 1927-with as against 1927 with Australia the I"I,IMMI,IMMI bushels bushels, against 1,:! heard from. Argentine yet to be heard from. to be Argentine yet foregoing rsum resume of of the the statistical statistical position in 1928 The foregoing of wheat in indi1928 indiposition of there was was only only one direction direction in wheat prices prices could cates cates that that there in which wheat could and that moved-and that downward. The exportable surplus possibly have was have moved possibly exportable surplus of the the United United States was greater; import requirements requirements of States and Canada was the import greater; the of were smaller. of Europe smaller. were Europe To take take one more aspect of the the question: August 18, the before the 18, before aspect of question: On August of the first estimate of the Canadian crop was issued before EuroEurofirst official official estimate issued and before crop was pean estimates were published, wheat was selling at $1.16! estimates were December wheat at published, pean selling $1.16J per bushel. bushel. The price price later later touched touched $1.l3i, but on October October 17, 17, two $1.13f, but per full extent America's and Europe's with the the full extent of of North America's months later, later, with Europe's the was The bumper crops crops realized, realized, the price price $1.15l speculators sold $1.15|. bumper speculators who sold in the the summer had forecast early in short early wheat short forecast conditions conditions correctly. correctly. Any short temporarily increases increases the sale temporarily short sale the supply of the the commodity. Any supply of commodity. For every every short however, there there must be be aa purchase-for every For short sale, for sale, however, seller, purchase every seller, is not not strong enough to absorb the of selling, aa buyer. buyer. If If demand is to absorb the of volume strong enough selling, if buying power is to absorb the selling, the prices recede. recede. But, sufficient to absorb the But, if buying power is sufficient prices selling, the a not be a decline, but an advance':""and an ensuing price will movement will not be advance and decline, ensuing price advance to the subsequent subsequent covering covering or by the the shorts advance to which the or purchases shorts purchases by will actively any case, case, every short sale must, before expirawill actively contribute. contribute. In any short sale before must, every expiration of the contract delivery period, be be offset by aa corresponding purtion of the contract offset by delivery period, corresponding pur-
Speculation Speculation
81 81
chase on the the exchange exchange or or physical physical markets, markets, thereby chase thereby increasing increasing at that time. time. at that
demand
in which heavy heavy short has sales have been made has A declining short sales declining market in in advance. a potential its fall cushioned in advance. Every Every short buyer short seller is a fall cushioned seller is had its potential buyer at any any time. time. He must buy buy sometime. sometime. As the the price declines, the buying the at buying price declines,
of short they cover their short short trades-tends trades tends to to offset cover their offset the the panicky of short sellers-as sellers as they panicky at at higher prices. selling of bulls bought of who bulls bought higher prices. selling analyses of short selling, written many many years of short The following before following analyses selling, written years before wheat crop crop suffered prices, present the reasoned the 1928 suffered from falling the reasoned the 1928 wheat falling prices, present judgment of nationally recognized recognized economists whose opinions economists whose deserve of two two nationally opinions deserve judgment attention: attention: Nine-tenths of people are are by by nature nature "bulls," the higher higher prices prices go Nine-tenths of ,t:he the people "bulls/' and the go and If it were not for elated elated ,they become. If it the group of more optimistic become. for the of they group optimistic
the the
it would be short resist an excessive excessive inflation, inflation, it be much easier to raise easier to raise short sellers sellers who resist inflation became apparent roof; and then, then, when the the inflation to all, all, prices through the roof; through -the apparent to prices until the the be abrupt the basemen-t basement was the descent descent would be likely unchecked until abrupt and likely operations of of the the "bear," inflation reached. The operations excessive inflation reached. "bear," however, however, make excessive tend to a violent and similarly tend to prevent a violent smash, because the extremely expensive the smash, extremely expensive similarly prevent realize his his profits, profits, must become a buyer buyer when he covers bear, to to realize covers...•. Short Short bear, unduly <1q>nvv>iii<; (ki)l'('~,illg prices, prices, as many would have us us believe, believe, selling, instead of of unduly as many selling, instead which the often the the most most powerful powerful support the market pos'sesses. It is ordiis often is It is an ordisupport possesses. in that nary affair to read in the press that the market is or put up at the the the is sus'tained to read sustained affair or at the press nary put up expense of the "shorts," who, having contracted to deliver at a certain price, contracted deliver of the to at a certain "shorts," who, having expense price, can frequently frequently be be driven driven to to "cover." thus aa beneficial beneficial factor "cover." Short Short selling is thus can factor selling is in steadying prices and obviating obviating extreme extreme fluctuations. its fluctuations. Largely in steadying prices Largely through through its of serious serious and unfavorable not take take the the action, the unfavorable events the discounting events does does not action, discounting of of aa sudden shock shock or or convulsion, convulsion, but, but, instead, is spread a period period form of out over over a instead, is spread out holder the actual of the actual holder of produce ample time to observe the situatime to of time, observe the situatime, giving produce ample giving 16 his loss before ruin ruin results. results. 16 tion and limit loss before limit his tion familiar argument argument is that short short selling is that is a a selling The familiar of products that do selling is selling of products that so furnishes not exist, exist, in to those those that that do, furnishes aa corresponding increase in addition addition to not increase do, and so corresponding of necessarily depresses depresses prices; prices; and figures of supply, figures representing supply, which necessarily representing enormous as statistical brought forward as statistical proof. proof. These sales, however, are are also also sales are brought sales are sales, however, is of and the question of their is no importance. They reprepurchases, of their amount of the question purchases, importance. They represent a speculative as well well as as a speculative speculative supply, the real real question question sent a supply, and the speculative demand as short side whether the the speculative speculative forces forces on -the 'the short than those on is whether side are are stronger is those on stronger than the speculative the long side of market, and whether the or is of the the market, or the demand is long side speculative supply supply It is is the the fact that they sometimes are not, which warranted by by actual conditions. It fact that actual conditions. warranted sometimes are which not, they that speculative of demand gives rise to to the the idea idea that are "independent speculative prices prices are gives rise "independent of and supply ..•• supply. .
.
.
.
.
.
of Produce 18 S. S. Functions of Produce Exchanges," Exchanges," in American Produce Produce in American S. Huebner, iS. Huebner, "The Functions Academy of Exchange Markets Markets (Philadelphia: of Political Political and and Social Social Science, Science, Exchange (Philadelphia: American Academy
1911) pp. 19, 20. 19,20, 1911),, pp.
82
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
Perhaps the the most most potent potent influence influence in is the in preventing the fluctuations is wide fluctuations Perhaps preventing wide is he he who keeps keeps prices prices down by his short sales, maligned short short seller. seller. It much maligned It is short his sales, by keeps them strong by his his covering purchases. This is is especially true and then then keeps covering purchases. strong by especially true in the the case of inflation inflation followed by panic. panic. If were not short selling in it were followed by If it not for for strong case of short strong selling prices might might rise before when the the market becomes inflated, rise to to almost almost any extent before inflated, prices any extent the crash. Now ,the rise tends tends to to be be checked by ,the of shrewd shrewd operthe final final crash. the rise 'the efforts checked by efforts of operof the ators take advantage the inflation. the other hand, when prices prices begin begin ators to to take inflation. On the other hand, advantage of to tumble, tumble, ·they kept from going going as by the the to are kept as {hey as low as otherwise would by they are they otherwise the shorts have to to cover their cont·racts. prices purchases which shorts the to make to their have cover contracts. Thus purchases prices at both both ends ends of of aa panic panic are than they wtihout short at less extreme than be wtihout are less short they would be 17 l1 selling. selling. So well is the cushioning effect of a short recognized on the the interest recognized well is the cushioning effect of short interest in price stock exchanges that, that, when a rapid rapid run-up run-up in price has has driven the shorts stock exchanges driven the shorts in a it is a technically out of of a stock, technically dangerous position. A is considered considered in stock, it dangerous position. if speculation enters at market without without short selling, if at all, is to be be enters bound short selling, is to all, speculation a of wide and violent real estate a market of violent price price swings. swings. The Florida Florida real estate bubble in in the the 1920's lends point point to to this this principle. principle. Reckless pushed Reckless speculation 1920's lends speculation pushed prices of Florida land up to levels economic justification. Florida land to levels had of which no up prices justification. When the inevitable end of of the the boom came, prices collapsed. Nothing the inevitable came, prices collapsed. Nothing of Florida land. to affect affect the the value value (not the price) price) of had happened land. The (not the happened to market had simply disappeared. If it make short it had been possible to If to short possible simply disappeared. sales of real real property, property, undoubtedly undoubtedly they they would have been made in in abundsales of ance as prices prices mounted. Some premature premature short short sellers sellers would have been ance as until in. trapped; others short until the decline decline set have remained short the set in. would others trapped; Their subsequent covering purchases, when the collapsing the market was collapsing subsequent covering purchases, would have have afforded afforded the the best, best, or perhaps the the only, realty or perhaps for realty only, market for at the time have tended tended to to stabilize prices earlier at stabilize prices earlier and at time and would have at the higher levels. higher levels. Regulation of of Speculation. Speculation. Speculation brunt of the brunt often bears bears the of Speculation often Regulation attacks that are really really directed directed against against manipulation, manipulation, which is is illegal that are attacks illegal for many under both both state federal laws, laws, as years under it has been for as it state and federal under many years is the rules the various various commodity By lawful lawful speculation of the rules of the exchanges. By commodity exchanges. speculation is traders buying or or selling selling of of commodities by traders who expect to to the buying meant the by expect in prices, profit by a subsequent rise or decline in prices, but are not acting in are not acting in profit by a subsequent rise or decline to gain action to control concert with one another or or attempting attempting by by joint joint action concert with gain control is of the or depress prices. By illegal manipulation is meant conconor the supply of depress prices. By illegal manipulation supply or more the certed buying buying or or concentrated by two or persons concentrated selling certed selling by persons with the object of forcing prices materially higher or depressing them ill(~rdinately of inordinately depressing forcing prices materially higher object for higher through such sales. sales. Manipulation Manipulation for higher prices prices may of such the volume of may through the result in illegal or less important "squeezes." less important corners or result in "squeezes." illegal corners several operators A corner, corner, always always illegal, illegal, is is aa condition condition where one or several operators i* 11
H. C. C. Emery, Emery, op. H. op.
cit., pp. pp. 119-121.
cit.,
Speculation Speculation control or have contracted for so so control or have contracted for
83
that outstanding much of of the the supply outstanding supply that contracts to deliver fulfilled except prices which the the operat prices contracts to deliver cannot cannot be fulfilled except at operators of of the the corner corner dictate. dictate. A squeeze is a relatively small corner, occura occuris small ators corner, relatively squeeze ring in in deliveries for some one month or in or some one grade. deliveries for Someor, in grade. Some-or, ring fact, most-squeezes are physical and the the exchange the physical are inevitable inevitable on both the fact, mostsqueezes exchange not the the result result of of illegal manipulation. For in~tance, in markets and are in markets are not instance, illegal manipulation. the steamers bringing bringing sugar, hides, coffee, cocoa, or or the winter winter months steamers sugar, hides, coffee, cocoa, at sea, rubber from foreign foreign ports ports may may not, not, because because of in of storms arrive in storms at sea, arrive the month for for which they they are are scheduled and in the cargoes they in which the the cargoes they failure of carry have already already been sold for delivery. thousand sold for of several several thousand delivery. The failure carry have in the anyone commodity to to arrive arrive in the expected tons of of any one commodity result tons expected month may may result in in aa sharp rise or squeeze in price of that month's delivery, as the merin that meror of as the rise delivery, squeeze price sharp chants, whose cargoes have not arrived, are forced to enter the spot enter are forced the have not to chants, arrived, cargoes spot and exchange markets markets to to buy, buy, often often at replace the at substantial substantial losses, to replace the delayed losses, to delayed exchange sold for delivery under contracts that must cargoes, have have which been for that sold contracts delivery cargoes, will be completed completed before before the the end of the month. Otherwise, be of the the sellers sellers will Otherwise, the be be in in default default and suffer suffer even more serious serious losses losses and penalties. penalties. The a in buying such conditions creates a squeeze in prices conditions or specific under such creates buying squeeze prices or specific market for the entire is of spot merchandise, for the entire is fully aware of of grades fully aware grades of spot merchandise, the usually usually acute need for replacement of acute need for immediate replacement of such delayed the delayed cargoes. cargoes. It has many years years since a corner corner has has occurred It since a occurred on any has been many any commodity commodity of The speculative corners of the past years were not always exchange. the corners always past years speculative exchange. at all nor were of the reputed corners at all effecfinancially successful, nor of the effecwere corners some financially successful, reputed brought ruin ruin upon upon the tive. the operators tive. Most of of them brought engineered operators who engineered the operators to criminal prosecution. The by-laws to them and subjected the criminal by-laws prosecution. subjected operators rules of all commodity commodity exchanges exchanges today today are to are framed designedly and rules of all designedly to of such activities and to make them ineffectua}.18 prevent the occurrence activities to ineffectual. 18 prevent the occurrence of manipulative or illegal squeeze squeeze is the corner, A manipulative is less or illegal less spectacular corner, spectacular than the a it is is still temporarily on a small scale. Most squeezes small and scale. and it still possible temporarily possible squeezes as aa result result of today innocently as of governmental as restrictions such as occur innocently governmental restrictions-such today occur the sudden establishment of or or decrease quota on a comin an import decrease in the establishment of comimport quota modity such as sugar. may be be seriously unfairly embarSellers may such as seriously and most unfairly modity sugar. Sellers it almost impossible to find it rassed by such restrictions restrictions and find deliver on rassed by impossible to deliver their sales By-laws have have been adopted by the exchanges, the their sales contracts. contracts. By-laws adopted by exchanges, however, for the purpose of preventing any squeeze from being of if for the ever, effective, if preventing any squeeze being effective, purpose or fair the price price is is forced above the the fair fair market or forced above fair commercial price the for price for the commodity. commodity. the The following following by-laws by-laws of the Commodity Inc., are of the are illusillusCommodity Exchange, Exchange, Inc., is designed to of this phase of of exchange exchange regulation regulation which is outlaw trative trative of this phase designed to outlaw and make ineffectual ineffectual any any corner corner or squeeze. or squeeze. is See 18 XIII for for further discussion of this point. point. of this further discussion See Chapter Chapter XIII
84
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
Sec. 404. Whenever through any exceptional exceptional contingency, not provided provided Sec. 404. through any contingency, not for in the By-Laws Rules, deliveries are not possible, and an extraordinary not and deliveries are for in the By-Laws Rules, extraordinary possible, situation a rigid rigid enforcement of generally would be contracts generally of contracts situation arises, arises, wherein a grossly at variance variance with with just just and equitable principles of trade or the the public public of trade equitable principles grossly at interest, then upon upon application of any any member, after investigation, the member, and after interest, then investigation, the application of in Board may may accord relief in such as in their judgment the emergency their in manner as the such accord relief emergency judgment may demand, wi-th due regard, regard, however, however, to to upholding rights of the rights of both buyer demand, with buyer upholding the may and seller the fulfillment of their their just just obligations interests to the the best best interests fulfillment of seller and the obligations and .to of the Exchange. Exchange. of the Sec. 409. Whenever it shall appear appear that has been created or aa Sec. 409. that an interest interest has created or it shall ~ituation exists exists in in respect respect to to any any delivery situation endangers, delivery month or months which endangers, or may endanger, normal functioning functioning of the market, the exchange or of of the or may the normal of the market, exchange or endanger, ,the or that that conditions conditions have have arisen jeopardize the the maintenance maintenance of of aa free, open, or arisen which jeopardize free, open, and orderly orderly market, market, or which which jeopardizes jeopardizes the the fulfillment fulfillment of of outstanding conoutstanding contracts, or or which which threaten threaten to to conflict conflict with with the best interests the exchange or the best interests of of the tracts, exchange or of the public, of the public, whether whether such such interest or such conditions may involve involve aa violation violation interest or conditions may of the By-Laws or or Rules Rules of the exchange exchange or not, the the Board of by aa of the By-Laws or not, of the of Governors, Governors, by vote of two-thirds two-thirds of those those present present and voting, voting, but but in in no event by by less less than than twelve twelve affirmative affirmative votes, votes, may may itself, itself, or through through any any regular regular or special special committee appointed by the the Board, the situation interest; and for the purpursituation or interest; for the Board, investigate investigate the appointed by poses of such investigation the Board, Board, or of such or such such regular or special committee, investigation the regular or special committee, poses shall have all of the powers and authority authority vested By-Laws in in the the Comshall have all of the powers vested by the By-Laws by the mittee If the shall conclude that mittee on Business Business Conduct. If the Board shall that such an interest, interest, situation, or condition or that that the the best of the the exchange or of best interests condition exists, interests of of the the situation, or exists, or exchange or public are are or or may may be be threatened, threatened, it vote of present, it may by a those present, of those public may by a majority majority vote after opportunity for the interested to be be heard, heard, require after affording for the interested members to affording an opportunity require the involved therein 'therein to take such steps may the member or members involved to take as the the Board may steps as necessary to to avert, regulate, or correct correct the the conditions in question, question, and deem necessary conditions in avert, regulate, for purpose may may require require such such member, member, or liquidate in that purpose or members, to liquidate in whole, for that members, to whole, or in in part, part, -their -their position position or or positions positions within within such upon such terms or such time time and upon such terms as may by the the Board, Board, or to to take take such may be be deemed fixed by as such other other steps as may may be fixed steps as necessary or or desirable desirable in in the the discretion discretion of the Board. In the Board. In of the event a a member the event necessary fails to comply comply promptly promptly with with such such requirements requirements as prescribe, fails to as the the Board may may prescribe, his failure shall be be considered considered as best interests interests of of the as an a'ct detrimental to to the the best his failure shall act detrimental the Exchange its members and he he shall be subject shall be to censure, censure, fine, fine, suspension, Exchange and its subject to suspension, (lr 210 of the By-Laws. By-Laws. or expulsion of the Section 210 expulsion under Section The above above powers powers and authority, to the Board, are to enlarge the Board, are intended intended to given to authority, given enlarge the not intended in to curtail curtail or are not in any of the the Board and are the authority or way to authority of any way restrict same. same. restrict the authority of such authority of such by-laws, by-laws, the the country Under the the exchanges of the exchanges of country
are are
at which contracts empowered to fix fix the the prices prices at contracts shall shall be settled in settled in empowered to order cope with with all all squeezes, whether they are innocent or· manipuorder to to cope whether are or innocent they squeezes, manipulative. Likewise, in time of war, when certain in time of war, certain exchanges lative. Likewise, are forced forced by exchanges are by conditions all by governmental proclamation to suspend all operations, conditions or or by to governmental proclamation suspend operations, all outstanding the directors are empowered empowered to to fix fix the prices at the prices at which all the directors are outstanding contracts be liquidated. liquidated. contracts must be
Speculation Speculation
85
of by-laws By the adoption adoption of by-laws limiting limiting the the extent price fluctuations extent of of price fluctuations By the in in aa single trading day, by rules of clearing associations (operating in rules of associations single trading day, by clearing (operating in conjunction with the respective exchanges), limiting the volume of with the the volume of conjunction respective exchanges) limiting trading clearing member can clear with the clearing associaclear with the clearing associatrading which each clearing by rigid rigid compliance with the regulations of the federal Comtion, and by with the of the federal tion, compliance regulations modity Exchange Authority limiting the number of open contracts of open contracts modity Exchange Authority limiting the individual speculator may have in any commodity individual in which any have any speculator may any commodity exchange exchange 19 the exchanges have established all the practical market,19 all have established the the effective market, exchanges practical and effective safeguards necessary to to keep keep their their speculative machinery free free from safeguards necessary speculative machinery abuses. It is is more than than possible possible-it is probable probable-that it is that other other reforms reforms will abuses. It will arise. To the or new techniques be made as as new occasions occasions or techniques arise. the extent that extent that be the exchanges are alert to exercise exercise aggressive to effect effect conconalert to the exchanges are aggressive leadership leadership and to as great necessary, their their position position as structive reforms from within, within, when necessary, structive reforms great market places places and insurance agencies (essential to the the public public interests interests and insurance agencies (essential to necessary to to more orderly production, distribution, conversion, and distribution, conversion, orderly production, necessary financing of staple commodities) will be constantly strengthened, of will be constantly strengthened, and financing staple commodities) emotional or or demagogic demagogic attacks attacks upon upon speculation will become ineffectual. ineffectual. emotional speculation will with the passage of the federal Commodity Exchange Since of federal with the the Since 1936, Act, 1936, Commodity Exchange Act, passage of speculation in an effort the volume of the federal government, in effort to to control control the federal government, the speculation fix the to fix the trading trading limits limits by individual individual operators, has been authorized authorized to operators, has by of or market positions of members non-members of such exchanges and or exchanges positions of a federal as are to the Act. limits are determined by a federal agency limits Act. These are as to the are subject by agency subject in and apply apply only to exchanges dealing in domestic agricultural products. to agricultural products. only exchanges dealing ,
19 See 10 Chapter XIII. XIII. See Chapter
CHAPTER ~ CHAPTER
IV
)
Grading, Standardization, and Inspection Grading, Standardization, Inspection
Commodity perform other valuable economic services in services in other valuable Commodity exchanges exchanges perform addition to their function function of providing aa means of to their credit of providing of price price and credit insurance. insurance. One of of these these important important services services is render the is that that they render the comthey modity liquid. By liquidity is (1) that the commodity may meant that the is modity liquid. By liquidity commodity may (1) be sold at always sold or bought at price readily, instantaneously, some always bought price readily, instantaneously, and in any of sharp in any amount without the the necessity necessity of price reactions, reactions, protracted protracted sharp price bargaining, or searching for a buyer or a seller; (2) that sale of for a that or sale of the the seller; searching buyer (2) bargaining, be to commodity may effected by sellers to buyers through a standardized effected sellers standardized buyers through commodity may by contract which requires requires no attention to its technical terms terms and condicondicontract attention to its technical tions on the the part part of of either either party party to to the the transaction, transaction, except price and as to to price tions except as time of of delivery; delivery; and (3) (3) that that title title to to the may be transferred transferred the commodity time may commodity by delivery negotiable warehouse receipt, passes from hand to a negotiable to of a delivery of by receipt, which passes hand, is everywhere accepted as representative of the stored commodity is of the stored as hand, commodity representative everywhere accepted it controls, accompanied by by an unimpeachable unimpeachable certificate it is accompanied the of the certificate of controls, and is quality of the merchandise. merchandise. the of quality futures contract, contract, in with the negotiable in conjunction the negotiable The standardized standardized futures conjunction with warehouse receipt receipt and the the certificate certificate of or grade, the of quality makes the grade, quality full measure of commodity liquid. to impart impart the the full liquidity to to of liquidity commodity liquid. In order to a commodity, it is necessary that a negotiable warehouse receipt shall it is that shall a necessary negotiable commodity, receipt be recognized recognized as as the the equivalent the commodity of the itself. Before such a a be commodity itself. equivalent of system of delivery by of receipts can be developed, it it means of be of warehouse receipts delivery by system developed, is essential essential that that definite or standard standard grades of each commodity is definite or estabgrades of commodity be established so that every every buyer buyer or or seller seller may may know with certainty lished so that certainty what he may if he accepts delivery, or or what he must tender, tender, if if he makes receive, if may receive, accepts delivery, delivery on the contract. After standard grades are established, however, are the After contract. established, however, grades delivery so that it is still necessary to to provide provide for for aa system that specific it is still necessary system of inspection inspection so specific certificated as of the the commodity may properly sampled and certificated as proper lots be lots of commodity may properly sampled proper lots are are inspected for delivery delivery under the the exchange exchange contract. contract. These lots for inspected and then certificates are assorted into standard grades, grade certificates are issued under and issued assorted into standard grades, grade exchange supervision. exchange supervision. 86 86
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of grading integral part part of of the the system system of As an integral the grading and inspection, inspection, the all lots lots intended exchanges license warehouses warehouses in in which all intended or or offered offered for for exchanges license stored. delivery be stored. The receipt, issued by approved must be warehouse issued delivery receipt, by approved and bonded warehouses, warehouses, certifies certifies to to the the existence existence of of the the commodity in commodity in the warehouse; warehouse; the the grade weight certificates certify to to its the certificates certify its quality grade and weight quality and weight. weight. Inspection and Grading. Advantages of benefits of of standardizastandardizaof Inspection Advantages Grading. The benefits tion or qualities qualities won early those trades in which which tion of of grades in those trades in grades or early recognition recognition in first conducted. The following summary of trading was first the futures trading futures following summary of the for the reasons of reasons for the adoption of the system and the benefits of its operation the the its benefits of adoption system operation in the appeared in Produce the Origin, the New York York Produce Growth, and Usefulness of the Origin, Growth, Usefulness of appeared
that exchange exchange about ten ten years issued by Exchange, issued by that after establishment establishment Exchange, years after and of a grain inspection grading system: of a grain inspection grading system: The year year 1874 also rendered rendered memorable by by the the changes the methods 1874 was also in the changes in in of handling of handling and dealing in grain, have proved so beneficial to buyers which have so beneficial to buyers dealing grain, proved and sellers the commerce of the port. port. The grain trade was rapidly growing, sellers and the of the trade was grain rapidly growing, and many many of the the shipments western points. points. Naturally, Naturally, more or far western or shipments came from far less less delay delay and confusion confusion occurred occurred in in conveying conveying the the grain so far, and the business the business grain so far, of the of the Exchange Exchange was much disarranged disarranged by the rule rule ,that the various railroads that the various railroads by the to deliver to consignees the identical lots of grain shipped by the western had to to the lots of deliver identical consignees grain shipped by the western made, and producers. Many suggestions as as to to the the most effectual effectual remedy Many suggestions remedy were made, producers. special weighed the the subject subject for period, until finally the the for a a long until finally committees weighed long period, special committees adopted.••. present system of grading grain was adopted. system of present grading grain Grades of of all all kinds kinds of grain were were then then established, standard samples of such such of grain Grades established, standard samples of kept in the Exchange, Exchange, and the the Committee on Grain also appointed grades being kept also appointed in the grades being inspector in in turn turn was empowered to appoint an inspector in chief, to chief, who in empowered to appoint deputies deputies to promptly and reliably inspect each car of grain upon its at the Hudson of its arrival arrival each car at the grain upon reliably inspect promptly River of the the railroads. railroads.•.• The inspectors the weighing terminus of River terminus weighing inspectors supervised supervised the the number of the grain kept books in they recorded accurately the recorded in which and books of the accurately they grain kept and therein of each car, the kind, kind, grade, grade, and quantity of grain therein inspected weighed, of of each car, the weighed, grain inspected quantity the consignee of such inspection, and the the name of the of the such inspection, the date date of consignee.. . . . These certificates were to be properly properly dated and numbered consecutively, to be certificates were These consecutively, of the and were were to to state state in the kind, kind, grade, grade, and quantity the grain grain reprereprein detail detail the and quantity of railroad company to the Upon surrender of certificates certificates to the railroad issuing sented by them. surrender of them. Upon sented by company issuing the company with an order directing the the delivery delivery of the grain, the same, same, with order directing the grain, the company was deliver to proper receipts for and promptly deliver the quantity them for to give grade quantity and grade promptly give proper receipts of the the grain grain specified therein at any customary place of delivery the port port of at therein of delivery in the any customary place specified also adopted, York. Strict rules governing the duties duties of of ,the the inspectors New York. Strict rules inspectors were also adopted, governing the has handling graded grain has proved a and, as thus formulated, the system of of the as thus formulated, and, handling graded grain proved system its adoption. grand success, reflecting credit credit on all all concerned concerned in its success, reflecting adoption. grand the struggle to refers H. Parker thus graphically refers to ,the resulted Mr. Forrest thus H. Parker Mr. Forrest struggle which resulted graphically was contest in the above great and beneficent change: "The contest sharp and bit,ter, beneficent in the above great bitter, sharp change: the members opponents of the grading of grain among the most able of the were the opponents of the grading of grain among were determined that our the friends of the the movement, movement, however, that our Ex(.hange; friends of however, Exchange; the .
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the inaugurated. It It was my my good to be fortune to be on the the system the Board good fortune system should be inaugurated. that it at that time, I testify that it believed that the results us and can I was believed that the results that would draw us at time, testify and dealers nearer to the producers dealers of the West, and be beneficial to them the the to would be nearer beneficial to West, producers lots was no longer as -well as ourselves. ourselves. Grain in in car car lots to be be burdened with the well as with the as longer to sold heavy charges incident to its being sold and handled by itself, but was to be to its to be being by itself, heavy charges incident inspected by the New York Exchange and a certificate issued by the Produce a certificate issued by the Exchange inspected by the railroad company, company, stating stating that that the the receiver receiver was entitled entitled to to _ _ bushels railroad bushels of of equal equal quality, thus materially materially lessening lessening the the cost cost of port of of of handling car grain in the the port handling car grain in quality, thus result of this compact compact with with the railroad companies proved the railroad of this New York. York. The result has proved companies has its promoters and it safe to to say that the the wisdom of it is is safe of car grain of its the the handling car grain say that handling of promoters by the method in in vogue vogue prior prior to to the the establishment the grading grading of grain establishment of of the of grain by the system a physical physical impossibility." impossibility." system would now be almost a
In the physical markets markets the the various various trade trade associations, before establishIn establishthe physical associations, before already developed contracts and ment of of exchanges, developed both standard contracts exchanges, had already their members. The exchanges, standard grades as as essential services to to their essential services standard grades exchanges, their own standard contracts coming later, were were required required to to develop develop their contracts and coming later, of the grades, they benefited benefited greatly greatly from the prior work of the trade trade the prior grades, but they associations. associations. strict adherence to of well-defined well-defined grades Establishment of to the the Establishment grades and strict official of inestimable benefit to producer, distributor, the producer, is of inestimable benefit to the official standards standards is distributor, converter, in addition addition to to standard machinery standard grades, consumer. 11 If, converter, and consumer. If, in grades, machinery is inspection classification to certain that each and is provided for for to classification certain that make each inspection provided lot of the commodity commodity conforms to to aa standard is no longer standard grade, lot of the there is grade, there longer any practical application of the principle of caveat emptor (let the buyer of the of the emptor (let buyer any practical application principle beware) . standard grades, a purchase be compelled would a carestandard Without compelled caregrades, purchase beware) fully to to inspect inspect every every lot lot of of aa commodity buys; but, but, once standbefore he buys; standcommodity before fully of ard grades are are recognized recognized in in the the trade, trade, although purchases of non-standard non-standard ard grades although purchases of standard grades lots continue continue to to be be made by by sample, purchases of all purchases are lots grades are sample, all made by by description description and deliveries by certification. great merit merit of of certification. The great deliveries by standardized grades is is that that aa large large volume of is of sales sales "on description" standardized grades description" is now possible possible and that that the the great great bulk bulk of consequently, can of trading, now trading, consequently, be done dpne in in contracts contracts for for forward or or future by future delivery, sales by be delivery, whereas sales in "sample" necessarily imply spot trading in goods ready for immediate for goods ready "sample" necessarily imply spot trading delivery-aa factor factor which decidedly decidedly limits limits both the the tempo tempo and the the volume delivery of trading. of trading. Standard Grades and Methods of Establishment of In Establishment Classification. of Standard of Classification. every commodity trade in which the exchanges operate, they have played in the exchanges operate, they every commodity trade played aa pioneer pioneer part part in establishing grading grading and inspection systems. At present, in establishing inspection systems. present, commodities may may be divided divided into into two broad classes: those in in which classes: (1) (1) those standards quality or or of of inspection, provided by are provided a federal federal or both, of quality standards of both, are by a inspection, or in which standards of of quality methods or state (2) those those in and or state statute; statute; and (2) quality .
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See I. See Chapter Chapter 1.
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of sampling are established by the by the the of established by the exchange exchange (or inspection are (or by sampling and inspection in the trade association association of the physical physical market) market) . Included in the first of the first classificaclassificatrade tion are cotton, wheat, wheat, and other grains under federal laws. In In the tion other grains federal laws. the second are cotton, .
rubber, cocoa, hides, tin, are coffee, sugar, are coffee, cottonseed oil, butter, eggs, cocoa, hides, tin, butter, oil, sugar, rubber, eggs, cottonseed and so so forth. forth. Standards in the the Cotton Trade. in the the cotton cotton trade trade have Standards in Trade. Grades in the subject of legislation by Congress and are now established of are established become the legislation by Congress subject 1916. The grades pursuant to to the Act, passed passed in 1916. the Cotton Futures Act, grades officially officially pursuant had recognized this prevailed previously as standard grades under this Act as grades recognized prevailed previously in the trade, trade, having having been developed developed and used used by by the the cotton in the cotton exchanges exchanges for many the many years. years. The Act, beyond prohibiting prohibiting the and trade trade associations associations for Act, beyond delivery on a futures contract of any cotton of a grade poorer than a futures of of a contract cotton than low any delivery grade poorer middling, material changes changes in in the trade standards. the previous standards. middling, made no material previous trade It did, however, (1) prescribe aa method of price differentials It of determining differentials did, however, determining price (1) prescribe establish a various grades, grades, (2) establish a system of sampling, weighing, between various of system sampling, weighing, (2) of by officials of the States Department of Agriculture, and grading of the officials United States Agriculture, grading by Department the and (3) for provide for the issuance of official certificates of quality by issuance of official certificates of provide (3) quality by all the of federal inspectors, inspectors, who must certify the weight and grade of all deliveries. federal deliveries. certify weight grade a futures of cotton for delivery cotton intended int~nded for Owners of futures contract contract are are delivery on a it first in first in to store a required by exchange regulations to store it a bonded warewareby exchange regulations required the exchange. exchange. The cotton maintains a staff, house, licensed licensed by by the cotton exchange house, staff, exchange maintains known as the Inspection Bureau, charged with the duty as the Inspection Bureau, charged of sampling the duty of sampling and weighing cotton cotton to to be be tendered tendered on all all exchange contracts. The owner weighing exchange contracts. gives the chief inspector a written order to sample and weigh. The order chief written order to order the weigh. gives sample inspector states where the the cotton cotton is is located located and the lot. in each lot. the number of of bales bales in states where an are A sampler and inspector arc then detailed to draw samples and superthen detailed to sampler samples superinspector the weighing weighing under definite procedures. Two sets vise the of samples definite procedures. sets of are vise samples are taken from each each bale bale in in the the lot, lot, marked, marked, and given lot taken given an exchange exchange lot of samples samples is is retained retained by by the Bureau, number. One set set of the Inspection which Bureau, Inspection also records the weights weights reported reported by by the weighers and compares the weighers records the also compares them with the inspector inspector who supervised the weighing. weighing. The other with those those of of the other supervised the set to the U.S. Department of Agriculture for classification as to for of classification as to to U.S. set goes the Agriculture Department goes grade. grade. Branch offices of the the Department of Agriculture are maintained in in offices of Agriculture arc Department of in New Orleans, Orleans, where cotton markets are cotton exchange are New York and in exchange located, and in in each each branch office office there there is is aa board of of cotton cotton examiners. examiners. located, owner's cotton has been weighed weighed and samples cotton has When each owner's drawn, he samples drawn, addresses a request request to to the the board of of examiners to to classify his lot. This his lot. addresses a classify a the request prescribed by by the Department Department of Agriculture. of Agriculture. is made on a form prescribed request is location of of the the cotton, bales, weight weight (compressed or The location cotton, number of bales, (compressed or in the stated uncompressed), and tag are stated in the request. The board, numbers board, request. tag uncompressed) on the the basis basis of of the the samples submitted, classes the cotton classes the cotton according to samples submitted, according to ,
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its proper proper grade. may be be one that that is is tenderable tenderable on the the exchange grade may grade. The grade exchange If the one that that is not so so tenderable. tenderable. If the cotton is of contract or is not of a a non·tenderor one cotton is contract non-tenderpink certificate is issued. issued. If the grade is tenderable, tenderable, aa able grade, grade, aa pink certificate is If the able grade is green certificate, setting out the location, the lot number, the marks, marks, out the the lot location, number, the green certificate, setting of staple grade, and length length of of each each bale, the board of of is issued. issued. From the bale, is grade, staple of examiners an appeal may be taken to the Cotton Board of the Departtaken to the be examiners of the appeal may Departif the ment of Agriculture, if the owner believes believes his his cotton cotton has of Agriculture, has been improperly improperly classified. classified. The owner now has has his his official official certificate certificate of of grade the federal federal grade from the board and his his negotiable negotiable warehouse warehouse receipt receipt from aa licensed licensed and bonded board warehouse. noted elsewhere, delivery of the receipt receipt to the buyer buyer of the warehouse. As noted to the elsewhere, delivery effects transfer of a transfer title. He may may now present the receipt to the inspection the effects a of title. to the present receipt inspection bureau of the exchange exchange to to have have the the weight certified. bureau of the weight certified. for an indefinite indefinite period. The certificate certificate of of grade grade is good for period. The weights weights is good are not. in determined by by the the official official weighing, weighing, however, are not. Cotton in storage determined however, storage to loss weight through through shrinkage, is subject loss of is of weight condition which must subject to shrinkage, a condition if delivery be taken into account, account, if is made more than aa month after the after the be taken into delivery is in have lot The owner in this case either may have the lot reweighed weighing. this case either the weighing. may reweighed or under exchange rules may deliver, making an allowance, however, or rules deliver, however, allowance, making may exchange for each month that one-half pound pound per per bale bale for that has has elapsed to the the buyer buyer of to of one-half elapsed the last last weighing. weighing. Inspected may be transsince certificated cotton cotton may since the be transInspected and certificated licensed warehouse warehouse to to another ferred another under the the supervision ferred from one licensed supervision of the Inspection Bureau of the exchange. exchange. of of the the Inspection in the The characteristics of inspection inspection and grading the cotton cotton trade. characteristics of trade, grading in then, are: (1) sampling weighing by are: (1) then, by an inspection sampling and weighing inspection bureau under direct control the exchange; exchange; (2) (2) grading by the the of the certification by direct control of grading and certification of Department of Agriculture. United States States Department Agriculture. Inspection and Grading in the Grain Trade. in the Trade. The federal federal Grain Grading Inspection in the Standards Act was was passed passed in in 1916 year in which the Cotton Futures Futures 1916 (the Standards Act (the year Act became operative). Prior to the adoption of the Grain Standards of Prior to the the adoption operative). standards of of quality. exchange its own standards Act, each had its each grain Act, quality. The Act grain exchange empowers the Secretary of the U .S. Department of Agriculture to U.S. of to of the the Agriculture Department Secretary empowers standard grades for the entire grain trade and, furprescribe official furprescribe official standard grades for the entire grain trade and, thermore, to to exercise exercise jurisdiction jurisdiction over of the inspection over the thermore, inspection and grading grading of grain. Grades, accordingly, are established authority of the Act, under of the are established Act, authority grain. Grades, accordingly, but only only with with the the full co-operation of other agencies of the the exchange full co-operation but exchange and other agencies in every deal in in trade. Not all all grain grain exchanges, exchanges, however, established established in the the trade. however, deal every of the commodity. . grade of the commodity. grade Passage of the the Act Act found the the machinery machinery of efficient inspection of an efficient inspection and Passage of a staff of classification system already in existence, with a staff of inspectors and in classification existence, inspectors system already weighers already operating either state authority under state either authority or directly directly weighers already operating as a a part of under the exchange. This machinery machinery was incorporated part of the exchange. under incorporated as its
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the federal federal inspection system by by means of licensing device. of a a federal federal licensing device. the inspection system actual sampling grading, accordingly, is still by state still done by state The actual accordingly, is sampling and grading, or by the exchange staff federal licenses. In the case employees staff under the or the licenses. federal case exchange by employees of appeals, however, all all questions questions of of grades the federal of are decided decided by federal grades are by the appeals, however, Department Agriculture rather rather than than by by the the the authority of Agriculture authority making making the Department of initial inspection. initial inspection. reaches the the terminal terminal markets markets by by rail rail or water. On arrival, Grain reaches or water. arrival, samples the grain of each lot lot are are drawn and the is weighed licensed weighed by by licensed samples of grain is employees of the the warehouse, warehouse, the the exchange, exchange, or the state. the basis basis or the state. On the employees of in of the the samples, the grain is classified in accordance with the standards, the is classified of accordance the standards, samples, grain established according to the the federal federal Act, Act, and certificates established certificates are are issued. issued. The according to inspection certificate, showing the grade, the weight certificate are are showing the grade, and the weight certificate inspection certificate, delivered to to the the warehouseman, warehouseman, whose receipts receipts record record the the grade grade and delivered weight certificate of indefinite established. The certificate of grade is good for so established. weight so good for an indefinite grade is in of time with Grain in storage, period of time with periodic exchange inspection. periodic exchange inspection. period storage, in In however, is subject to deterioration in quality. In case grain deteriorates deteriorates case grain however, is subject to deterioration quality. so that it it no longer to the the grade so that in the the certificate, certificate, longer corresponds grade specified corresponds to specified in a notice is posted posted on the the exchange. exchange. The rules rules of the exchange a notice is of the it exchange make it necessary for for such grain grain to ~o be be immediately immediately removed from the the official official necessary is no longer deliverable it is on an exchange contract. warehouse, and it deliverable contract. warehouse, longer exchange The general procedure of of inspection inspection and classification grain and classification of of grain general procedure in cotton has been been separately treated, inasmuch as they are are as in each case case they cotton has separately treated, subject, under federal legislation, to the rules of the Department under federal to the rules the of of legislation, Department of subject, in order to assure growers that their products are classified Agriculture in their order to assure that are classified growers Agriculture products fairly. This federal supervision does not not apply to commodities imported imported This federal fairly. supervision does apply to from abroad, abroad, such cocoa, coffee, rubber, silk, as cocoa, such as etc. coffee, rubber, silk, etc. in classifying description of the methods followed followed in grading each A description of the each classifying and grading to commodity, not subject to government regulation, involve not would involve much government regulation, commodity, subject if the unnecessary repetition, repetition, if the commodities commodities were taken taken up one. by one. unnecessary up one by separately here, basic principles by Instead of treating treating them separately the basic which Instead of here, the principles by in establishing exchanges are guided establishing inspection grading systems systems guided in inspection and grading exchanges are will be be considered. considered. will Standards in grading, and cercerin the the Rubber Trade. Trade. The inspection, Standards inspection, grading, rubber were first first established the by-laws by-laws of tification established by of the of crude crude rubber the tification of by the Rubber Exchange of York, Inc., on its organization in 1925. In of in New its 1925. Inc., York, organization Exchange 1933 was merged merged with with the the Commodity Commodity Exchange, Exchange, Inc. Inc. Its Its operations, it was 1933 it operations, suspended during the the Second World War, War, were revived revived in in 1947. 1947. suspended during Prior to the organization of the the Rubber Exchange, Exchange, an exhaustive invesexhaustive invesPrior to the organization of to discover the experience and opinion of the tigation was carried to discover the carried on of was the experience opinion tigation deliverable grades rubber trade trade as as to to the the determination of most of deliverable the most rubber grades and the satisfactory methods of classifying rubber. the result of responses rubber. result As the of of methods to classifying responses to satisfactory in questionnaires conferences with leaders in the trade and industry, and leaders the conferences with trade industry, questionnaires
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various specific grades were tenderable under the the exchange convarious exchange conspecific grades were made tenderable non-standard grades, in the tract. The standard the standard and non-standard tract. already developed grades, already developed in trade, were were found found to to be be highly highly satisfactory. satisfactory. The only problem of the the of trade, only problem exchange, was to to determine determine what grades be tenderable tenderable therefore, was grades should be exchange, therefore, under the contract and to to establish of inspection, establish methods of the exchange under inspection, exchange contract in that weighing. This experience closely parallels that in other grading, and experience closely parallels weighing. grading, commodity trades exchanges have been organized. where trades have been exchanges commodity organized. a system Sampling. The first problem in the establishment of in of inspecfirst the establishment of a system of inspecproblem Sampling. in tion is that of sampling. Every commodity, dealt in on an dealt tion and grading is that of grading sampling. Every commodity, organized market, is graded, but on an exchange contract sampling is is contract but organized market, graded, exchange sampling is necessary before before acceptance acceptance or or certification in certification for for delivery. delivery. Sampling Sampling in necessary each commodity commodity presents presents its its own difficulties. the grain grain trades trades aa difficulties. In the is employed because of in quality sampling apparatus is of fine fine differences differences in employed because sampling apparatus quality between different different grades. grades. Cotton is by cutting into both sides is sampled sides between sampled by cutting into is necessary in in of a bale bale and drawing drawing aa pound pound or or more; more; this this is order to order of a to necessary cotton which detect any admixture of inferior cotton might not be discovinferior be of not discovdetect any might side. Sugar erable in aa sample only from one side. erable in Sugar may may harden and sample drawn only that so of coffee may may deteriorate be otherwise so that a large large part part of coffee or be deteriorate or otherwise damaged, damaged, is subject to to the bag must be be taken taken as as aa sample. sample. Rubber is mold and to the bag to subject freezing, any lot lot may may contain contain aa mixture mixture of thus making making of ribbings, freezing, and any ribbings, thus it to obtain samples that that are truly representative. This brief it difficult difficult to This brief obtain samples are truly representative. in statement will will give some idea of the difficulties inherent in the process inherent the idea of the difficulties give process before certificertifiof proper proper sampling specific lots various comm~dities of of specific commodities before of various lots of sampling of exchange contract. contract. cation for for delivery delivery on an exchange cation in various various trades trades may by one of The actual actual sampling be done by of four four may be sampling in methods: (1) (I) by by representatives representatives of of buyer buyer and seller, together in in seller, acting acting together licensed drawing samples; (2) by licensed employees of licensed warehouses; or licensed of or warehouses; drawing samples; (2) by employees license or or license (3) by inspectors license from acting under governmental governmental license (3) by inspectors acting the exchange; exchange; or (4) by by the the inspection inspection bureau of the exchange. of the the or (4) exchange. first method has has defects defects which which are at once are at once apparent. Since the The first the apparent. Since a object of to secure secure such uniformity uniformity that receipt that a warehouse receipt is to of grading grading is object a for aa lot of the of a given grade will be recognized of will the commodity for lot of given grade recognized and commodity in of a accepted by all in the trade as representing goods of a known and definite the as all trade definite representing goods accepted by standard, by private private parties parties strikes very root root of the at the strikes at the very of the standard, sampling sampling by lending its repudesired condition of of uniformity. uniformity. A central central authority, its desired condition authority, lending reputo the the process, process, is is lacking. second method, tation and sanction sanction to tation sammethod, samlacking. The second pling by by employees employees of of aa licensed licensed warehouse, warehouse, is the same objecis open to open to the pling objecIt is tions and likely likely to to be be attended by disputes as to grading. It is also objecas attended by to also tions grading. disputes objectionable because because the the warehouseman in in some trades a financial trades had a financial interest tionable interest in the the grading grading process. process. Since in some grain trades he is is permitted in Since in to grain trades permitted to deliver warehouse receipt receipt not not one specific specific lot, lot of a given lot of deliver on a a warehouse a lot, but any any given grade and quantity, quantity, his his interest interest lies lies on the the side side of of grading grade grading low (hence (hence
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If the in poor samples). the sampling the third third in securing is done under the securing poor samples) If sampling is method, by by licensees licensees of the exchange, their compensation is derived of the derived method, exchange, their compensation is fees and no such question occurs. from fees occurs. question Consequently, in in the the first first two methods, methods, lack lack of of centralized centralized control control Consequently, possible that that uniformity uniformity of will be be lacking. it possible of sampling makes it lacking. An objecsampling will objecthird tion the fee entailed in the third is fee system in tion attendant attendant on the entailed the method is a a system on the part of licensed samplers to rush the work (at possible tendency rush of to licensed the the part samplers possible tendency (at in order the of careful to handle more jobs jobs and careful examination) order to the expense expense of examination) in earn more fees. fees. earn The most satisfactory results are obtained through the fourth method, are obtained fourth method, satisfactory results through the sampling by an inspection bureau, established by the established by the exchange exchange and inspection bureau, sampling by in directly responsible to its governing board. Uniformity in grading its board. to Uniformity directly responsible governing grading and integrity of the certificates are best assured by this plan. of best this the certificates assured are by plan. integrity In In respect to wool tops tops and grease wool, the the United States States Testing grease wool, Testing respect to the as its Company, Inc., is by the exchange as its agent for these for is designated by these Inc., exchange agent designated Company, its own certificates, based exchange issues issues its based on tests made services. tests services. The exchange certificates, by that that company. company. by Grading. After the the establishment establishment of of methods for for uniform sampling, Grading. After sampling, next arises. the samples the problem of next arises. Grading from the be the problem of grading Grading samples may grading may be undertaken (1) (1) by by graders the exchange; (2) license from the undertaken acting under license graders acting exchange; (2) by a committee of the exchange authorized to perform this function; the authorized this a committee of to function; exchange perform by (3) by aa staff graders employed employed by by the the exchange its direcstaff of of graders direcexchange and under its (3) by or (4) by graders graders employed employed under governmental tion; tion; or governmental authority. authority. (4) by The objections to the first of these, grading by licensees, are the same to first of are the the these, licensees, objections grading by as those above for sampling by licensees. Nevertheless, mentioned for licensees. as those in a Nevertheless, in sampling by trade representatives of seller are of both buyer licensed representatives are authortrade where licensed authorbuyer and seller ized to to inspect jointly and agree upon samples, the license method has the license ized has agree upon samples, inspect jointly proved feasible. feasible. proved the New York Coffee license system is in in operation The license Coffee and Sugar system is operation on the Sugar and weighing are all by Exchange, where sampling, grading, are all carried carried on by weighing sampling, grading, Exchange, A the persons licensed by the exchange. special committee investigates the exchange. special investigates the persons licensed by and qualifications of all on its favorable report licenses are all applicants its favorable of are applicants report licenses qualifications issued by the the Board Board of of Managers. Managers. Samples of coffee are drawn by licensed of coffee are licensed issued by Samples by the exchange. exchange. The samples so drawn are samplers are inspected of the the samples so inspected by by the samplers of If receiver or their qualified representatives. If approved, they deliverer and receiver or their deliverer qualified representatives. approved, they of the the exchange. are stripped of all all identification identification marks except those of are except those exchange. stripped of then submitted for for grading panel of three of the a panel of three are then to a of the The samples grading to samples are lot graders 'licensed by the exchange, are selected by lot and are not the who are selected are not licensed exchange, by by graders in any way-either indirectly-interested or indirectly as deliverer, either directly interested as in deliverer, receiver, receiver, directly or any way of a of the decision of a majority of the or representative of the owner. The decision majority of the three three or representative of final is final in behalf of both, is and binding upon the deliverer graders, acting the in behalf deliverer both, binding upon graders, acting In that the sample and receiver, unless an appeal appeal is is made. In that event, event, the receiver, unless sample on which .
94
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
the is made is is submitted to to five five qualified licensed graders the appeal qualified and licensed graders appeal is five are that (or three in the event that five are not available or qualified to act). event available in the to three qualified act) (or must include These selected by lot, not include those rendered the who selected those rendered the These graders, lot, by graders, earlier decision; decision; aa majority majority decision decision by is absolutely final and earlier by them is absolutely final binding. binding. similar system of exchange In the cocoa and other other trades, trades, aa similar grading In the cocoa system of exchange grading in use. use. is in and certification certification is The second third methods, methods, grading by an exchange second and third committee grading by exchange committee or by by members of of the the exchange exchange under license, present problems. problems. also present or license, also Since exchange members are usually traders, whose business are usually traders, business affairs affairs do Since exchange the performance not permit them to to give give much time time to to the of exacting not permit performance of exacting work of standards standards may suffer under such systems. of this sort, uniformity of may suffer of this sort, uniformity systems. The primary primary object object of of any is uniformity-an of grading any system system of grading is uniformity an object object the control is best best achieved achieved by by (1) control by the exchange; (2) a single which is a by (1) exchange; (2) single to establish and maintain the integrity policy, firmly administered, to establish the administered, integrity and policy, firmly all certificates; reputation certificates; and (3) responsibility for of all for grading, as well well (3) responsibility reputation of grading, as in one administrative as for sampling weighing, centered centered in as for administrative body. body. sampling and weighing, Warehousing. warehouse, approved approved by the exchange by the Warehousing. The warehouse, exchange and bonded insurance stores by an approved insurance company, stores and preserves the commodity. company, preserves the commodity. by approved collateral security Its negotiable negotiable receipts receipts are are collateral Its security against against which banks make loans to the commodity. commodity. Since the warehouse warehouse receipt receipt Since the of the to the loans the owners of of goods possible for for the the owner of to readily, it contributes makes it to borrow it possible it contributes goods readily, marketing costs. costs. More business therefore be be directly to reducing marketing business can therefore to reducing directly the owner's owner's capital. done on the done capital. In summarizing the services services performed performed by by warehouses warehouses in in the In the cotton cotton summarizing the in the trade, Alonzo B. B. Cox, agricultural economist the Division of economist in Division of Cox, former agricultural trade, Alonzo Cotton Marketing of the federal of Agricultural Economics, says: federal Bureau of of the Cotton Economics, Agricultural says: Marketing .
determine the the value receipts are: value of of warehouse receipts The considerations considerations which determine are: (1) the the structure the warehouse; warehouse; (2) the facts location of of the facts set set forth structure and location forth on (2) the the receipts; receipts; (3) (3) the the kind kind and amount of received from disinterdisinterof supervision the supervision received of the free assets the net net free assets of the company; the size size and nature ested parties; (4) nature ested parties; company; (5) (4) the (5) the of insurance of the bond furnished; (6) the the kind and amount of insurance carried the carried on the of the furnished; (6) in the the warehouse; warehouse; and (7) the integrity of the officials cotton in of the officials cotton (7) the integrity and standing standing responsible for for the the operation the warehouse. warehouse. for the operation for responsible There is is such such aa wide wide difference difference between the the values individual bales values of of individual bales of of There for bale of cotton is cotton that aa receipt receipt calling merely for a bale of cotton is of indefinite value. of indefinite value. cotton that calling merely the cotton, most desirable receipt shows the the grade conits condesirable receipt The most cotton, its grade and staple staple of the dition, the weight of the bale, the tag of the bale, by whom the cotton of the number the the the cotton the of bale, bale, dition, by weight tag whether the the cotton to the has been classed, classed, whether as to a statement statement as is insured, the cotton is has been insured, and a negotiability of the receipt. of the negotiability receipt. the way are marked paper on which which the the receipts receipts are are written written and the way they they are The paper and issued issued should should be be designed designed to to make the of receipts of the counterfeiting counterfeiting receipts extremely extremely The United States Department of Agriculture has worked out aa plan plan difficult. difficult. States Department of Agriculture has (1)
Gradil1g, Standardization, and Inspection and Inspection Grading, Standardization,
95 95
which tends tends to to throw throw around around the the federal receipt restrictions restrictions similar federal warehouse receipt similar .to in the the issuance issuance of bank notes. to those those observed observed in of notes. Just as has given given confidence confidence in banks, so proper superas inspection in national so proper national banks, Just inspection has superin warehouse inspection strengthen strengthen confidence warehouse receipts. Inspection vision vision and inspection confidence in receipts. Inspection by a disinterested government official official has has demonstrated many banks banks disinterested government its value. demonstrated its value, and many by are insisting are insisting upon upon aa federal federal receipt. receipt. value of of the the net net free the company of ,the A knowledge free assets assets of of the the value knowledge of company operating operating the warehouse if the receipt is 'to be used used at distant the warehouse is is important, especially if is the at distant to be important, especially receipt points. periodic statement of the assets and liabilities adds much to A statement assets adds of to the the the liabilities points. periodic of a standing of a warehouse company. warehouse standing company. the warehouse, warehouse, based Insurance to to cover the cotton cover the in the based on the the class cotton in class and weight Insurance weight the receipt receipt and on the the daily daily market price, is usually usually required required when shown on the price, is for loans. policy on the may be be receipts are are offered loans. The policy the cotton cotton may offered as as security security for receipts a loan loan is carried by the the warehouseman or the owner, is desired, desired, or the carried either either by owner, but when a the small small country In the the banker's conditions conditions must be be met. met. In the banker's it is is country warehouse it frequently carried by the and paid for as a part of the wareas a of carried the warehouseman for the warefrequently by paid part their cotton merchants merchants and the the large carry their house charge. charge. The cotton house large co-operatives co-operatives carry their cotton, cotton, because because they they can obtain obtain better rates and aa own insurance insurance on their better rates policy broader broader in in scope. scope. . • . policy for delivery In markets markets where where cotton is tendered tendered for futures contracts. cotton is contracts, delivery against against futures a of warehouse a proper proper system warehollse supervision supervision and inspection inspection adds greatly to the the greatly to system of value of the contract contract and facilitates facilitates aa freer freer movement. The improved improved system of the value system of wa.rehousing, coupled coupled with with aa better better cotton of cotton classing service and means of of warehousing, classing service identification of bales, is doing much to to eliminate waste and shorten the of bales, identification eliminate waste shorten the is doing marketing route. route. 22 marketing .
.
.
Services in Cotton Marketing, Bulletin Bulletin No. U. S. Cotton Marketing, No. 1445 S. Department 1445 (Washington: (Washington: U. Department
2 2 Services in
of Agriculture) of Agriculture)
pp. 23. 24. 23, 24. pp.
CHAPTER
~ CHAPTER
Publicity of Prices, Crop of Prices, Publicity Crop and
V
)
Market Reports, Reports,
and Other Other Statistics Statistics
Commodity exchanges exchanges have have been aptly aptly termed clearing inforcenters of of inforCommodity clearing centers for the mation, not only only for for their their respective respective trades trades and industries, the mation, not industries, but for general public as well. It is important, especially to their members, that as It their that well. is to members, general public important, especially the exchanges collect collect and correlate pertinent to their the exchanges statistical data pertinent to their correlate statistical related trades. trades. In making moverelated making public public these these data bearing bearing on supplies, supplies, withdrawals of the commodity, ments, and withdrawals of the as well well current current prices for future future ments, commodity, as prices for all producers, deliveries, they they perform perform services of great great value value to to all producers, merchants, services of deliveries, merchants, and manufacturers. of rapid rapid communication link link dismanufacturers. Modern methods of distant markets tant markets closely closely together, together, especially especially when there there is is daily and hourly hourly daily publication of prevailing prices, prices, as as is the case in all markets. of prevailing case in all exchange is the exchange markets. publication There are are no commodities traded traded in the prices prices of in on exchanges of which exchanges the are not influenced by developments developments in widely separated parts of the globe. in widely are not influenced by of the globe. separated parts in Approximately one-half of the world's wheat crop is produced in Europe of world's is the crop produced Europe Approximately one-half and Asia Asia (exclusive of India) India) and is is consumed by the producing producing councounby the (exclusive of tries. Approximately one-half is produced produced in the United States, in the one-half is tries. Approximately States, Canada, Canada, India, Argentina, and Australia, Australia, which normally normally have surpluses over their their India, Argentina, surpluses over own consumption consumption and, and, consequently, consequently, are countries. A short are exporting countries. short exporting crop in in any anyone producing country not necessarily high one producing necessarily mean a high country does not crop world price, price, for for an increased increased output in other countries may offset the in other countries offset the may output in Chicago shortage. price of of wheat futures not only represents the futures in the only represents Chicago not shortage. The price in the outlook production and consumption consumption in the United States for production States and Canada, outlook for Canada, but is is also the result result of the interplay many forces based on every of many forces based also the of the every known interplay of factor world. A bumper bumper the world. factor affecting throughout the affecting supply supply and demand throughout crop in the Argentine or a prevalence of black rust in the northwestern black rust in a of the in or the northwestern prevalence Argentine crop United States will be be reflected reflected in in world exchange prices long long before the States will before the exchange prices crop to market. market. Damage Damage to to the the American AmerIcan cotton proin one procotton crop crop in crop comes to reflected in ducing area is therefore reflected throughout the in the price paid world the area the is therefore throughout ducing price paid for every pound of cotton which comes on the markets. the world markets. of cotton for every pound of cotton cotton and grains The United United States exporter of States is is an exporter grains and normally normally of its its cotton crop each year and sells abroad from 40 40 to to 60 per per cent cent of sells abroad crop year and an 96 96
Prices, Crop Market Reports Reports Crop and Market
Prices,
97 97
11 per average of about It per cent of its its wheat crop In the the 1930's, cent of since 1926. 1926. In 1930's, average of crop since under the price-pegging operations government, United the price-pegging of the the federal federal government, United operations of States exports States exports of of cotton of cotton and wheat fell fell drastically the level level of drastically from the in and previous years in some years have disappeared completely, had would have previous years years disappeared completely, not not the wheat exports by as the federal federal government subsidized wheat as much as as 30 30 government subsidized exports by cents or cents or more per per bushel bushel and exports exports of by as 4 cents cents per per of cotton cotton by as much as as 4 pound-the extent extent to to which federal price supports supports held prices federal price held domestic domestic prices poundthe world During and after the Second World War wheat wheat above price levels. levels. During after the price and cotton farmers in in the the United States began producing large States again again began producing large of their crops for world-wide foreign markets and European portions of their for world-wide markets portions crops foreign European relief, with exports rising to to about 45 per cent the crop in 1946. of wheat rising of the 45 per 1946. cent of relief, exports of crop in On the the other other hand, hand, the the United States produces no coffee, tea, cocoa, States produces coffee, tea, cocoa, silk, silk, natural or rubber. it or natural rubber. does it produce for its still-growing tin, pepper, Nor for does its tin, pepper, produce still-growing sufficient sugar population sufficient sugar or or wool, wool, or of or an ever ever increasing increasing number of population other many other materials, essential to the well-being and living standards raw essential to the standards materials, many well-being living of our people. of people. Yet Yet we consume more of these commodities, of these of most of even commodities, even of which we produce all the those of of the produce none, none, than all the rest rest of the world combined. those Nevertheless, with with only only about about 66 per per cent of the cent of the world's land area world's land area and Nevertheless, 40 population, produce annually about 40 per cent of the entire world of cent the entire we population, produce annually per of goods production of services and consume 70 to 80 per many 70 to cent of of many goods and services production per cent of the the world's world's basic basic staple commodities. of commodities. staple great productivity productivity-the marvel of the world world-and the marvel Our great of the and the the satisfaction satisfaction of capacity are the result of our of our great are in in no small small degree result the of our great consumptive consumptive capacity degree organized commodity exchange markets, especially in those major export in those markets, organized commodity exchange especially major export staples to the the welfare welfare of of our cotton in so essential essential to cotton and wheat farmers farmers and in staples so those necessary, imported imported articles or produce articles which we do not produce or those necessary, produce produce only in insufficient insufficient quantities. It is is the the delicate intricate functioning delicate and intricate functioning only in quantities. It of exchange markets markets which make possible possible the the international of international flow flow of of these these exchange huge quantities quantities of materials from country to country regularity, of raw materials country to country with regularity, huge of and sound credit safeguards. The various services of the exstability, the services excredit various safeguards. stability, major part in the efficiency and regularity of our vast change play a of vast in the efficiency regularity change play a major part in international trade in staple commodities, commodities, which in in 1947 in staple 1947 was valued in international trade many billions of dollars. dollars. of billions many in future of Since exchanges are are markets markets for deliveries of for dealing future deliveries Since the the exchanges dealing in most international international staple commodities, their and other exchange their members most commodities, exchange staple operators have accurate, accurate, complete, market, up-to-the-minute market, complete, and up-to-the-minute operators must have other trade information in their price, crop, in order to enable them and their order to price, crop, and other trade information If commodities grown customers to grown in events months ahead. If to discount discount events customers widely separated territories or countries were marketed locally, locally, prices prices in in or countries widely separated territories each area area would would reflect reflect local local conditions might have no relationrelationconditions only each only and might and ship to world-wide supply demand. world-wide to supply ship The exchanges exchanges in times are are world markets; they in normal times markets; accordingly, accordingly, they
9988
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
gather, gather,
from all all over the world, world, information information relating relating to to (1) past and over the (1) the past the present production of the commodity, (2) percentage of the crop the crop commodity, (2) percentage present production of to afloat or in transit has moved to to export export points, points, (3) transit to which has supplies afloat (3) supplies primary and central central markets, markets, (4) in pripriarrivals and warehouse stocks in (4) arrivals primary mary and central markets, (5) exports from or imports into each country, or central markets, (5) exports country, imports mary total (6) supplies in the of domestic dealers and converters, the total converters, the (6) supplies in the hands of domestic dealers as evidenced by visible domestic domestic and foreign foreign supply, supply, (7) by statisstatisvisible demand, as (7) demand, contics current and past, past, collected and domestic conof sales, collected from foreign tics of sales, current foreign verters, wholesalers, retailers, and (8) certificated supplies in and certificated verters, wholesalers, retailers, supplies in (8) warehouses available for delivery on futures contracts. for futures contracts. available delivery only are are such such statistical regarding each commodity Not only statistical data regarding commodity assembled by the exchanges every available source, every exchange but available the from source, every every exchange mainexchanges by all foreign tains the closest touch with prices prices in abroad and on the closest in all markets tains foreign all futures other in the the United States. Prices prevailing futures States. Prices other exchanges exchanges in prevailing on all markets are are transmitted transmitted by by telegraph, telegraph, teletype, radio, and cable. for cable. Not for radio, teletype, an instant a commodity commodity exchange a market standing by its existence existence is is a instant of of its standing by exchange itself. part of of aa closely closely related related and interconnected world-wide It is is a part itself. It market. Information about the the commodities in in which they they provide facilimarket. provide facilities for for trade trade and the the record record of prices which prevail on their floors are also of prices their are also ties floors prevail made available to the the public public by by the the exchanges usually in daily, monthly, available to exchanges usually daily, monthly, and yearly yearly reports, reports, whereas on the the physical not are not physical markets such data are made public. public. Importance Reports and Statistics. Statistics. The value of the exchange's of the of Reports exchange's Importance of as aa compiler compiler and publisher publisher of data and price records is of commodity is work as commodity price records summarized by by Professor fourfold: S. Huebner as as being Professor S. S. S. fourfold: being (1) It makes makes possible possible the the discounting discounting of the future; is, it of the that is, it enables enables dealers dealers future; ,that (1) It ftheir best best judgment judgment at the form in the to exercise at once and speculators exercise ftheir once in form of of actual actual speculators to to reflect reflect this this current the quotations transactions, and thus thus 10 current information in the information in transactions, quotations it would otherwise be impressed impressed upon public. Thus, long before before it otherwise be the general Thus, long general public. upon the is reflected, or bumper bumper crop crop upon upon prices discounted, the effect of of aa short short or that is, the effect reflected, that is, discounted, prices is It . . (2) It steadies prices. The daily discounting current weeks in in advance. advance . .... steadies of current daily discounting of (2) prices. in rare instances where manipulation has events makes unnecessary, unnecessary, >except in rare events makes instances where except manipulation has interfered with with the working of of the market, a sudden decline the organized the smooth working a sudden interfered decline organized market, or rise rise in in price price upon upon the the wide wide publication publication of which have have been been slowly of events events which or slowly It the (3) It helps to regulate the rate at which the year's developing. . . . to rate at ... which the is regulate helps year's crop (3) developing. crop is . . It It is is ·a well-recognized fact that 'the quotations for consumed -a well-recognized fact that consumed.. . ... the exchange for exchange quotations the new crop not entirely contracts which which call call for for delivery in .the contracts delivery in crop months depend depend not entirely but prospects of a new crop. but are vitally influenced by the smallness or are of a on the the prospects influenced the smallness or vitally crop, by with of largeness. as compared with previous years, of the old crop yet runsold, as the old as largeness, previous years, compared crop yet oinsold, as "visible supply" reflected by by the the "visible or by -statistics relating to holdings which have or reflected ^statistics to which have by relating supply" holdings not yet yet left left the the producer's producer's hands. hands. (4) It serves to "level" prices between not serves to "level" prices between different different (4) It 1 1 is had here here to to the the practice practice of between markets. markets. Reference is markets. Reference of "arbitraging" between markets. "arbitraging"
1i "The Functions Functions of of Produce Produce Exchanges" American Produce Produce Exchange Exchange Markets Markets in American Exchanges" in of Political (Philadelphia: American Academy Academy of Political and and Social Social Science, 17-21. Science, 1911) (Philadelphia: American 1911) • pp. pp. 17-21. ,
Prices, Prices,
Crop and Market Reports Reports Crop
99
In some commodities such such statistics, by the the exchanges, are distributed by statistics, distributed exchanges, are the best and most widely widely used used of all sources is true true of all of information. information. This is sources of the best in the the coffee coffee trade, trade, for for example. example. The New York Coffee in Coffee and Sugar Sugar in Exchange publishes information regarding growing conditions in BraziL information conditions Brazil, Exchange publishes regarding growing the movement of by steamers steamers from Brazil Brazil to stocks the of coffee to foreign coffee by foreign ports, ports, stocks on hand in in different different primary primary and central markets, receipts and deliveries central markets, deliveries receipts Brazilian and European daily, weekly, monthly, prices prices prevailing prevailing in Brazilian European weekly, and monthly, daily, markets, with reference reference to to the the United States States market. data with similar data markets, and similar The records records of the Coffee Coffee and Sugar Exchange relating the movement of the to the Sugar Exchange relating to and supply of the crop are of the utmost value to coffee dealers, roasters, coffee to dealers, roasters, supply of the crop are of the retailers in this country speculators in this abroad. country and abroad. speculators and retailers The Importance Importance of of Widespread Publication of Prices. The machinery machinery Publication of Prices. Widespread all transactidns made at the for reporting prices at all transactions are on the exchange for which are exchange reporting prices floor has been described elsewhere. Through the ticker services, prices floor has described elsewhere. Through the ticker services, prices in every prevailing for for delivery trading month become a matter of of public public every trading delivery in prevailing after trade In knowledge almost immediately after each trade has been executed. In the the almost has immediately knowledge evening morning daily papers throughout the country, of and summaries the of morning daily papers throughout country, evening prices paid paid for for each future future delivery published on the page, financial page, are published the financial delivery are prices high, low, low, and closing clo~ing quotations quotations are Prices paid are 'Usually Prices where high, usually given. paid given. but for not only only available to the the public, also become future deliveries available to also for future deliveries are are not public, a matter of of public public record record in in the the daily daily press. press. No individual in a individual interested interested in of prices aa given given commodity commodity need be ignorant prices paid paid on the the exchange for ignorant of exchange for contracts for immediate delivery or for delivery months hence. or for contracts for hence. delivery delivery In commodities where exchange markets exist, of futures futures conconexist, prices exchange markets prices of and tracts serve manufacturers as a basis for estimating prices manufacturers a serve merchants tracts as basis for estimating prices they will required to to pay pay producers producers or they may may ask their or prices will be required ask from their they prices they in October for customers. miller who requires requires wheat in be for flour flour to customers. The miller to be delivered bases his his price price for prevailing price price in December bases delivered in for flour flour on the the prevailing "Prices paid of December wheat futures. paid to to the the wheat or producer futures. "Prices of or cotton cotton producer are based on prevailing prevailing cash cash prices prices in organized markets. The price price are based organized markets. or may producer receives receives may mayor not be satisfactory to him, but, be the producer to which the but, him, may satisfactory if is inadequate, inadequate, it it is is so so because because the the world world market is a factor is glutted, if it it is factor glutted, entirely beyond control either himself himself or the exchange. price control of of either or the entirely beyond exchange. The price at the which he he receives receives is the best best obtainable is the obtainable at the time he chooses chooses to to market his crop. his crop. The prdducer producer or or farmer likewise uses these these price price quotations likewise uses as the the quotations as basis for for sales of spot to deliveries of or forward deliveries of the the actual sales of actual commodity basis spot or commodity to dealers in addition to to his his use use of market and converters, of the dealers "and the exchange converters, in exchange for purposes. Without the the publicity publicity of transactions, of exchange for hedging hedging purposes. exchange transactions, the producer, dealer, and converter only very limited and have would the producer, dealer, only very limited of transactions often inaccurate inaccurate reports reports of of prices prices and volume of often transactions on the the physical markets. markets. physical this with the Contrast this the situation that exists is an inadequate Contrast situation that there is exists when there inadequate
100 ioo
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
record or or no publication publication of prices or prices for for future of prices or where reliable record reliable prices future delivery are altogether wanting, as is usually the case on markets as is the are case markets which usually altogether wanting, delivery operate without without exchanges. exchanges. It It would be claiming too much to hold that that to hold claiming too operate the futures exchange exchange is necessary in that the in order is necessary the futures order that the producer obtain a a producer obtain If there fair price. If there is is sufficient, free, and continuous competition for his fair price. for his sufficient, free, competition product, he will will obtain obtain a fair price, whether or fair price, or not an exchange product, exchange market exists. Yet the the exchange, by assuring assuring aa broad, broad, competitive, exists. Yet competitive, and continuous exchange, by all transactions, with widespread widespread publicity publicity of of all transactions, is the most effective market with is the effective instrument available available to to producers producers or or converters instrument in search converters in search of of fair, fair, competitive, and objective prices. petitive, objective prices. This service service of of daily publication of prices and volume of all transacof prices of all transacdaily publication tions it exchanges takes takes on major major significance it is recalled that tions on exchanges when is recalled that significance such records records and publications publications are are not not possible possible on the the cash physical cash or or physical few exceptions, markets of of the the same commodities. commodities. In these these markets, markets, with few exceptions, there is no central meeting place place where producers, producers, dealers, brokers, specucentral meeting there is dealers, brokers, speculators, and converting converting manufacturers can meet to trade either directly to trade either directly lators, is done by or through through their their agents. agents. Such trading trading is by telephone, telegraph, or or or telephone, telegraph, cable, either directly between principals principals or through brokers brokers or either directly or through or agents. cable, agents. Direct trades between, say, say, aa farmer and aa dealer factory Direct trades between, a dealer dealer and a a factory dealer or a confidential. In any are usually kept kept confidential. any case, public record record is is kept kept of of are usually case, no public prices or quantities. Brokers and agents act for their principals and not or act for their not principals agents prices quantities. for they are not to their principals' principals' for their their own account, are bound not to disclose disclose their account, and they business. business. Furthermore, there is is no agency agency in the physical markets which at in the at Furthermore, there physical markets present is organized to collect and publish data regarding transactions transactions is organized to collect regarding publish present on such markets. markets. Undoubtedly, Undoubtedly, if if an attempt made to to establish establish were attempt of the trade refuse to co-operate_ such to most members trade would refuse the such an agency, of agency, co-operate. Producers, merchants, and converters, or small, small, would Producers, merchants, converters, whether large large or prefer that transactions remain secret, the understandable reason reason for the that their their transactions secret, for prefer that they would not not want their their competitors competitors to to know their their business. that they business. Although it might might be possible possible to to develop a system of disclosure disclosure of of system of Although it develop a prices and quantities without disclosure of names, most operators would disclosure of without names, prices quantities operators still to give give their their consent consent and co-operation, for trade trade members hesitate to still hesitate co-operation, for all too fairly accurately the volume all too frequently accurately determine from the frequently could fairly of transactions or or other other clues clues who was buying or selling at any given at of the the transactions buying selling any given is true true especially especially because because the of turnover in time. volume the daily of in time. This is turnover daily the physical physical markets, markets, as as aa rule, rule, is is much smaller than on exchange smaller than the markets, exchange markets, at and, published, such publication at would if prices and quantities were and, if published, publication quantities prices times affect affect this this "thin" very considerably, raising or lowering "thin" market very or times considerably, raising lowering at to certain prices sharply sellers withdraw times and causing sellers to at certain times and buyers buyers causing prices sharply erratic stable less at other other times, times, thereby making for erratic and less stable markets. more markets. for at thereby making Some time time ago the project project of of organizing organizing a new exchange in exchange market in ago the
Prices, Crop and Market Market Reports Reports Crop and
101
Prices,
agricultural commodity In order to sound an agricultural consideration. In order to commodity was under consideration. out opinion in the the trade trade and industry, industry, aa questionnaire was sent out sent out out to to opinion in questionnaire was in producers, merchants, and manufacturers in the field. The prepondermanufacturers field. the merchants, producers, preponderance of of sentiment on the the part part of of operators the commodity in the was adverse adverse operators in commodity was to the the establishment establishment of of futures trading. One dealer returned his futures trading. to dealer returned his questionquestionnaire with with "no" inscribed the face the document, naire inscribed across across the face of of the in order order document, and in a member of to discover the the reasons reasons for his opposition the group responfor his to discover of the opposition a group responfor the sible questionnaire visited visited the the center the questionnaire center of sible for of adverse adverse sentiment sentiment and interviewed the negative impressed interviewed the merchant whose emphatic had itself emphatic negative impressed itself him. no in upon in the of the caller that the There was doubt the mind caller of the that the mermerupon chant's reply reply had been dictated by aa genuine that same dictated by chant's self-interest, but that genuine self-interest, self-interest of tKe die outstanding publication value of of publication self-interest was more eloquent eloquent of outstanding value of prices of prices by by commodity abstract summary could exchanges than any commodity exchanges any abstract summary could possibly be. The said: said: merchant be. possibly
I have have many many buyers buyers 'traveling throughout the the producing areas to I to purchase traveling throughout producing areas purchase They pay pay cash. cash. When they they go to aa grower offer directly the growers. go to growers. They grower and offer directly from the definite price price per per pound pound in in spot spot cash, the grower is tempted tempted to him aa definite to sell sell cash, the grower is often does without investigating investigating prevailing prevailing prices. prices. He often if there there were were without so. But, does so. But, if all over the country an exchange exchange in in existence, its .prices _prices would be telegraphed telegraphed all over the existence, its country of appear in in every newspaper of any size and circulation. circulation. The seller and would appear size seller every newspaper any the just how closely closely the the price price he was offered the prevailing offered approached would know just approached prevailing buyers work to to purchase purchase the the commodity the prevailing prevailing market price. price. Our buyers market commodity under the the market. If the they make excellent excellent purchases purchases below the market. If the exchange market, market, and they exchange were established, probably have have to to pay pay current prices for for all current market prices all were established, II would probably
I buy. buy.
I
the advance in This situation situation is isolated instance. instance. Great though in is no isolated This though the - business business morality morality has has been, been, we have have not reached reached the the millennium where fair and just the buyer buyer will will always pay aa fair just price, price, no matter how superior the always pay superior his 'knowledge, his resources, resources, or his bargaining bargaining power. power. A knowledge of or his his knowledge of knowledge, his to the current prices, coupled coupled with with financial financial resources resources to to pay cash to the relarelacurrent prices, pay
A
tively tively
needy producer, producer, gives the buyer buyer an incalculable incalculable advantage over advantage over gives the needy the grower grower and seller seller of the commodity. commodity. of the the The need need for widespread dissemination dissemination of prices is by of prices stated clearly is stated for widespread clearly by
Professor Professor
follows: as follows: Weld as
It is of of extreme extreme importance importance that that price price quotations with determined with It is quotations be deteImined to on accuracy impartiality. Country shippers have to rely largely the have the and rely largely impartiality. Country shippers accuracy the value of in order to gauge the value of their commodities published quotations in their order and to gauge published quotations to have some system to to ship. ship. It is therefore therefore necessary necessary to of deterIt is deterto know when to system of which trade as mining and issuing quotations represents a trade as a whole rather rather whole and issuing quotations represents mining than individual firms firms or of firms firms having having a common interest. interest. Wholesale or cliques than individual cliques of like to market to have the underquoted receivers, for example, might naturally like the receivers, for example, might naturally underquoted are so far as quotations sent to the country are concerned, and jobbers prefer the concerned, so far as quotations sent to country might prefer jobbers might
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
102
so that to see the market market overquoted that they they may prices as possible exact as as high as possible to see the may exact high prices overquoted so retail stores. In other words, there there are interests within every are conflicting interests within other words, stores. In retail conflicting every
from from
market, and and market,
is highly highly important that aa well-established well-established and generally generally accepted accepted it it is important that no one one
as well well as as impartial impartial system system of of obtaining devised so so that that as obtaining quotations quotations be devised be misled misled concerning concerning actual market conditions. will actual market conditions. 22 will be is the B. Cox: the same effect the comment of of Alonzo B. effect is To the
to give primary function function of of price price quotation service is is to the buyer a chance The primary chance give the quotation service buyer a in the the cheapest to obtain obtain his his cotton market and the the seller or seller a a chance sell or cotton in chance to to sell to cheapest market bargain in in the the highest highest market. market. It It is the best malis the best protection available against against malbargain protection available practices by by shrewd buyers or or sellers sellers who may may happen to have have more informainformashrewd buyers happen to practices 3 the person tion about prices in in different markets than than the with whom they different markets trade. s tion about prices person with they trade. of all only does the exchange's exchange's record record of benefit all prices does the Not only prices substantially substantially benefit it trade and also constitutes a in the trade industry; it also constitutes a valuable those engaged in the valuable those engaged industry; permanent record for businessmen, economists, legislators, and others record for others businessmen, economists, legislators, permanent in fluctuations to delve into the the history history of fluctuations in years delve into of price occasion to who have occasion price years the are of the best gone by. "The reports of the grain exchanges are the best sources of sources of grain exchanges reports gone by. detailed information with regard regard to to price price movements of in detail detail of grain detailed information grain in for the the year year under review review and summarized statements statements and averages for for averages for 4 previous years."4 previous years/'
Sources Information. The inexperienced takes aa Sources of of Information. inexperienced speculator, speculator, who takes future on a tip flyer in the basis basis of of random news in some commodity commodity future tip or on the flyer at the items has read, read, would be astonished astonished at the range of information items he has range of deemed desirable desirable for a commodity exchange to procure benefit for a for the the benefit commodity exchange to procure for of its its members who attempt attempt to to analyze analyze future future market trends trends scientifically. of scientifically. Information is by the exchanges from government reports the is gathered Information exchanges government reports gathered by at home and abroad, periodically issued current crop crop conditions conditions at issued on current abroad, from periodically private commercial agencies which serve exchanges, serve numerous private agencies exchanges, and from special correspondents of the exchanges in markets throughout the the of markets the exchanges throughout special correspondents world, as as well well as their own members and from various various producers', producers', as from their world, dealers', manufacturers' associations in the same fields. in associations operating the fields. dealers', and manufacturers' operating vital statistical These associations collect (and (and redistribute) redistribute) vital statistical data associations collect data from their members in regard to to past past and current prices, purin regard their inventories, purprices, inventories, after chases, all such such data data are are published only after the fact-weeks the fact weeks sales, but all chases, and sales, published only after the the transactions transactions take take place. place. after Reports Issued. Issued. Most exchanges exchanges publish publish a daily report for the benefit benefit for the daily report Reports more of their their members. A number of of exchanges publish comprehensive of exchanges publish comprehensive L. D. D. H. H. Weld, Weld, The Marketing Marketing of Products (New York: The Macmillan Macmillan of Farm Products (New York:
2 2 L.
Company, pp. 286, 286, 287. 287. 1924) , pp. Company, 1924) ,
83 Services Services in in
Cotion Marketing, Bulletin Bulletin No. 1445 U. S. of 1445 (Washington: Cotton Marketing, S. Dept. of (Washington: U, Dept.
Agriculture) ,, pp. pp. 84, 35. 34, 35. Agriculture) 44 L. Weld, op. cit., cit., p. p. 280, 280. D, H. H, Weld, L. D.
op.
Prices" Crop Reports Crop and Market Reports
Prices,.
103
all issue monthly reports. Nearly Nearly all yearly publications, publications, ranging ranging in in imporissue yearly monthly reports. importance tance from brief, brief, but but useful useful compilations compilations to to substantial volumes containsubstantial volumes containing exhaustive exhaustive statistics trends. statistics of of commodities movements and price ing price trends. the New York Daily Report of the Cotton Exchange. The cotton cotton exexDaily Report of Exchange. weather condichanges receive reports reports from the the federal federal government condichanges receive government on weather tions prevailing throughout throughout the the country, country, the condition of the current tions prevailing the condition of the current crop crop at stated intervals at stated throughout the the growing season, weekly ginnings, intervals throughout growing season, weekly ginnings, shipshipments, and the the like. Reports from the the Weather Bureau come into into the the like. Reports ments, exchanges daily, describing temperature and rainfall in each important rainfall in each exchanges daily, describing temperature important cotton-growing district. district. These weather weather reports, they are as they are received, are received, are cotton-growing reports, as posted on the the bulletin bulletin board of the exchanges. by the of the Official forecasts forecasts by the posted exchanges. Official of are Department of Agriculture for the current crop are issued monthly. for the issued current Agriculture Department crop monthly. in July, Formerly for each each cotton cotton crop July, but agitathese estimates estimates for Formerly these began in agitacrop began of July led tion, provoked by by disputes disputes over over the the accuracy has led tion, provoked forecasts, has accuracy of July forecasts, until to deferring deferring the the first until August. From August throughout to first crop estimate estimate August. August throughout crop the remainder remainder of of the the year, year, the the Census Bureau publishes the publishes semi-monthly semi-monthly are issued reports are statements ginnings. These reports statements of of ginnings. issued monthly monthly throughout throughout in March at the end of the winter, last one in at the the old year. of the the last old crop the winter, the crop year. Current information is made available by the the New York Cotton available by information is of cotton Exchange to its its members by by its its daily daily market report. report. Receipts Receipts of cotton Exchange to for at twenty ports ports are are given given day day by by day for the previous week, with a coma at twenty the week, day previous parison of receipts for the corresponding day of the previous and the of the for of week corresponding day previous parison receipts as total of the the previous previous year, year, as as well well as receipts for the previous week. A total receipts for the of previous week. the movement of similar daily and cumulative cumulative record record of exports portrays portrays the of of exports similar daily cotton from seaboard gulf terminals. Telegrams from southern terminals. and seaboard southern cotton gulf Telegrams markets, sent by the the exchange'S the destination destination of of sent by markets, give the exchange's correspondents, correspondents, give the exports, sales in the market, with prices, and the "tone" prevailing. The with in sales the market, prices, prevailing. exports, in the fluctuations in consolidated report report is is aa summary summary of the supply of fluctuations of cotton cotton consolidated supply of visible throughout the country during the week. The visible supply, receipts, the week. the country during supply, receipts, throughout in all all ports of exports are summarized, and stocks stocks in New York and in ports of are summarized, and exports the United States the correspondStates are are given, the United correspondgiven, including including comparisons comparisons with the ing week of the previous year cumulative totals since the beginning since the and cumulative totals the of beginning previous year ing of the movement of of the the crop. of the crop. cable. Cables From other other markets markets prices prices are are received received by by cable. by wire and by report futures 15, 2:00, 2:00, and 4:00 P.M., with from Liverpool55 report at 12: futures contracts contracts at from Liverpool 12:15, P.M., with at 12: of the the high high and low low for delivery month. The tone of the market at 15 12: 15 each delivery for each the include of the and at the closing reported prices prices include those those of the is given. Other reported at the and given. closing is for the spot market in closing prices for futures on the cotton cotton and in York New market closing prices spot exchange in in New York and other trading centers, other trading centers, opening opening and closing closing exchange 5 Prior Prior to to suspension of the the Liverpool Cotton Exchange British Government Exchange by by the British Liverpool Cotton suspension of this exchange during Second World World War. War. To date date the the reopening reopening of this has not been the Second exchange has during the permitted. permitted.
104 104
Commodity Exchanges Exchanges and Futures Futures Trading Trading Commodity
prices in in prices
Havre and Bremen, Bremen,66 and closing closing prices prices in in Alexandria Alexandria and Bombay. Ocean freight freight rates rates to to the the twenty twenty leading leading cotton cotton markets markets are are Bombay. recorded, together together with demand and cable cable rates rates for for sterling, sterling, francs, francs, recorded, lire, and so so on. on. marks, and lire, marks,
The exchange's exchange's price price record record is is given given for for each each delivery delivery month, month, includincluding prices prices at at the the three three daily daily calls calls-high, low, closing of the day-and and of the low, ing high, closing day and the the previous previous day's day's closing dosing prices. prices. A complete complete record record of of all all prices prices on exchange contracts contracts in in each each delivery delivery month is is published. published. The supply supply of of exchange each grade grade of of cotton, cotton, certificated certificated for for delivery delivery on futures futures contracts, contracts, is is also also given. given. Pursuant to to requirements requirements of of the the federal federal Cotton Cotton Futures Futures Act for for deterdeterof price price differences differences on grades grades above above or or below middling, middling, the the mination of the average differences prevailing currently ten spot markets of the differences ten markets of on average prevailing currently spot
country for for country
all all grades grades of of cotton, cotton, deliverable deliverable and non-deliverable, non-deliverable, are are a differpublished, together with a notation of the day on these differwith notation which these of the published, together day ences will will apply apply to to current current deliveries deliveries on exchange contracts. ences exchange contracts. a E. The following of following quotation quotation from a statement statement of E. G. Bright, Bright, vice-presivice-president of of the the New Orleans Orleans Cotton Cotton Exchange, Exchange, before before the the Joint Joint Committee dent the Economic Report Report (December (December 1947) indicates the the importance importance on the 1947) indicates of the of the price-registration price-registration function function of of commodity exchanges: commodity exchanges:
for a period, as in At times times in in the the past past the the futures markets have been closed period, as in closed for futures markets at six six cents cents and less less 1914 at the beginning of the first first world world war. war. Cotton sold sold at of the the beginning 1914 at sold at at more in the the following during the the marketing marketing period period in the fall fall and in in the following spring spring sold during futures
Daily Market Report the New York Coffee Coffee and Sugar of the Sugar Exchange. Exchange. Report of Daily Market the The record of futures on the New York Coffee and Sugar of futures of prices record of Sugar prices the Exchange differ materially not differ does not materially from the record of those on the Exchange does is computed Cotton visible coffee coffee supply, world's visible Cotton Exchange. supply, which is computed Exchange. The world's is the from carefully gathered by representatives of the exchange, from figures exchange, is figures carefully gathered by representatives in the given of coffee coffee in detail. Stocks the principal Stocks of in considerable considerable detail. European principal European given in the centers together with the amount are reported, in South America are centers and in reported, together afloat bearing markets. These figures, to various various markets. Brazil to afloat from from Brazil figures, bearing on the world detail the others which detail the movements into, are followed followed by world supply, into, by others supply, are and the coffeethe United States the two large States and the coffeestocks on hand in, the stocks in, the large 66 Prior of these these markets Prior to to suspension suspension of
the Second World War. during during the
Prices~ Prices,
Crop Market Reports Reports Crop and Market
10 5 105
distributing Orleans. A statistical statistical summary centers, New York and New Orleans. distributing centers, summary of in the the United States, the world's visible supply, of arrivals, arrivals, deliveries deliveries in world's visible States, and the supply, month by by month, month, is is given given in in separate separate tabulations. tabulations. Prices Prices prevailing prevailing on other markets, the Santos other as the Santos and Rio exchanges, are also also summarized. summarized. markets, such as exchanges, are In addition addition to to the the usual usual summary summary of the section of the the day's the section of of day's trading, trading, this exchange exchange which is is devoted devoted to to sugar details stocks of sugar in this details stocks of in New sugar sugar other warehouses, warehouses, as receipts, exports, York, Havana, as well well as as receipts, York, Havana, and other exports, and summaries of of the the new and old old crop crop movements, movements, with quotations quotations from other exchange exchange markets markets in in Europe. Europe. Weather occupies place in the a place other in the occupies a sugar market, but is omitted in the coffee market report. is in but the coffee market sugar market, report. In this this connection, the following bearing as as In of interest, is of connection, the interest, bearing following quotation quotation is it does it does not not only the price-registration function, but also on the advanon the but also the advanfunction, only price-registration of price in contrast price determination on free free markets in price controls tages contrast to to price controls tages of by government: government: by During Ithe war, when sugar any the war, control, no one had any government control, sugar was under government During idea as as to to the the true true value value of of sugar. sugar. When decontrol was being being debated during idea during officials of of the the early early part part of of this this year, year, we heard responsible responsible officials the Department of the Department of of 30^ Agriculture prophesy prophesy that that aa price price of 30~ to to 40^ 40~ per pound might might result, if result, if per pound Agriculture sugar suddenly decontrolled. decon,trolled. Today, later, we see see Today, some seven months later, sugar were suddenly
of slightly slightly over 5~ per per pound pound quoted quoted on our Exchange Exchange for prices of for raw sugar over 5^ sugar prices into for 1948 translate itself into a price of about 8~ wholesale itself This would translate wholesale 1948 delivery. for 8^ price delivery. for refined sugar instead instead of of 40^f, 40~, 20^, 20~, or some other price at by by guess. guess. arrived at for refined sugar price arrived point is, is, in in aa controlled buyers and sellers sellers have no way of expresscontrolled market buyers The point way of expressing their individual judgment. In a free market, each producer has a good idea a a In free individual their market, good idea producer ing judgment. cost him, of he will will produce, produce, what it it will will cost him, and at price he he is at what price is of how much he knows his because it his willing to sell it. buyer his requirements, because he makes it his sell it. The to requirements, buyer willing business to to estimate estimate the the probable probable demand from his his customers. customers. Governments business at the -that to estimate the for a commodity must guess the financial a the demand for financial to estimate that at:tempt commodity guess at attempt ability of the probable buyers. In a free market, each of these buyers in in a free these of knows the of market, buyers probable buyers. ability advance his his financial financial resources resources and can can estimate range a very narrow estimate within within a advance range very just he can buy at various various price price levels. buyers and levels. Therefore, Therefore, when buyers just how much he can buy at sellers are permitted permitted to to come together together in in aa free place, they they very quickly free market place, sellers are very quickly or the price price of a commodity commodity for today, next month, or establish for the of a the delivery establish the month, delivery today, next year. year. 77 next Trade. The grain Crop Statistics in the Grain Trade. in the grain exchanges exchanges compile compile Crop Statistics
to those those which have been described described and issue reports reports similar nature to in nature similar in and issue the is gathered exchanges. The information is by the exchanges, for other exchanges. for other gathered by exchanges, operoperating through their committees information and statistics, and valuvaluon their statistics, ating through Broomhall's Agency, Agency, an internationally internationally able are obtained obtained from BroomhaH's data are able data organization whose whose lines lines of of information spread over the world. the world. known organization spread of the the New York Coffee Coffee and Sugar 7 Remarks Remarks of of John John C. president of C. Gardner, Gardner, president Sugar the National the Exchange, Inc., at a symposium, August 14, 1947, under the auspices of the National of a at 14, 1947, Inc., August auspices symposium, Exchange, Association of Allied Trades, Inc. of Commodity Trades, Inc, Association Exchanges and Allied Commodity Exchanges
106 io6
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
This a large, large, specialized reporting bureau, publishes is a This agency bureau, which publishes agency is specialized reporting to subinformation to subthe world-famous Corn Trade News and supplies the world-famous supplies the of world are All scribers throughout the the world. world. All grain are scribers throughout exchanges of the grain exchanges subscribers. subscribers. to similar to Reports. All All exchanges exchanges publish Annual Reports. reports similar publish annual reports operating of other business organizations. other business statements of exchanges, organizations. Some exchanges, operating statements of data in addition, addition, publish publish statistical annuals which contain wealth of contain a wealth in statistical annuals these constitute constitute on prices, prices, supplies, crop movements for for years years past; past; these supplies, and crop valuable historical historical records. records. The Chicago of Trade issues yearly of issues Board valuable yearly Chicago the a of volume, of 200 or more pages, containing a review of the year aa bound volume, or of 200 year pages, containing information covering covering all in on the the all commodities dealt dealt in and statistical statistical information exchange. exchange. Prompt and Widespread Publication of Prices. A vital vital field, the field, where the of Prices. Prompt Widespread Publication commodity exchange is the sole source of information, is the record of all record all the of is the of is sole source information, commodity exchange of the volume of all transactions consummated on its floor. prices and its floor. of the all transactions of prices to all all of the available to This record the prices prices prevailing prevailing daily is generally This record of daily is generally made available other domestic domestic and foreign foreign exchanges exchanges and markets other of the the same commodity markets of commodity to the the public, public, by radio and ticker ticker services, by direct direct wire wire and cable; cable; to services, which by by radio offices of of commission commission houses throughout carry quotations to to offices dealers throughout houses and dealers carry quotations and in the country, the by publication publication in the papers. This publicity of the daily country, by daily papers. publicity of exchange transactions serves a most valuable economic purpose. transactions serves a most valuable exchange purpose. a basis for arbitrage By basis for arbitrage B8 operations, the all the the markets markets of of the By affording affording a operations, all world on the commodity are together. Although world the same commodity are linked linked closely Although closely together. in market in one may occasionally get out of parity those in prices in out of with those may occasionally get prices parity with other markets, markets, in in the the long long run wheat wheat prices Kansas City, other in Chicago, Chicago, Kansas prices in City, and the foreign markets will be at a substantial parity; Minneapolis, the markets will be at a substantial foreign Minneapolis, parity; at New York, York, New Orleans, world markets will cotton prices prices at cotton other world markets will Orleans, and other in alignment; be be in the same condition will hold hold true true for prices of of condition will for prices alignment; and the all all other other commodities commodities on various various domestic domestic and foreign exchanges. Thus, foreign exchanges. Thus, for commodities of of world-wide world-wide production production and consumption there is for is consumption there 9 not or national not aa mere local local or national market; market; there brought is a a world world market,9 there is market, brought about by by close of price price quotations quotations and alertness part about close interchange alertness on the the part interchange of of to seek a profit by bringing prices back to parity whena of arbitrageurs to seek back to whenarbitrageurs profit by bringing prices parity of parity parity with with others. ever one one market is ever is out of others. Control of Different arrangements for disseminating of Quotations. Quotations. Different arrangements for disseminating quoquotations various exchanges. exchanges. They are generally tations prevail prevail on various are generally promulgated They promulgated by ticker ticker services by cable, cable, telegraph, telegraph, radio, teleregisters, and the services and by the radio, teleregisters, by in daily press; in the customers' of the exchange commission house the room of the customers' house daily press; exchange See Chapter 88 See Chapter XL XI. of course, 9 This, course, This, of
is not true true where where governments governments under war controls controls or or priceis not pricefix the the prices prices of fix of international international staple!!. staples.
pegging schemes arbitrarily arbitrarily pegging
Prices, Crop and Market Market Reports Reports Crop and
Prices,
107
members quotations quotations are are posted posted promptly promptly on an electrically electrically operated operated board. board. For years the law has has been well well established established that years the that exchanges have comcomexchanges have their plete control of their quotations-that is, exchanges may establish of own control that establish is, quotations plete exchanges may rules to be observed in in transmitting transmitting their their quotations quotations as rules to as news, news, and they they to non-members, may also refuse refuse to to supply supply quotations quotations to a step if such such a non-members, if may also step desirable. 10 Allowing ticker companies to take take appears desirable.1° Allowing telegraph telegraph and ticker appears companies to sell quotation and sell to their their subscribers has been held by the the services to subscribers has held by quotation services courts not not to to publication publication such courts to amount to as would debar such as debar exchanges exchanges the furnishing from exercising exercising discrimination discrimination and forbid forbid the of such such furnishing of services to certain certain types types of of organizations. organizations. This control services to control of of quotations quotations of inestimable value value in in contributing contributing to to suppression bucket has been of of bucket suppression of off quotations to be be "buckshops. By shutting "buckshutting off any recipient shops. By quotations from any recipient known to a dealt of operator. eting orders," exchanges dealt a deathblow to this type to this of orders/' eting exchanges type operator. The courts have have upheld upheld this this right, right, and commodity exchanges particicourts have particicommodity exchanges have in the pated actively actively in the extirpation of these pose these gambling houses, which pose extirpation of pated gambling houses, as commercial enterprises. as legitimate commercial legitimate enterprises. of the clauses of customer's contract contract with with the Western Union TeleThe clauses the Western Telethe customer's for continuous graph Company for con~inuous quotations of the York Cotton of the New graph Company quotations Exchange, reproduced below, below, are are illustrative illustrative of the extensive of the controls extensive controls Exchange, reproduced maintained by exchanges: by exchanges: 1. That our place of business at No. 1. business is is and shall shall be at No............................. Street, Street, place or said of State of Town of ............................ State of ............................ and that that said City City or and firm the name of business is conducted under the firm business is style style of .................................. .. and that that notice notice of of any any change change of of the the name, name, nature, of said firm or or place or said firm nature, or place of business shall shall at at once be given given to to the the said Company; said Western Union Telegraph business once be Telegraph Company; not keeping keeping or causing to to be kept, will not keep or cause cause or causing and that that we are are not kept, and will keep or in assist to be kept, kept, or or be be in wise interested in, or in any way assist or promote, wise interested in any to be in, any way any promote, any any or wherein or bucket-shop business, or any office, store, or other place wherein bucket-shop or office, store, business, any place bucket-shop bucket-shop or permitted permiHed the the business business of making, or to make, conis conducted or or offering of making, is conducted make, conoffering to in or transactions, either orally or in writing, respecting tracts, trades, either or trades, transactions, tracts, agreements, orally writing, respecting agreements, of cotton, the purchase purchase and sale) the purchase purchase or sale (or or sale the bonds, cotton, or any stocks, bonds, any stocks, (or the sale) of or other other securities securities or commodities wherein wherein both parties, or the party maintainmaintainor commodities or party parties, ing office or place or or conducting conducting such business, or the the undersigned, consuch business, or place such office undersigned, coning such or intend that such contracts, agreements, trades, or transactions template transactions intend that such contracts, agreements, trades, template or to or may may be, be, closed, or settled settled according, with reference, reference, to shall, closed, adjusted, shall, or according, or with adjusted, or the quotations of of any Exchange, Board of of Trade, upon which the quotations Trade, or market place, place, upon any Exchange, cotton, or stocks, stocks, bonds, bonds, or or other other securities securities or in; or or are dealt dealt in; or commodities are cotton, or otherwise than than by by an an actual actual bona fide fide ,transaction purchase or sale; or wherein transaction or or purchase otherwise sale; or office or place such both parties parties or or the party maintaining maintaining such place or conducting such office both the party conducting suoh that such contracts, the undersigned undersigned contemplate contemplate or intend that agreebusiness or or the business contracts, agree-
10 For see Chapter 10 For the the law law regarding regarding control quotations see of quotations control of Chapter XVI.
108 io8
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
ments, trades, or transactions transactions shall, may, he or may, be dosed closed or or 'terminated the terminated when the merits, trades, shall, or of quotations of some such Exchange, of Trade, or market place respecting or Board of Trade, Exchange, quotations place respecting the cotton, stocks, bonds, bonds, or or other other securities the securities or or commodities in such commodities specified such cotton, or stocks, specified in contracts, agreements, trades, or transactions shall reach a certain figure; and or transactions shall a reach certain and we contracts, agreements, trades, figure; that we will not agree that will not use, or allow anyone else to use, such quotations or any of or allow else to such or use, use, agree anyone quotations any of or in any such bucket-shop, office, or place. such purpose them for for any such or in or any any purpose bucket-shop, office, place. said quotations 2. are to to be be received received by us only private and for our private 2. That said by us only for quotations are in our individual use use in our said business at at the above designated; individual said business the office or place office or above designated; and place that will not not communicate or or otherwise otherwise furnish or permit to be that we will or furnish permit to be communicated or otherwise furnished, said quotations to any news distributing said otherwise furnished, or distributing company company or quotations to any telegraph or any any person person or nor to to any place than than or corporation, other place telegraph company, company, or any other corporation, nor that above designated, that designated, nor nor allow allow any any person person or whatsoever to take or corporation to take corporation whatsoever undersigned shall If the shall directly or indirectly said quotations said office. office. If the undersigned directly or indirectly said quotations from said of them, or permit permit to to be be furnished, furnished, said to any furnish, or said quotations, or any furnish, them, to any any of quotations, or the Western or corporation, corporation, the the undersigned undersigned hereby hereby agrees that the Western person, firm, firm, or person, agrees that Union Telegraph may sue sue the the person, to whom or corporation firm, or corporation to Telegraph Company Company may person, firm, said quotations said quotations or or any of them are are thus receipt or furnished to the receipt or thus furnished to prevent any of prevent the use use thereof thereof by by said said person, person, firm, firm, or without making making the the undersigned or corporation undersigned corporation without a of a a defendant defendant thereto, thereto, provided provided -the undersigned does not, or in case a partpartthe undersigned does not, or in case of all of the do not, reside within the jurisdiction of the nership all the thereof members reside the thereof within the not, nership jurisdiction in which Court which said said suit is brought. brought. suit is Court in office or place 3. the office place above above designated designated shall shall not by any any 3. That the not be connected connected by private telegraph or telephone wire, or other wire connection, or other means or or or other wire connection, wire, private telegraph telephone of communication communication with with the or place place of business of persons, of any or persons, of of business the office office or any person person or or engaged in the business of making contracts, agreements, trades, in business of the or corporation, contracts, trades, engaged agreements, making corporation, sale of or transactions respecting respecting the the purchase purchase and sale bonds, or of cotton, or or transactions cotton, or stocks, stocks, bonds, other commodities, or with any place where such business is conor with such is business conother securities securities or or commodities, any place of ducted, unless unless the the New York Cotton Exchange been notified shall have been notified of ducted, Exchange shall such shall not not have have disapproved disapproved the the same. such connection connection and shall the undersigned 4. That the the furnishing of said said quotations be disdisto the shall be 4. undersigned shall furnishing of quotations to the New Co. or the Cotton continued whenever whenever the the Western Western Union Telegraph or York continued Telegraph Exchange shall shall require require ,the discontinuance thereof. thereof. the discontinuance Exchange financial pages Newspaper Reports. Reports. The financial pages of daily papers carry detailed daily papers carry detailed Newspaper reports of price changes on the principal commodity exchange markets. the markets. of principal commodity exchange price changes reports Official prices for for all all active active trading trading months are made public public by the QuoOfficial prices by the Quotations establishes official also establishes official quotations for inactive inactive tations Committees, Committees, which also quotations for months, when no prices prices are are established established by by trading, usually gives the months, trading, and usually gives the "tone" the market. of the "tone" of Market Letters. Letters. Another source source of information consists consists of market Market and letters, issued by dealers, brokers, commission houses. These letters letters issued dealers, brokers, letters, by to to their them or bulletins are distributed to their customers to acquaint with or bulletins are distributed acquaint price trends prevailing in in the market. They of They contain current news of price trends prevailing the developments bearing on the supply of commodity or the demand on the commodity supply developments bearing for other data and trade trade information deemed of importance it and other as for it importance as
Prices~ Prices,
Crop Market Reports Reports Crop and Market
log 109
affecting prices. prices. The exchange, however, possesses to censor the power censor exchange, however, affecting possesses the power to all such bulletins all bulletins sent out by by its its members. members. The publication publication of rumors, of rumors, sent out or other supported reports, or misleading matter intended other misleading supported reports, to prices, as well as as advertising advertising matter matter which might invite influence prices, as well to influence might invite a "incompetents to undertake a hazardous enterprise," is discountenanced hazardous to undertake is enterprise/' "incompetents and disciplinary disciplinary action may be be taken taken by by the the exchange action may exchange against against offending offending members. members. Regulation of of Consumption. l?rice or high of an article article high price Regulation Consumption. The low price price of major degree degree influences the demand for for it, the one tending to a major to a to stimuinfluences the stimuit, the tending to the other other to to retard retard demand. This is true whether whether the the price price is late and the is late is true that of or caviar caviar-of cotton or or futures. But the or futures. that of cotton or shoes-of the of wheat or shoesof spots spots of hourly and daily publication of the prices of futures, reflecting the conof conthe futures, hourly daily publication reflecting the prices sensus of trained trained judgment judgment as as to to the the course prices months into into the of prices the sensus of course of in a future, provides provides the the dealer, producer, or manufacturer operating a or manufacturer future, dealer, producer, operating in in in futures trading is conducted with a peculiarly sencommodity with a which futures is sentrading commodity peculiarly miller does does not not have have to to wait wait until until October to sitive governor. governor. The miller to sitive for wheat which he will ascertain what he he will will have have to to pay pay for will then need. need. ascertain his requirements by exchange operations-and so with He can anticipate his and so with anticipate requirements by exchange operations or tire the farmer, farmer, spinner, tanner, or tire manufacturer. manufacturer. the spinner, tanner, The regulation regulation of prices, consequently, of consumption is a much by prices, consumption by consequently, is more orderly orderly process process and one one attended attended with with much less uncertainty and less uncertainty If cotton anxiety than would otherwise prevail. If prices work so that otherwise prevail. so low that cotton prices anxiety than it consumption of finished cotton goods will be stimulated, it appears that that finished of cotton will be stimulated, goods consumption appears for example, the the manufacturer can take take advantage prices to for example, of the the low prices to advantage of assure his his requirements requirements by by purchases purchases on the the exchange for months ahead. for ahead. assure exchange are indispensable, it is It will not do to to say that futures futures quotations is It will not say that quotations are indispensable, but it not the services rendered by the exchanges that conservices rendered not overstating to say conby the exchanges to say that overstating the tinuous of futures are a valuable contribution to our of futures valuable are most contribution our tinuous quotations to quotations modern industrialized industrialized society. society.
insufficiently insufficiently
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CHAPTER CHAPTER VI VI)J
Adaptable to to Futures Futures Trading Trading Commodities Adaptable
Why are are some commodities commodities the the subject subject of of futures futures trading trading on organized organized Why for exchanges, whereas no such markets have established for trading been established such trading exchanges, it that in other other commodities commodities of of equal equal importance? importance? Why is that wheat, wheat, cotton, is it in cotton, coffee, corn, corn, oats, oats, rubber, rubber, silk, silk, cocoa, cocoa, tin, tin, and other commodities are are coffee, when singled out for futures trading exchange markets, steel, brass, on for out futures steel, brass, markets, exchange trading singled petroleum, lumber, lumber, and many many other basic basic materials materials are not the the tea, coal, coal, petroleum, tea, in the relative subject of exchange exchange trading? trading? The reason reason cannot be found in the relative subject of in question. importance or value of the commodity in money value value the or of commodity question. The money importance of our annual imports that of of the annual production production of of steel imports far exceeds steel far exceeds that of the annual of cocoa beans, and tea tea is is in in more extensive use throughout throughout the the world extensive use of cocoa beans, futures than coffee. coffee. In the reasons reasons why why some commodities have futures than In examining examining the first center center attention attention on the markets not, we must first the nature markets and others others do not, of itself. itself. of the the commodity commodity Units Homogeneous. It It is is a condition condition precedent for all all Units Must Be Homogeneous. precedent for futures that units of the commodity be interchangeable. The that units of the futures trading commodity interchangeable. trading speculator the hedger hedger does or the does not buy sell on an exchange contract any exchange contract buy or sell speculator or any lot of specific or specific of a commodity, or identified or identified grade commodity, but he buys grade or specific lot buys or specific or sells to established grades and descriptions. One ton of Grade A of to established sells according grades descriptions. according It rubber is It is homogeneous. as another of the same grade. is of the is the the same as grade. homogeneous. Hence aa commodity, the units units of of which are are not readily is commodity, the readily homogeneous homogeneous is an impossible for futures futures trading. impossible one for trading. at Looking at those commodities in which futures futures trading those is conducted, conducted, Looking trading is that they all it all answer this requirement. Some homogenit will will be found that this they requirement. homogengoods. Wheat is an example eous are also also fungible eous commodities are is a of a fungible goods. example of A elevator may grain fungible store thousands of bushels thousands of bushels commodity. fungible commodity. grain elevator may store 1 Hard spring wheat, of belonging to several owners, 'and it of Number 1 to several and it is is wheat, owners, spring belonging to entirely immaterial to the buyer what lot or whose wheat of the same lot or of the buyer entirely receives. The stocks stocks of various grade various owners can be mixed and stored stored grade he receives. in and purchases or sales can be made, with no thought of in bulk, sales the bulk, made, purchases thought of the of such wheat. On the specific the other other hand, hand, cotton, cotton, silk, silk, and identity of specific identity 110
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rubber are are examples of commodities that are not fungible, are not commodities that fungible, although examples of although they are homogeneous. Although specific lots of cotton and rubber are lots of are cotton rubber are they homogeneous. Although specific not in storage, are not mixed in they are capable of being graded so that one lot of that so lot storage, they being graded capable of a given of given officially officially certified grade is to a buyer certified grade is just as as just as acceptable buyer as acceptable to any other lot of that grade. lot other of that any grade. The Commodity Susceptible of Standardization of of Grades. Grades. of Standardization Commodity Must Be Susceptible If a If the the units units of of a commodity are homogeneous, homogeneous, it it follows as a a corollary follows as commodity are corollary that must that the the commodity be susceptible of division into standard grades. be of division into standard commodity grades. susceptible all units There is is no commodity commodity all units of of which are alike. Differences alike. are exactly Differences exactly in grade in grade arise multiplicity of of causes. causes. One lot arise from a multiplicity lot of of cotton cotton will will differ differ in in length length of of staple, in cleanness, and in color. in from another in in color. Rubber in cleanness, staple, course of production in the a clean course of production may may come out out in the form of of a clean sheet sheet of of it may accumulate dust, amber-colored translucency translucency or or it bark, and other other dust, bark, may foreign substances. bales of vary in evenness, cleanof raw silk substances. Two bales silk may in cleanevenness, foreign may vary ness, and neatness neatness of of the the threads, threads, and there there may may be variations in in size, be variations ness, size, tenacity, and elasticity. Conditions of this sort, affecting every of Conditions this comsort, affecting every comelasticity. tenacity, it impossible for unit of modity according according to to its nature, make it its nature, of modity impossible for every every unit the to be regarded commercially as the equivalent of every to be the commodity as the of commodity regarded commercially every equivalent other. other. If, however, standards can be be established established so that by inspection and standards can so that If, however, by inspection classification the commodity may be divided into a definite of classification the be divided a into definite number of commodity may well-defined, grades, readily identified by the trade throughout uniform identified trade the well-defined, by grades, readily throughout the world, the the units units of each grade the world, such grades of each grade become homogeneous, homogeneous, and such grades are suitable trading. for futures futures trading. are suitable for Supply Large. The necessity of a broad market necessity of Supply and Demand Must Be Large. for futures trading has been emphasized emphasized elsewhere. if every elsewhere. Even if other for futures every other trading has element necessary necessary for for futures trading were were present, present, alligator pears would element futures trading alligator pears not be be aa commodity a satisfactory satisfactory futures market could be futures market for which a could be not commodity for that of with that is maintained. The supply, of staple maintained. commodities, is staple commodities, supply, compared compared with small, is the the demand. Consequently, Consequently, speculators with large so is small, and so large speculators financial resources might might readily readily obtain obtain control pear of an alligator control of financial resources alligator pear a natural natural and free futures market. market. It It would soon cease cease to to be a free market futures and would become merely merely aa battleground battleground for for contending contending speculative speculative factions. factions. for futures Some authorities hold that that the the commodity, to be eligible futures authorities hold eligible for commodity, to most trading be in world-wide demand. As a matter of fact, comin a of must be world-wide fact, trading wide worldmodities ~hich are the subject of the futures trading enjoy a world-wide the futures the of are which modities trading enjoy subject It is in widely different degrees. It demand, although is questionable, howin different demand, degrees. questionable, although widely if this characteristic is indispensable to exchange ever, to is if this characteristic ever, trading. The exchange trading. indispensable statminimum requirement requirement in in this this respect respect may may best best be be summarized by by statto assure assure that ing that the supply should be large that that the large enough enough to ing supply and demand should the will function as a continuous and orderly market as will function futures exchange the futures orderly exchange
112
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
of supply for the interplay interplay of of normal factors factors of not for the supply and demand and not merely an arena arena for for contending speculators. as an contending speculators. merely as to Market. a supply The Supply Supply Must Flow Naturally Naturally to Market. Not only only must a supply of commodity be be large, large, but but its flow to be to world markets its flow markets must also a commodity also be of a substantially free and unhampered unhampered by by artificial restraint, whether whether by by artificial restraint, substantially free An governmental or private agencies. impossible condition would exist, or condition exist, impossible governmental private agencies. in a if organized futures futures trading trading were were attempted a market where the the if organized attempted In is under effective supply price of the commodity commodity is be of the or price control and could be effective control supply or at the increased or diminished diminished at the will will of government, group, cartel, of any increased or cartel, any government, group, or individual. individual. The market would then function, not as as corporation, function, not corporation, or price-making machine, machine, but but merely to the as an adjunct the an efficient efficient price-making merely as adjunct to arbitrary will of the controller of the supply or price of the commodity. of the or of of the controller the will commodity. arbitrary supply price has been used advisedly. "effective control" control" has The term "effective advisedly. The Rubber in 1925 Exchange of began operating of New York began at a a time time when the the 1925 at operating in Exchange in British plan for restricting production of rubber in British British for of British (Stevenson) restricting production (Stevenson) plan Colonies, with various various price price and export been in in control features, features, had been Colonies, with export control the plan control the the price effect for three years. The purpose purpose of of the plan was to to control price effect for three years. through periodically periodically increasing reducing production production and the or reducing the exportincreasing or through exportable supply able by government edict. Nevertheless, Nevertheless, the the Rubber Exchange Exchange government edict. supply by until forced functioned effectively effectively from the the time time of of its its organization forced to to functioned organization until during the Second The reason for the success of suspend the World War. reason for the success of suspend during the exchange exchange was was that that the the attempted attempted control was not not effective. the control was the effective. Had the price of rubber brought complete or practical control, every rubber been under of or control, brought every price complete practical whether manufacturer manufacturer or user of of rubber, user or consumer, rubber, whether consumer, would have been compelled to to accept accept dictated dictated prices. prices. As was expected, however, tempocompelled expected, however, temporarily high prices produced the inevitable economic effect of increasing effect inevitable of increasing the rarily high prices produced the by the the supply other sources; control by the British British govsources; consequently, supply from other consequently, control government was was only only partially partially effective effective and the ignominiously failed ignominiously the scheme failed in 1928, in but was was revived revived again in cartel in as an international international governmental 1928, but governmental cartel again as the the 1930's. 1930's. The same situation has existed existed in various valorization in coffee coffee under various situation has valorization schemes of of the the Brazilian Brazilian government which have operated more or less or less government operated beginning of the twentieth twentieth century-without, continuously the beginning of the since the continuously since century without, however, control. In In fact, fact, other other governmental effective control. control schemes however, effective governmental control in wheat, wheat, sugar, cotton, corn, teas, silk, and the like were disastrous in the like disastrous were sugar, cotton, corn, teas, silk, occasioned heavy heavy losses losses to the controlling governments and failures failures and occasioned to the controlling governments their taxpayers. taxpayers. Similar schemes have have been attempted from tim.e to to time, time, time their Similar schemes attempted in the years between the two world wars, usually without especially in the the years wars, usually without especially success except in the short term. The long term results have have generally generally in the short term. results success except long rubber. However, However, state as been the the same as as in in coffee state trading-such coffee and rubber. trading such as in England, prevails in wheat, and other England, in in in cotton, now prevails other commodities in cotton, wheat, cocoa in Africa and Brazil, Brazil, in hides, wheat, in British in hides, cocoa British West Africa other comwheat, and other
Commodities Adaptable to Futures Trading Commodities Adaptable to Futures Trading
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in wheat modi ties in in the Argentine, and in wheat in modities the Argentine, in Canada-poses Canada poses much more difficult problems and, if continued permanently permanently and expanded cover difficult problems to cover and, if expanded to
of supply other major major areas areas of or demand, may seriously demand, may supply or seriously upset upset exchange exchange trading in such commodi ties. in commodities. trading The testimony of George C. Schutte, George C. the New York Cocoa of the Schutte, president testimony of president of Exchange, Inc., before the Joint Congressional Committee on the the Ecobefore the EcoInc., Exchange, Joint Congressional illustrates Report, December 4, 1947, illustrates the disruptive effect and the nomic Report, effect 4, 1947, disruptive sinister implications involved involved in in the the current widespread sinister implications of widespread development development of state trading, partly partly as as a result result of of war controls partly because because of of the the controls and partly state trading, in many acceptance of socialism in many countries. of state state socialism countries. This statement statement relates relates acceptance in cocoa beans: to the trading operations beans: the state to state trading operations in
The public public interest interest requires requires that that the the nation's nation's great great public public market places places be be any influences that can possibly interfere with the estabinfluences interfere that with the estabany possibly the forces lishment of prices prices by by the forces of of supply lishment of supply and demand. Our public public market a vital the places exist to perform a vital function for the producers, importers, to economic function for exist perform producers, importers, places and of consumers of our basic commodities. They perform vital processors, consumers basic this vital commodities. They perform this processors, in direct economic function function efficiently in direct proportion to their breadth and liquidity. breadth their to efficiently proportion liquidity. for hedging They are, are, above all, hedging purposes, purposes, and all the sound and all the all, markets for They efficient placing proper factors factors which contribute contribute to to the the efficient placing and removing removing of of a proper be nurtured always nurtured and protected. protected. They never be be discouraged, hedge must always hedge discouraged, They must never and the the liquidity Iiquidi·ty of of the the market place place must never be tampered tampered with. never be with. Cocoa, for for the the major major part, part, comes from West Africa Africa and Brazil Brazil and is is usually Cocoa, usually two- to to three-month three-month shipping-period shipping-period spreads; transportasold for transportasold on twoallowing for spreads; allowing tion not unusual unusual for to arrive three to arrive in in this for cocoa cocoa to this country to four it is is not four tion time, time, it country three the time time of of original purchase. This makes the extremely the exchange after the months after original purchase. exchange extremely of protection important in two two respects respects-one the standpoint the imimto the one from the standpoint of protection to important in it provides a a in that for porter, and the other in that it medium for assuring supplies on the other assuring provides supplies porter, it does not tax the the imagination these shores. the circumstances, not tax imagination to to estiestishores. Under the these circumstances, it the effect of two monopolistic monopolistic sellers per cent of of our sellers controlling effect of 78 per mate the controlling 78 cent Brazil requirements (British 50 per cent-Brazil 28 per cent) . 50 28 cent) per per (British requirements to the The world world cocoa cocoa market was brought brought to the United States States from London, London, Amsterdam, Liverpool, and Hamburg Hamburg by the establishment of the New York of the Amsterdam, Liverpool, by the Cocoa Exchange in Formerly a large large part part of African cocoa was shipped of African in 1925. cocoa was 1925. Formerly Cocoa Exchange shipped to these places places for for transshipment transshipment to to New York. to these World monopolies monopolies now threaten threaten the the primacy primacy of of the the New York market. market. The as from in order Exchange be kept as free as possible any interference in as free be interference order to must to any possible kept Exchange and fight the battle against monopolies, the Exchange must not throttled the not be throttled battle the Exchange against monopolies, fight by domestic domestic peace-time peace-time controls. England, Brazil, Brazil, and controls. Government controls in England, by free trading Santo Domingo could, could, in in time, time, destroy destroy free trading and dictate dictate the fate of of the fate Santo Domingo 40 which the American chocolate chocolate industry, consumes over per cent of the of the the American per industry, world's production production of of cocoa beans. cocoa beans. world's at all all times times of of free at free
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director of L. Strange, of research statement below, below, by by H. G. L. research for for The statement Strange, director the Grain Co., Ltd., Winnipeg, Winnipeg, Canada, before the the Joint Joint ConCanada, before Searle Grain the Searle Co., Ltd., is a gressional Committee on the the Economic Report Report (December a (December 1947) 1947) is gressional
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startling analysis of of the the way way in in which paternalistic paternalistic legislation insidiously startling analysis legislation insidiously develops gradually the relief relief measures measures demanded feeds on itself itself and develops feeds gradually from the by short-sighted co-operatives into full-fledged totalitarian controls into totalitarian controls and full-fledged by short-sighted co-operatives state trading, which destroy destroy free free markets markets and, if extended, will inevitinevitif state trading, and, extended, will ably lead to complete of the the entire entire socialization or or communization of lead to ably complete socialization economy. experience should be a grave warning to the The to the Canadian be economy. grave warning experience have already forced the United States far down far American farmers farmers who have forced the States already the road to to state trading, which has in state trading, the has destroyed free agriculture destroyed free agriculture in many nations. nations. many In our Canadian Canadian wheat whea,t pools pools co-operatives co-operatives suffered 23 million million a loss of 23 loss of In 1929 suffered a 1929 our they owed to to the banks and could They lost this money which they the banks could not not pay. lost this money pay. They had a their because they adopted a policy of marketing -their straight to the the of wheat to because straight marketing they policy adopted millers of the the world world without without using using the the facilities facilities of Winnipeg open "futures" millers of "futures" of the the Winnipeg open They did did not not hedge hedge their their wheat. wheat. Fearing Fearing political repermarket. They market. political and economic reperif the bankrupt, their their losses to the banks cussions, the pools pools went bankrupt, banks losses were guaranteed to the cussions, if guaranteed Provincial the Dominion Dominion governments of Canada. But the by the Provincial the and of governments by affairs to appointed administrator over their their affairs to dispose their of their gradually of dispose gradually appointed an administrator unsold the full unhedged unsold wheat, using the full facilities of the futures market to sell facilities market to of futures sell the wheat, using unhedged the wheat. the wheat. . . . the Canadian Wheat Board, From such such aa small small beginning beginning started started the Board, which as an agency to a functioned primarily primarily as to implement a guaranteed moderate Hoor functioned floor agency guaranteed implement price for wheat~the wheat, however, being sold through the futures market. sold for wheatthe the futures market. wheat, however, being price through This went along along quietly until September 27, 1943, the Government This 1943, when the September 27, quietly until decided that wheat wheat was was aa munition munition of of war. war. . . . The Government then closed then closed decided that the Winnipeg wheat futures futures market, market, with with the the full that it would full expectation the Winnipeg that it expectation the war was soon as as the was over. market has remained closed be reopened reopened as as soon over. The market be has remained to closed to this however, is still closed. 1943, therefore, the sole marketing and closed. From is still the sole this day, however, 1943, therefore, day, marketing agency for all Canadian wheat has has been the the Government itself, through its for all its itself, through agency has become aa complete state Board. Since Since 1943, Wheat Board. state 1943, Canadian wheat has complete monopoly. monopoly. 80 per cent of normally has has to to sell sell abroad 80 per cent of an average Canada normally of average crop crop of around 400 million million bushels bushels aa year. year. For the the crop year, 1943-44, the Government the crop year, 1943-44, at a considerably price of of wheat to to Canadian farmers farmers at lower figure set the price set '~he considerably lower figure than the price reflected reflected by by the the Chicago Chicago "futures" For that that year year our "futures" market. the price market. For than our less than they dollars less farmers received received 136 million dollars would have received 136 million farmers received had they they the same prices prices that that American farmers paid through through the farmers were paid the enjoyed the they enjoyed markets. the Chicago and other open "futures" markets. For the year, 1944-45, our farmers "futures" For other our farmers year, 1944-45, Chicago open million dollars less, and for year, 1945-46, they received received 147 for the the year, dollars less, received received 126 147 million 126 1945-46, they than farmers received. Since the "futures" million dollars less American farmers received. Since the "futures" market million dollars less market was closed the Government alone alone has has had to to sell year by all the in 1943, sell year closed in was the 1943, the by year year all Canadian wheat crop. crop. The Government became somewhat frightened, apparfrightened, apparin July, at the the possibility possibility of of unsold unsold surpluses. ently, at the Canadian 1946, the surpluses. So in July, 1946, ently, guvernment invitation from the British government in the British to engage government to government accepted accepted an invitation engage in that Canada would sell a bilateral bilateral wheat wheat agreement. agreement. The terms terms were that sell to a to Britain Britain 160 million bushels bushels for years at at $1.55 million bushels for two years 140 million 160 million bushels a bushel, and 140 a $1.55 a bushel, dollars dollars
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year for two years years at a minimum price price of for the the third year and at a for another of $1.25 another two third year $1.25 for year $1.00 for the fourth, the actual prices for the third fourth years to be be the the for for actual and the third fourth fourth, $1.00 years to prices for arranged later. actual price for the third year was recently agreed upon The actual the third later. arranged year price recently agreed upon at $2 at a bushel. bushel. Unless Unless wheat prices prices fall fall drastically drastically by by August August 11 next next-as not as does does not $2 a seem likely-then this two-dollar two-dollar price price will will further increase our losses. further increase farmers' losses. our farmers' likely then this Minister of of Agriculture Agriculture it was advised leaders of The Canadian Minister of it seems, advised by seems, was by leaders certain farm organizations ~hat the price of was likely, certain Canadian farm the price of wheat was after organizations that likely, after to fall fall below the the $1.55 price. As we all rose steadily 1946, all know, after 1946, to know, prices $1.55 price. steadily after prices rose of the the agreement. The Canadian government August 1, the start start of 1, 1946, 1946, -the August agreement. government and their advisers guessed wrong. their advisers guessed wrong. The Government announced some time time ago prairie farmers that our prairie farmers had ago that lost million dollars (equal to to 77 77 cents bushel) during the first year of lost 123 dollars (equal the cents a a bushel) first 123 million during year of the agreement, as compared with with the the much higher price at which Canadian the agreement, at as compared Canadian higher price actually been been sold by the to some sixty-five wheat had actually wheat sold by the Wheat Board to countries sixty-five countries of world other than Britain. Britain ..•. of the fact that Britain paid the world ... In spite the fact that Britain of of the other than paid spite $1.55 for the she bought, the paid the farmers only $1.35, holding for the the Board the farmers wheat she $1.55 bought, only $1.35, holding paid in case future losses back 20 20 cents bushel in of possible possible future a bushel case of losses.. . . . The Canadian cents a back this comparatively price of that Britain Britain was was government seized on this of $1.55 $L55 that government seized comparatively low price sell for paying to oblige our farmers to 'sell wheat, for Canadian consumption as flour farmers to our as to flour wheat, oblige paying consumption also at bread, to to 12 miIIion Canadian people people also to our Canadian and bread, at $1.55. loss to 12 million $1.55. The loss farmers for domestic farmers on wheat for domestic consumptionapproximately consumption-approximately 70 bushels million bushels 70 miIIion per year-came to additional 77 million dollars, making the total loss for an additional million to 77 the total came loss for dollars, making per year the first year year of the agreement 200 million dollars. I have calculated that if I million have calculated if of the 200 dollars. that the first agreement anything like present prices of wheat, as set by the Canadian Wheat of as like set the Board wheat, by anything present prices or as as registered registered by by the the Chicago Chicago open market, prevail prevail until until December 31, or 1947, 31, 1947, open market, the total loss to our prairie wheat growers will amount to 419 miIIion dollars, million dollars, the total loss to to growers will prairie or the average farmer. The losses today to each farmer. losses are are going or about about $1,600 $1,600 on the average to going on today at the rate of of around around $1.90 $1.90 aa bushel. bushel. . . . at the rate weeks ago, ago, Mr. J. J. Hume Lee, Lee, aa farmer, at Gretna, has a farm at A few weeks farmer, who has Gretna, line at farm immediately immediately across across the the border line Neche, Manitoba, and an adjoining at Neche, Manitoba, adjoining farm North Dakota, informed me that that last his adjoining last year farms at at North Dakota, informed year he sowed his adjoining farms Gretna and Neche with with Thatcher Thatcher wheat wheat and O.A.C. 21 barley. barley. He harvested harvested O.A.C. 21 Gretna both crops together, with with the his wheat at at the the the same implements. sold his both implements. He sold crops together, at the the Canadian elevator American elevator for $2.56 $2.56 aa bushel bushel and at elevator for elevator for for $1.20Y2. $1.20i/. at the his barley barley at at the elevator for for $2.10 the Canadian the American elevator and at He sold sold his $2.10 land elevator for for 85 85Y2 cents. Since then, the the quotations for wheat on November 19 19 elevator quotations for 1/2 cents. Since then, at these were $2.94 for at the American elevator and the wheat at the elevator the for these same elevators elevators were at $2.94 It is same price price as formerly-$1.20Y2--at the Canadian elevator. is to to be noted that, elevator. It as formerly that, $1.20 i/^at the at is buying buying wheat wheat from Canada under government agreement while Britain Britain is while government agreement at and all wheat $1.55, she is paying for wheat-and has been paying all these American these for she is $1.55, paying paying -the Chicago futures market. • • . years-th~ higher price price as as reflected reflected by by 'the the much higher Chicago futures years for taking One reason reason given given by by the the government taking over complete complete control control of of government for in to the whole wheat wheat industry was, as they put it, to prevent speculation in wheat as the whole they put it, prevent speculation industry was, at the the expense of the and to to prevent prevent speculators speculators from from making making profits the farmers. farmers. expense of profits at the for The fact fact is, however, that those who signed the agreement for Canada engaged those that is, however, signed agreement engaged sold "short" in the greatest speculation of all time. time. They actually sold "short" 600 of all in the They actually greatest wheat speculation .
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million bushels bushels of of unproduced unproduced wheat over years for prices a term of four years over a of four for prices million they could not not foresee. sold short, not with with their with foresee. They their own money short, not They sold money nor with they could future income of with the the future prairie farmers. the government's money, money, but with of our prairie the government's farmers. These good people forgot, forgot, or or did did not not realize, realize, that has no real that speculation real effect These effect good people speculation has on the price of wheat, either up or or down. They forgot also that, because wheat either up also of wheat, because the price that, They forgot it delivered in harvested and aa good part of market within is harvested of it delivered to to market within 90 90 in Canada is good part of the world and because the millers of the only buy their supplies in a steady days the millers their in a because only buy steady supplies days daily stream throughout throughout the the year, year, wheat cannot be be marketed marketed without without the the aid aid daily stream of speculators, for buys in the fall-so that the farmer can be whoever wheat in the fall so that the of speculators, for buys paid for for it it-and holds that that wheat for for months until until millers millers require require it it later, a is a and holds later, is paid it is the government government buys buys and holds holds the the wheat, wheat, therefore, therefore, as as it speculator. is speculator. When the doing in in Canada today, today, then then the the government, hence all taxpayers, become all the the taxpayers, government, hence doing speculators. . . . speculators. extent because It is to to aa great great extent because the the United States has enjoyed It is States has futures enjoyed an open open futures market, with with its reflected high high prices prices to to producers, producers, ,that the United United States its reflected that the States market, It is is because because of the government-set price, last year year increased increased wheat acreage. acreage. It of the last government-set price, that Canada last last year, year, in in spite of the of necessity aa low low price price to to producers, producers, that of necessity the of spite reduced its world's great hunger, actually reduced its acreage, for there was wheat world's for there no was great hunger, actually acreage, it. incentive to to Canadian farmers farmers to to increase increase it. Since the government government dosed Since the incentive closed the futures market in in Canada in 1943, have received futures market the farmers have received much 1943, our farmers less for their wheat and coarse grains than than they they should have done. This, II am coarse grains should have done. This, their wheat less for I convinced, is accident. It must, I am convinced, almost always happen is accident. It almost no must, convinced, convinced, always happen under I government monopoly. I confidently the prediction that, if the "futures" make the if the "futures" confidently prediction that, government monopoly. were in the United States to be closed, or even were they to be markets States to or in the United be to markets be unduly closed, they unduly r< hampered by unnecessary governmental n gill:!; iOIl, the same great losses much the great losses hampered by unnecessary governmental ^ul.'iiion, that have been incurred by our Canadian wheat producers would most cerincurred wheat been certhat have by producers upon your your American grain grain producers. producers...• tainly fall fall upon tainly It will will have have been been noticed noticed that that the the present present absolutely control state control It absolutely complete complete state over Canadian over the the Canadian wheat wheat industry farmers and over all actually Canadian farmers over industry all actually in aa very very small way in in the the year, year, 1930, but that it has started small and mild way that it started in has gone 1930, but gone with aa number of quiet, successive, until we have have arrived arrived along of quiet, successive, gradual gradual steps, steps, until along with at complete complete state state monopoly. monopoly. This illustrates, I suggest, insidiously today at illustrates, I suggest, how insidiously today by little, creeps up on the people once it is permitted government control, little little by the it once is control, little, creeps up people government permitted to start . . II venture venture to to recommend to to our good not friend the the United States start.. . ... States not to good friend of control wheat to take that that first of control over your industry, for, if it is taken, it first step over if it is it to take for, taken, your industry, step will inevitably lead to still further steps until United States farmers end up in lead further until to still States farmers in will steps inevitably up ,the position in in which our our Canadian farmers farmers find find themselves. the same bad position themselves. During the course course of of its sixty years years of than eighteen royal its sixty of activity, less than activity, no less eighteen royal During the futures market. commissions have thoroughly thoroughly investigated investigated the ,the Winnipeg commissions have futures market. Not Winnipeg one of that the the market market be not one even recomof them ever ever recommended that not one be closed; even recomclosed; mended any hampering of its operations. of its curtailment or hampering commissions operations. These cO!1lmissions any curtailment decided that the the futures futures market market was in the interest producers and that in the interest of of producers that the decided that the market performed performed important services to both producers and consumers .••. services to market consumers. important producers Today, in Canada, our farmers farmers have have unwittingly unwit'1ingly become merely merely humble servants in Canada, servants Today, is us in Canada look of us in their master. master. Thousands of look longlongof state is their the state. state. The state of the ingly to the the United United States, freedom fanners still still enjoy the States, where farmers enjoy the liberty ingly to liberty and freedom .
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Commodities Adaptable to Futures Trading Commodities Adaptable to Futures Trading
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for and fought for fought
of us us in in of
won by by their their ancestors Many ancestors against against kings kings and governments. governments. Many Canada today today believe believe fervently fervently that the United States is an oasis of that the States is oasis of
liberty in in aa gradually gradually extending extending world world desert desert of of human servitude. servitude. liberty their action not It was to have their every action policed to It dictated by bureaucrats, every policed and dictated by bureaucrats. with aa constant constant fear fear of of fine fine and imprisonment breaking minor 1( glll.1I iom, for breaking with imprisonment for K^ubiions, in order that Canadian farmers farmers made very very great great sacrifices to assist in winning sacrifices in that order to assist in winning in Canada are two great wars for for human freedom. freedom. We in hoping. '~herefore. that are hoping, therefore, that great wars some day day we may may again blessed with that that same individual liberty and freedom individual liberty again be blessed cherished by is still fortunately enjoyed enjoyed and cher!shed brother farmers the still fortunately which is in the farmers in by our brother United States. States.
of state state trading Another illustration illustration of of the the effects effects of trading in basic staple in basic comstaple comin Argentina. II is is found in Argentina. That country's World War II country's in the state monopoly the sale government likewise likewise created created aa state of wheat, sale of wheat, monopoly in government for export. state products for The state bought at fixed hides hides and skins, at fixed skins, and other products export. bought who were forced to prices from the producers, were forced to accept such arbitrary the from producers, accept arbitrary prices at much higher prices for for all sold these these commodities at prices all exports, exports, and sold higher prices prices in the the United States on foreign foreign markets. markets. Whereas the the farmer farmer in States during during this period period obtained obtained on world markets markets $3.00 higher for much of of this for $3.00 and higher half wheat, the Canadian farmer received only about one half as much, while received only as much, while wheat, the to countries were paying to the Argentine the same importing countries were the the paying importing Argentine government government for the of $5.00 or per bushel for wheat. The free markets or bushel of more wheat. free markets the equivalent $5.00 per equivalent for wheat maintained by the grain exchanges of the United States States assured for wheat assured by the grain exchanges of the a market price price based based on world world supply the farmer of of a the American farmer supply and demand, but the farmer forced to subsidize British and was forced to Canadian British but the subsidize demand, Canadian consumers and the Argentine farmer to subsidize the state the farmer to subsidize the state consumers Argentine of his government. monopolies his of government. monopolies Futures markets are are as as frequently in 'the located in the consuming Futures markets centers consuming centers frequently located centers. in as in the producing or distributing centers. Exchanges in basic internabasic internaas in the producing or distributing Exchanges United the States imports in large large tional staples, especially those those which the States tional staples, especially imports in important to the nation's economy. Although quantities, are vitally to the nation's are economy. Although no vitally important quantities, in the coffee, cocoa, natural rubber, rubber, or or pepper pepper are produced in are produced the United coffee, cocoa, natural States, nevertheless the the principal principal and largest futures markets for these futures markets for these States, nevertheless largest in New York City. The licensed warehouses commodities are are located located in licensed warehouses commodities City. in which many many of of these these commodities commodities are in the are located stored are located in are stored the in which it profitable United States. merchants find find it to import these to States. Because merchants United these profitable import commodities to store store them in in the the licensed warehouses and hedge licensed warehouses commodities and to hedge of these in the the futures markets, large stocks of these imported futures markets, commodities them in large stocks imported commodities have from time time to to time time been been accumulated accumulated in the United United States normal in the States for for normal have consumption purposes. Stockpiling will become more and more imporwill consumption purposes. Stockpiling imporof many essential materials tant, approach the the exhaustion exhaustion of many essential materials and are are as we approach tant, as import them from abroad. This point is forced is rapidly approaching to import forced to point rapidly approaching in iron ore, ore, copper, copper, and other other materials. materials. in iron
modities after after modities
llS n8
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
Uncertainty of supply and Demand Must Be Uncertain. Uncertain. Uncertainty of supply is prerequisite for demand is a commodity to be the the subject of futures futures commodity to subject of prerequisite for a trading. If supply are both certain, prices are capable If and demand are are of certain, trading. supply prices capable of ready adjustment without the intervention of any organized intervention of without the market any organized ready adjustment if of machinery. Again, if either of these factors is and the either these factors is certain other certain the other machinery. Again, uncertain, although although the the problem problem of of price adjustment is difficult, is more uncertain, difficult, price adjustment no elaborate elaborate market machinery machinery is is required required to to bring there it about, is there about, nor is bring it sufficient uncertainty to to engage engage the the attention the large of riskriskattention of sufficient uncertainty of the body of large body bearing speculators essential to a successful futures market. When supply to a essential successful market. futures bearing speculators supply large, and both uncertain and subject and demand are are large, fluctuato wide fluctuasubject to tions tions from season season to to season season or year to to year, a condition condition exists or from year exists where year, a the relationship the relationship between the the forces forces of and demand on free markets free of supply supply is is constantly constantly changing. uncertain economic forces proof uncertain forces prochanging. This interplay interplay of duces the the constant constant fluctuations fluctuations in in price price which must exist successful in any duces successful exist in any futures market. futures No one would call call United States States Government Bonds or Atchison, Atchison, Fe General Topeka, and Santa 4s, or States Steel Preferred specuor United States Steel Preferred 4s, Topeka, speculative Yet the the prices prices of these gilt-edged securities fluctuate from of these lative footballs. footballs. Yet securities fluctuate gilt-edged to week and over years. The upward day to day and week to to day over the the years. or downday upward or ward price price changes may large proportions. Constantly uncertain assume changes may large proportions. Constantly and shifting to make for for shifting demand and changing changing market supply operate to supply operate an irregular a similar irregular but constant constant oscillation prices. It in prices. similar shifting oscillation in It is is a shifting demand, coupled coupled with with the the fact fact that that supplies and demand can never be never be demand, supplies in the estimated with exactness, that causes the prices of all all estimated with causes oscillations oscillations in of exactness, that prices commodities which are are adaptable adaptable to to exchange exchange trading. trading. The Commodity Perishable. The futures futures contract contract may may Commodity Must Not Be Perishable. call for for aa delivery of units of the commodity many into the the of the months into call of units delivery commodity many future. Consequently, the the commodity commodity must be be capable future. Consequently, of being stored capable of being stored at all times and for periods to of the considerable periods for considerable to meet requirements of all times at the requirements of scarcity. times of scarcity. A commodity subject to rapid deterioration in times market in to deterioration commodity subject rapid does not meet this this requirement. requirement. The trader trader who makes aa contract to contract to does not the deliver the after date of sale, having the commodity after months of deliver the commodity sale, having commodity commodity in store at the time he makes the the contract relying upon upon the the possibility possibility contract or or relying in store at the time that he can can buy buy at at aa price price from those those who do have, have, must have assurance that he assurance that the commodity commodity will will remain substantially unchanged in quality until in that the substantially unchanged quality until delivery date. commodity should lend itself to the warehouse's to The itself the warehouse's commodity delivery date. economic function function of providing time time utility. utility. The surplus of providing of economic surplus supply supply of the present present must be be capable of becoming the essential supply of the of the of essential the the becoming capable supply future. future. Commodities in Which Exchange Exchange Trading Is Conducted. Conducted. The cereal cereal Commodities in Trading Is grains-wheat, corn, oats, rye, barley-are all susceptible of exchange and all are of barley susceptible exchange grains wheat, corn, oats, rye, textile commodities traded trading; cotton the principal principal textile traded are the cotton and wool are trading;
Supply and Supply
Commodities Adaptable Adaptable to Futures Trading to Futures Trading
119 119
Silk was the in on futures futures markets. markets. Silk the subject the of futures futures trading trading on the subject of many years. years. Futures Futures trading was inauguinauguYokohama Bourse for for many in silk silk was trading in rated rated in New York in in 1928, continued until until the the Second World War. 1928, and continued in on the Sugar coffee are dealt in the New York Coffee Exchange, are dealt Coffee and Sugar Sugar and coffee Sugar Exchange, on New York Cocoa cocoa the Exchange, products on the cocoa the Chithe ChiExchange, and pork pork products cago Board of of Trade. Cottonseed oil the oil has an active active futures futures market on the cago Exchange and the the New Orleans Cotton Exchange. New York Produce Exchange Exchange. futures trading Butter and eggs eggs are are the the subject subject of of futures trading on the the Chicago Chicago Merin since cantile Exchange. Hides futures have been traded in cantile since 1925. 1925. 11 Hides Exchange. Rubber futures have had an exchange exchange in in New York City since 1929. The Commodity since 1929. City Commodity Exchange, Inc., provided provided aa market for trading in tin, zinc, zinc, and lead. in tin, for trading lead. Exchange, Inc., in silver Silver copper were also also included, included, but since trading in Silver and copper since 1934 trading silver a because has been suspended because of a prohibitive federal "transactions" tax. of federal tax. has "transactions" suspended prohibitive In contrast contrast with this this group of commodities (which is not all-inclusive), of (which is group all-inclusive) however, there are many many more commodities commodities which obviously there are however, obviously do not lend themselves themselves readily readily to to futures trading. futures trading. Commodities Not Adaptable Adaptable to to Futures Futures Trading. fruits Trading. Uncanned fruits vegetables do not not lend lend themselves themselves to go no to futures futures trading. and vegetables trading. We need go further than to note the the fact fact of their perishability. perishability. Shoes are of their are an example further to note example for which may of a manufactured commodity, the demand for the of a commodity, the may vary, vary, but the supply of which is co-ordination with with demand. is capable of close co-ordination capable of close supply of Any product the value of is influenced by changes is value of which is influenced the in style by changes in Any product style is obviously unfitted for futures trading. The demand be as capriunfitted for futures be would as obviously trading. capriin the artificial in a commodity cious in in this this case case as as the the supply supply is is artificial case of the case of a cious of commodity of nature a monopolistic monopolistic or nature or of one effective or of under or semi-monopolistic effective semi-monopolistic monopoly control. Sulphur outstanding example is an outstanding a commodity of a Sulphur is monopoly control. example of commodity of the unfitted for for futures trading because because of the restricted restricted sources supply. unfitted futures trading sources of of supply. deposits greatly depleted, and the abroad have been Known sulphur the greatly depleted, sulphur deposits in world's is in the States. Furthermore, it is the United States. chief supply is now world's chief it is Furthermore, supply controlled principally by by two producers. producers. Sulphur prices, consequently, controlled principally Sulphur prices, consequently, as other commodities, not fluctuate frequently or or as as widely widely as the as frequently fluctuate as do not for the commodities, for producers can exercise control over supply and fairly well regulate it in control well can exercise it in fairly supply regulate producers relation to anticipated anticipated demand. relation to of successful successful futures Since coffee and cocoa are are both the the subject futures trading, Since coffee subject of trading, in on futures why is tea not also traded in futures markets? The difficulty is traded also here is difficulty here why is tea not with grading. The establishment this comestablishment of commercial grades for this with grading. grades for not but modity is a matter involving only expert opinion, individual is a matter individual only expert opinion, involving modity into tea taste well. The human factor factor enters enters into tea classification to such classification to such as well. taste as an extent as to to make it it aa difficult difficult subject subject for trading. for futures futures trading. an extent as of a a commodity, of the Consideration of the the nature nature of breadth or or the breadth Consideration of commodity, and of or the for will narrowness of of its its supply supply or the demand for it, why futures futures narrowness it, will explain explain why ,
i 1
the Second World War. Except for the the years years of of suspension suspension during during the Except for
uo 120 trading trading
Commodity Futures Trading Commodity Exchanges Trading Exchanges and Futures
is not carried carried on and is not likely be attempted in many many to be is not is not likely to attempted in products. Some will will obviously be debarred because because of of perishability; obviously be perishability; products. like others are to have aa comparatively comparatively narrow market. Some, are known to others Some, like potash, will fall in the category as sulphur-unadaptable because in as fall the same category sulphur unadaptable potash, will thin of restricted sources of of supply, as well well as because of as because of a comparatively of restricted sources comparatively thin supply, as market. market. Manufactured articles are capable of more ready to market articles are ready adjustment capable of adjustment to than is the case case with with raw materials, materials, partly because of the relarelais the of the demand than partly because in tively small of producers in each manufacturing industry. number small of tively manufacturing industry. Of producers more importance is the fact that, in proportion the art the manuis the fact in as the art of of the that, importance proportion as the facturer to the the form, or, ·and make-up of facturer contributes and make-up of the contributes to color, form, shape, style, col shape, style, finished article, individual units of will vary widely. The element finished article, individual units of each will vary widely. is lost, their purchases of homogeneity homogeneity is lost, and buyers, buyers, necessarily necessarily making purchases of making their contract after inspection, only after not be be aided by only by aa market whose contract inspection, would not in design, could not not possibly possibly reflect reflect the the manifold differences style, differences in design, style, and in quality in such articles as shoes or hats. found or hats. articles as women's shoes quality It is It is sometimes stated stated categorically, categorically, but wrongly, wrongly, that that no manufactured line can be drawn product is to futures trading. Nevertheless a line is adapted to a Nevertheless futures product trading. adapted articles which pass pass through through an elementary and uniform process process between articles elementary of manufacture to to prepare prepare them for for the the wholesale wholesale market and those those which of pass through less uniform stages of manufacture. and less of advanced more pass through stages The test test of adaptability is is not not whether whether the manufactured, but articles are the articles are manufactured, of adaptability whether the the process process of of manufacture is the products products homis uniform and the ogeneous capable of standardization through grading. and of standardization ogeneous through grading. capable Commodities Which Might Might Be Adaptable Adaptable to Futures Trading. to Futures Trading. The foregoing review review of reasons which make some commodities unsuitable of reasons foregoing for leaves one question question unanswered. What of iron, tobacco, tobacco, for futures futures trading leaves of iron, trading petroleum, jute, coal, similar commodities are durable, posand similar commodities which are durable, pospetroleum, jute, coal, sess uniformity, are are in world-wide demand, yet are not dealt in on in world-wide sess uniformity, are not dealt in demand, and yet futures markets at at all, all, or, if such trading trading is its is so futures markets its volume is so is organized, or, if organized, is the strictly limited that the attempt to create a futures market is totally that create limited to futures strictly totally attempt unsuccessful? Are any any of these commodities commodities adaptable trading, unsuccessful? of these futures trading, to futures adaptable to if so, and, the reason reason for the absence of markets? for the is the of exchange so, what is and, if exchange markets? A commodity commodity may may possess possess all the inherent inherent characteristics all the that make it it characteristics that adaptable for trading and yet yet be be without such a market because because for futures futures trading adaptable of conditions in in the the industry or because the trade has not yet come to of to or trade because the yet industry a full full realization realization of of the the usefulness usefulness of of futures trading. It requires more It requires futures trading. than the of the the commodity the inherent characteristics characteristics of a futures futures to make a commodity to market. These must be present, present, but but they they must also be coupled also be coupled with a futures condition in in the the trade trade and the the related related industry which aa futures makes industry market a logical in the natural step the development distributive of distributive logical and natural step in development of methods. To illustrate, may take take aa few of methods. the commodities ment.ioned mentioned of the illustrate, we may
Commodities Adaptable Adaptable to Futures Trading to Futures Trading
121
and inquire further into into their their possibilities possibilities as as subjects of futures futures markets. markets. inquire further subjects of Metal Exchange The Metals. Metals. The London ,Metal Exchange was was for many years a for many years a futures trading factor in in futures trading in in the metals. In London's long long leading factor the metals. In fact, fact, London's leading control over tin tin prices prices has has been ascribed in no small measure to control over ascribed as as due in clue small measure to the presence presence of of an organized futures market in in that Trading the that center. center. Trading organized futures there was conducted conducted in the the four four principal principal non-ferrous metals-copper, there non-ferrous metals tin, copper, tin, of and zinc. Instead of having separate pits or rings and trading in lead, Instead zinc. lead, having separate pits or rings trading in the the four four metals metals simultaneously, they are taken up by one are taken one for for short short simultaneously, they up one by periods during each day. day. periods during are not These four four metals, metals, then, then, are not only to futures futures markets markets only adaptable adaptable to for years years have been the the subject of active trading. The organization but for of active subject trading. organization of National Metal Exchange in New York in was an effort of the the National in 1928 effort 1928 was Exchange in to active interest in metal to revive interest in metal futures markets in in this this revive and maintain active futures markets of the the usefulness of the market increased, it was expected that country. the usefulness As market it was that increased, country. expected for other other non-ferrous markets markets for non-ferrous metals metals would develop. in lead lead and develop. Trading Trading in zinc futures was started the Commodity Exchange, Inc. in 1934, but zinc futures was started on the Inc. in 1934, but Commodity Exchange, the the Second World War disrupted the sources of these sources of these commodities and disrupted the closed their markets. They have not yet been reopened. their markets. not closed have yet They reopened. in iron Iron. In Great Great Britain, dealing in warrants preceded iron warrants Iron. Britain, dealing preceded modern in full futures trading. trading. Scottish to keep keep their blast, Scottish ironmasters, furnaces in full blast, their furnaces futures ironmasters, to iron for for stock stock during periods of dullness in the often manufactured iron often manufactured of in dullness the during periods industry. This This process process naturally naturally involved involved substantial substantial:'1 ::'C :~, was !:. ',which which was industry. the iron in store. As the practice accomplished by borrowing against iron in the the store. accomplished by borrowing against practice their own developed, central storehouses issued their storehouses came into into being, being, which issued developed, central warehouse receipts. receipts. These warrants warrants served warrants or or warehouse as highly warrants served as highly acceptacceptbanking collateral. Dealing in in them had much of the aspect able banking able collateral. Dealing of of the aspect of modern futures futures trading. trading. The market, market, however, was not generally servicenot servicehowever, generally able to the distributing distributing and converting able to the the warrants warrants were trades, although converting trades, although the valuable for financing financing purposes. purposes. There was little to the the valuable for little or or no recourse recourse to hedging purposes. purposes. for hedging market for The growth growth in in recent recent years years of of integration integration in the iron industry in the iron and steel steel industry in the the United States-mergers own mines, iron furnaces, rolling which in iron mines, furnaces, Statesmergers rolling mills, and converting mills, devoted to specialized forms of steel devoted to forms of manusteel mills, converting mills, specialized facture, such rails and plates plates-has market for hedging a futures has made a as rails futures market for hedging such as facture, in and in iron in iron in steel products. Pig iron, however, purposes unnecessary steel iron, however, products. Pig purposes unnecessary in price, is subject to wide wide fluctuations price, and the risks incident these the risks fluctuations in incident to to these is subject to iron in in manufacmajor hazards hazards to to the the users users of pig iron manufacprice changes of pig changes remain major price may in time be developed. ture. futures market may in time ture. A futures developed. are many Other Commodities. Naturally there there are many commodities which do Commodities. Naturally in due time develop not now have have futures markets, but may may in them. In the the futures markets, not develop them. market the of of every commodity the problems of grading assume evolution of evolution problems grading every commodity the industry greater greater importance, changing conditions in the industry must conditions in importance, changing greater and greater fii
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.
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
122
a considerable of be carefully considered, and there there is is always considerable degree degree of always a carefully considered, to be be overcome. overcome. Some of these commodities in in inertia or of these inertia or antagonism antagonism to futures markets markets would be be of of benefit benefit to to the the trades trades and related which futures related industries include petroleum, jute jute (and (and its manufactured product, burinclude petroleum, industries its manufactured product, bur-
lap), rice, wood pulp, pulp, tobacco, tobacco, scrap scrap iron, hemp. iron, sisal, sisal, and hemp. lap) rice, The constant improvements in the field in the field of of refrigeration, constant and substantial substantial improvements refrigeration, both for and transportation purposes, are greatly expanding the both for storage are greatly expanding the storage transportation purposes, in otherwise would be unsuitable possibilities of exchange trading in be unsuitable of what otherwise exchange trading possibilities commodities because because of their perishability. perishability. Futures is already commodities of their Futures trading already trading is in butter, eggs, lard, and hides, all of which require refrigorganized in all of hides, butter, eggs, lard, organized require refrigeration to adaptable to to futures the to make them adaptable eration futures trading. Furthermore, the trading. Furthermore, in the uniformity of quality, of production, and other conditions in the conditions of volume of other uniformity quality, production, of canned goods field of goods open open up up increasing for development field increasing opportnnities development opportunities for It is of exchange exchange trading trading in fruits, vegetables, vegetables, fish, possible in fruits, meats. It is possible of fish, and meats. that futures futures markets markets will will evolve as instruments of price protection in that as instruments of evolve price protection in many of of these fields where they they have have not not hitherto hitherto been been known. these fields many As an illustration illustration of of the the possibilities possibilities of of refrigeration, the following refrigeration, the following resume operation by by the the Commodity Commodity Exchange, was underof an operation underrsum of Exchange, which was is highly instructive, of hides, of refrigeration refrigeration of instructive, as taken to test test the the value value of as taken to hides, is highly well as as interesting. well interesting. in 1929, it was the hide hide futures futures market market was was established was generally established in When the 1929, it generally that accepted in the hide trade and the tanning industry that green salted the hide trade the green salted tanning industry accepted in six months not be be stored refrigerated warehouses beyond beyond six hides in refrigerated could not stored in hides could without the risk of the Tanners Council for the chemist for of deterioration. deterioration. The chemist the risk without if hides thought differently. that, if hides of America, however, however, thought of America, differently. He contended that, at least least two years were properly properly refrigerated, refrigerated, they they could be be stored years stored for for at were without deterioration. without deterioration. a quantity accordingly, purchased hides of hides The Commodity Commodity Exchange, Exchange, accordingly, purchased a quantity of and stored refrigerated warehouses. One year later in approved warehouses. stored them in year later approved refrigerated out of of the the warehouse and distributed 2,000 of these hides hides were were taken taken out distributed for for of these 2,000 tanning among four of the leading tanners in the country. The resultant four in of the resultant the tanners country. tanning among leading be aa perfect perfect product product-as tanned from leather proved proved to to be as good as leather leather tanned leather good as in warehouse for current production. After After the the hides hides had been been in years, for two years, current production. another lot was taken out and distributed for tanning among the lot of of 2,000 was taken out distributed for another 2,000 tanning among the in quality same tanners. resulting tanned tanned leather was equal to leather leather tanners. The resulting leather was quality to equal in tanned hides which had been been warehoused warehoused for three months. three tanned from hides for only only As aa consequence, it is the hide hide trade a~d in in the is now generally accepted in trade and the generally accepted in the consequence, it that tanning industry that hides can be refrigerated for at least years withleast two withhides can be for at years tanning industry refrigerated out deterioration. deterioration. The Commodity Exchange, of practicing what out of course, course, practicing Commodity Exchange, its leather, which was was the the product of these its members preach, hedged. The leather, these preach, hedged. product of hedged hides, was sold at various times over three years and the hedges the hedges sold at various times over three years hedged hides, ,
Commodities Adaptable Adaptable to Futures Trading to Futures Trading
123
were closed proportionately at the same time. entire operation, at the closed out proportionately time. The entire operation, of hedge because easily financed without because of hedge protection, protection, was easily financed and conducted conducted without any loss or expense to the Exchange. or to the loss any expense Exchange. value of of the the world's world's wool wool crop Wool. The value that of of cotton. cotton. crop approximates approximates that The chief for years chief difficulty difficulty which for years was was considered the major major obstacle as the considered as obstacle in wool to futures trading in wool was was the the problem to futures trading of standard standard grading. problem of grading. The principal wool-growing wool-growing areas areas are are Australia, Australia, New Zealand, United the United Zealand, the principal States, Great Britain, South Africa, and South America. Differences natunatuGreat Differences America. States, Africa, Britain, exist in in wools wools which are the product product of However, rally exist of different are the different climes. climes. However, rally 85 cent of 85 per cent of the domestic wools fall into eight approximately the domestic wools fall into per approximately eight gradesgradesfour four "fleece" wools, raised raised east east of the Mississippi Mississippi River; River; and four "fleece" wools, of the four "terri"terriin raised in the trans-Mississippi states. Considerable study was tory" wools, raised the states. Considerable wools, tory" study was trans-Mississippi of wool given to the the problem problem of wool classification classification and standard standard grading. given to grading. The work accomplished by the United States Department of Agriculture inthe United States of accomplished by Department Agriculture ina less in that this less formidable formidable obstacle to futures in wool dicated this was a obstacle to futures trading dicated that trading than appeared to be. be. it had formerly to than it formerly appeared for years textile trade trade where producers, producers, was for years the the one important Wool was important textile dealers, and converters converters in in the the United States remained without without the the States remained dealers, were benefits of of futures trading, although active futures markets operating futures markets futures trading, active benefits operating although in Belgium. Fluctuations of domestic in the domestic and foreign Fluctuations in in France France and Belgium. the price foreign price of been sharp extensive, and such conditions operators wools had been and under such conditions wools extensive, operators sharp their acumen alone. alone. They in trade were were forced to depend depend on their in the forced to the trade They had perforce to to carry carry on on their their business business in in large part as Yet wool as speculators. large part speculators. Yet perforce to The wide was in in most respects respects admirably adapted to futures trading. futures admirably adapted trading. fluctuations in its its price price brought brought about about by by changing fluctuations in changing demand and supplysupplyvarying because of droughts, disease, and a competing demand for sheep a because of for disease, droughts, varying competing sheep as food-unite with the the elements use, homogeneity, homogeneity, and elements of of world-wide unite with world-wide use, as food in wool durability it eligible. eligible. Finally, Finally, trading wool tops tops futures futures was to make it trading in durability to York as a part of the Cotton Exchange in 1931, and in 1941 organized in in a the as of New Cotton 1941 1931, Exchange organized part trading was inaugurated wool. in grease trading was inaugurated in grease wool. Petroleum. Few industries industries have have passed passed through through such periods such frequent Petroleum. frequent periods 2 famine as as the the petroleum petroleum industry.2 of feast feast and famine of industry. The prosperity prosperity in in the the petroleum petroleum industry in the First World the First industry generated generated in War was terminated in 1921, from then until the Second World War in and then until the was terminated 1921, the problem was was largely the market problem largely a struggle against oversupply, struggle against oversupply, with new and at frequent intervals pouring flush production on the areas opening at flush intervals the areas frequent pouring production opening of large development of in Calimarket at at distress distress prices. prices. The development Calilarge production production in fornia, coupled with cheap transportation through the Canal, the Panama with fornia, coupled Canal, cheap transportation through 2 2 In In the the early development of the petroleum petroleum industry in the part of of the the eastern eastern part of the the industry in early development for crude oil United States, market for operated for for some oil was organized a futures futures market United States, a organized and operated with active trading at City, Pa. Pa. years at Oil Oil City, active trading years with
124 124
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
in 1925. served unsettle the the markets markets in After a brief brief recovery, oil to unsettle the oil served to 1925. After recovery, the markets again the flush production from the the as the flush production markets demoralized, as again became demoralized, Semi no le field poured forth forth in in 1926-27. field poured Seminole 1926-27. Co-operation self-regulation within within the arose from necesnecesthe industry industry arose Co-operation and self-regulation in an effort effort to to prevent prevent waste waste of resources through through maintesity in natural resources mainteof natural sity nance of of aa balance balance between production production and demand. This effort effort was nance production by followed by by official official regulation regulation of of production followed individual states states and, and, by individual in 1933, by federal federal restrictions restrictions under under the National Industrial Industrial in the short-lived short-lived National 1933, by Recovery Act, which was followed followed by federal legislation in support of Recovery Act, by federal legislation in support of state regulation of production until until the the Second World War, War, when demand of production state regulation for purposes shifted the emphasis emphasis from oversupply for war purposes shifted the to maximum oversupply to production. In 1940-48, as in 19l4-1920, there developed in the United United in in as there the 1914-1920, 1940-48, developed production. substantial petroleum States petroleum shortage, appears likely to necessitate States a a substantial which to necessitate shortage, appears likely increasing imports over the coming coming years. years. over the increasing imports It would appear appear that that the the petroleum petroleum industry might benefit greatly It benefit greatly industry might overproduGtion exists, oil goes into storage. from hedging hedging facilities. facilities. When overproduction oil into exists, goes storage. When shortages exist, imports storage become necessary. necessary. Stored Stored oil, oil, shortages exist, imports and storage is an expensive process. however, represents locked-up capital, and storage is however, storage represents locked-up capital, expensive process. It is is necessary necessary to to note note the the manner in in which crude crude oil oil is marketed. The It is marketed. producer receives receives aa price price which reflects reflects generally generally the the condition of of supply supply producer in the demand. Price Price schedules schedules are are established various oil the various established in oil fields, and demand. fields, and in response these move upward upward or response to to competition or downward in in these competition and in accordance with changes changes in the volume of in the of consumption accordance with consumption and production. production. Similarly, price schedules for refined products are established by the the refined for are schedules established Similarly, price products by refiners. refiners. If conditions in the industry industry were were such that that prices prices quoted the same in the in the If conditions quoted in the territory differed to appreciable extent, the usefulness of a futures usefulness an of a differed to futures extent, territory appreciable market would be more apparent. As it is, the keen competition in the the it is, the apparent. competition in industry causes causes prices prices of refiners in to move in the the same territory different refiners of different territory to industry upward with considerable uniformity. The development and considerable downward with uniformity. development upward of the Big Inch and other other pipe pipe lines lines across the continent the across the continent during of the during the Big Inch Second World War should stimulate stimulate the of futures trading the possibilities of futures possibilities trading in petroleum. petroleum. Under present present conditions, conditions, petroleum petroleum may may be classed as aa in classed as adaptable to futures trading, with the marketing problem commodity the marketing problem and commodity adaptable to futures trading, state regulations the the principal in the conservation regulations difficulties in or federal federal conservation the state or principal difficulties of way of the efficient working of a successful futures market. futures efficient successful the of working way Coal. the anthracite bituminous branches branches of the cqal indusanthracite and bituminous of the Coal. Both the coal indusand try have also their ups over the years, with the downs had their downs over the also with have the years, ups try been felt uncomfortably prevalent. prevalent. Competition Competition from fuel has been oil has fuel oil felt uncomfortably recent years, years, and the the country's increasingly in in recent for country's productive productive capacity increasingly capacity for far in needs. bituminous coal in excess excess of of its its present needs. Largely as a conseis far coal is as a bituminous consepresent Largely free market, quence, between between 1933 coal has has not had a free market, but but has has 1933 and 1947 1947 coal quence,
Commodities Adaptable Adaptable to Futures Trading to Futures Trading
125
been controlled controlled by by the the federal federal government government under the the rigid rigid price-fixing price-fixing devices established by devices established by the the National Industrial Recovery Act, the subseIndustrial Recovery Act, the subsequent regulations of the National Control Act, and emergency of the National Coal conControl Act, regulations quent emergency controls trols
during the the Second World War. It the It became a a free for the free commodity during commodity for first time first time in in fourteen years years on July July 1, 1947, with the expiration of war the expiration of 1, 1947, controls. controls. In coal, in the difficulties exist the relatively relatively high exist in costs as as compared coal, difficulties high storage storage costs compared in grading. price and in Size, condition, and heat values are with price heat values are all all matters matters grading. Size, condition, to be taken taken into consideration. Coal mined at pit is likely to to to into consideration. at the the same pit is likely show considerable variance. variance. Assuming Assuming that that coal coal can be scientifically scientifically graded, as as is is most likely, it possesses possesses durability, a demand which fluctuates fluctuates graded, likely, it durability, a to with the the length length and mildness mildness of seasons and to to some extent to some extent with of seasons extent the business with the business cycle, cycle, and aa supply may be estimated, but is fairly which but is be estimated, may supply fairly uncertain. The principal principal problem problem in trading in in uncertain. in connection connection with futures trading with futures coal, as in in petroleum petroleum to to aa much less less degree, lies in the market, market, which is in the is coal, as degree, lies limited to substantially limited to arbitrary zones by freight rates that are relatively zones rates that are substantially arbitrary by freight relatively heavy in proportion proportion to to the the price price of of coal. there is coal. Consequently is no such heavy in Consequently there at present thing present as national or or world coal market. Furthermore, as a a national coal market. the Furthermore, the thing at and ability willingness of coal producers to contract for industrial delivof coal industrial to contract for delivability willingness producers far into eries into the the future future in in large large volume at prices make the eries far at negotiated the negotiated prices a need of a hedging market appear less apparent than it really is. of it really is. hedging appear less apparent Conclusions. First, the the qualities of uniformity, imperishability, Conclusions. First, of uniformity, imperishability, and qualities uncertainty of demand supply must of in a a commodity and be inherent inherent in uncertainty commodity supply or connected with its use, if it is to lend itself to exchange trading. if its it to itself to with is or connected use, Second, exchange trading. Second, the conditions it is is marketed are are important. the conditions under which it important. It is evident that adaptability adaptability of commodity and of also that of the It is evident also the commodity the market of the must coexist coexist before before futures futures trading trading can be developed successfully. developed successfully. A commodity which may may be be scientifically scientifically graded the price of which commodity graded and the price of is subject to relatively and frequent fluctuations is fluctuations is admirably to wide is admirably adapted relatively subject frequent adapted to futures Unless its is restricted or its market futures trading. Unless is restricted or under close close and to trading. effective control, in in the the course course of time trading trading in develop. of time in futures futures may effective control, may develop. Sharply and constantly fluctuating prices may give rise to such heavy rise to constantly fluctuating prices may give heavy Sharply speculative risks that an exchange will be a natural evolution to bring that will risks natural evolution to exchange bring speculative such risks under control. control. such risks
CHAPTER ~ CHAPTER
VII VII
~
Exchange Contract The Futures or or Exchange
at the reveal a a section section A glance glance at the financial financial page page of will reveal of any any newspaper newspaper will as as those devoted to to daily daily transactions transactions in the commodity markets, as well as those devoted in the well markets, commodity of of the the various various stock stock exchanges exchanges of the country. Prices are quoted, of the Prices are country. quoted, with
summaries of of the the day's day's fluctuations in wheat, rubber, sugar, fluctuations in cotton, wheat, corn, corn, rubber, sugar, cotton, coffee, hides, hides, cocoa, many other staple commodities. Opening, coffee, cocoa, and many high, Opening, high, staple and are all for low, closing prices are given for all these commodities, only for for these low, commodities, not only closing prices given immediate or or spot in the the current month, but also deliveries for deliveries current month, also for delivery in spot delivery in in various future months over the the ensuing ensuing year or more. or year Physical (Cash Spot) Markets and Futures Futures Markets. Markets. Unless one Physical (Cash or Spot) is an observant reader, reader, he will will be be decidedly confused, there will will is for there decidedly confused, for appear to be be not not one market, market, but two two or for each comor more markets for appear to in modity in each trading center. Part of this confusion is due to to the is the this confusion center. of Part modity trading various for these these markets. markets. In each commodity one reads trade names for reads various trade commodity of the actual, physical, physical, cash, cash, or spot market on the the one hand and of of of the actual, or spot paper, futures, contract, exchange markets on the other. Careful the and other. futures, contract, exchange paper, reading that there there are, in fact, fact, two markets for discloses that for some commodiare, in reading discloses one for others. ties and only ties for others. only For some commodities-those commodities those which have no commodity commodity exchange-as exchange as in petroleum, is the petroleum, coal, coal, burlap, burlap, tea, tea, many many metals, metals, and aa large large is the case case in in of miscellaneous miscellaneous staples staples-there one market in each trading there is is only number of only trading center. This single is aptly the physical physical market, center. called the because market, because single market is aptly called it is it in the the actual or physical physical article; article; it also called market, actual or is also called the it deals the spot deals in spot market, because it it deals deals in in contracts the immediate delivery on spot the for the because contracts for of the delivery spot of is called physical merchandise; merchandise; and it it is the cash because its called the cash market, its conconmarket, because physical payment of the full price in tracts usually call for payment full contract call for of the in cash tracts usually contract price cash on delivdelivbest term for for this this market, market, however, physical market, ery. The best is the the physical for however, is market, for ery. it deals in spot lots ready for immediate delivery, but also trades in it not only deals lots for also trades only delivery, spot ready in in contracts forward deliveries deliveries of of the moreover, though though contracts for for forward the commodity; commodity; moreover, it in contracts of sale it does does deal contracts of sale which call its condeal in call for for cash on delivery, its condelivery, 126 126
The Futures Futures or Exchange Contract or Exchange Contract tracts also frequently tracts also frequently
127
provide for for payment payment on credit for credit terms terms calling calling for provide
payment 30, 30, 60, 60, or or 90 90 days after delivery. delivery. payment days after In addition to the the physical physical market, market, there is for many commodities commodities aa addition to for many there is second market, market, variously variously called the exchange or contract or paper or or called the or contract or paper exchange futures market. market. Here again, again, there there is truly descriptive futures is one truly namethe descriptive name-the exchange (or, if one prefers, the futures market, as it is more market if as it one the is market, futures exchange (or, prefers, commonly, but less appropriately called) . To call it the contract market but less call it contract market the commonly, appropriately called) that the implies the physical physical market market does does not in not deal in contracts, while in deal in contracts, while implies that it does. it the fact it does. To call call it the paper paper market implies that in the exchange fact in that the exchange implies market alone alone are are contracts contracts made which are are settled contracts settled by by offsetting offsetting contracts and payment payment of of price price differences, differences, whereas whereas in portion in fact fact a a substantial substantial portion all physical market contracts of all of are so settled without actual delivery contracts are so actual of settled without delivery of physical the commodity. call the call the exchange the futures market (as is market To the futures the commodity. exchange (as is the that the the common practice) practice) is is to to imply imply that the physical does not physical market does in contracts deal in in fact deal for forward delivery, delivery, when in the great great majority contracts for fact the majority the contracts of of the the physical physical market call of the contracts of call for in future for delivery future months. months. delivery in it is is more appropriate, appropriate, more realistic, realistic, and less Consequently less conducive conducive Consequently it to to misunderstanding misunderstanding to to speak of the commodity markets as the of two as the the commodity speak the physical and the exchange markets. markets. physical exchange It should be It be made clear, however, that these two, the that these the physical clear, however, two, the physical and the exchange markets, though distinctly separate and independent and permarkets, exchange though distinctly separate independent perin effect forming different functions, are different functions, are in effect but one market with two sepaforming separate or divisionsfor divisions-for those those commodities which have the rate compartments the compartments or benefit of One, the exchange market, is a later development, of an exchange. a benefit the later is One, market, exchange. exchange development, as an auxiliary to the the physical physical market, market, organized to perform perform new services as services auxiliary to organized to vital economic functions the physical physical market is to functions which the and vital able to is not not able in It should borne in mind, however, that the physical market perform. It be that borne the mind, however, perform. physical deals in in contracts for both spot spot and forward deliveries, the contracts for deals deliveries, though though the majority of of its its trading trading is forward delivery, is for for forward whereas the the exchange majority delivery, whereas exchange in properly deals in contracts for future delivery of the market properly deals only contracts for future the comonly delivery of an extremely small portion portion of the exchange exchange contracts, modity. Only of the contracts, modity. extremely small Only and the balance are settled however, are are ever ever consummated by by delivery, are the balance settled however, delivery, and by offsetting contracts payment of cash differences; on the other hand, contracts other of cash the differences; hand, payment by offsetting aa great majority of of the the physical physical market market contracts by contracts are are consummated by great majority relatively only a few (as compared with the exchange condelivery and a the few condelivery relatively only exchange (as compared payment of of cash tracts) are by payment are settled settled by cash differences. differences. tracts) The f,;mdamental purpose of of traders traders in the physical physical markets fundamental purpose in the is to to make markets is of or take take actual actual delivery of specific grades of the physical commodity of the or delivery specific grades physical commodity when the contracts contracts mature to to delivery date. Settlement of date. Settlement the of offsetting contracts delivery offsetting contracts as aa common-sense practice practice to to avoid unnecessary, unnecessary, costly, develops only as costly, develops only and illogical illogical deliveries deliveries and counter the other hand, the counter deliveries. deliveries. On the other hand, the fundamental purpose purpose of the traders in exchange contracts is primarily of the traders in exchange contracts is primarily .
uS
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
not to to make or or take delivery, but but to to cancel purchase by by an cancel out every take delivery, not every purchase all deliveries deliveries and setoffsetting sale vice versa) versa),, thereby thereby avoiding setsale (and avoiding all (and vice offsetting tling all differences by cash cash payments. payments. While the buyer or seller on the the the buyer or seller differences by tling all exchange may, if he so chooses, take or delivery on exchange contake or make if he so conchooses, delivery exchange may, exchange for he primarily he will will usually usually offset them, for primarily uses uses the the exchange tracts, he offset them, tracts, exchange contract as an insurance or for for speculation; in either case, he wants wants in either he insurance device device or contract as case, speculation; to neither to delivery nor nor to to take take delivery, but desires to settle all all to make delivery but desires settle neither delivery, contracts by by cash cash payments. payments. contracts To understand understand this this somewhat confusing picture of the commodity of the commodity confusing picture it should be recalled our earlier discussions that the markets, that the it be recalled from discussions earlier markets, development in the commodity marcommodity exchange a later later development in the commodity exchange was a commodity marhad kets. the exchanges were conceived, the physical markets markets were the Before the kets. Before conceived, exchanges physical already been organized, with standardized grades and various uniform various already organized, with standardized grades contracts for various various specific specific grades Tradcontracts for circumstances. Tradvarious circumstances. grades and various ers markets generally contemplated delivering the commoders on such such markets the generally contemplated delivering ity under every contract of of sale sale or taking delivery conor taking ity every contract delivery under every every contract of purchase. purchase. Yet, Yet, even even in in the the physical physical markets markets before before the tract of the developdevelopthe exchanges, especially in those fields where the exchange ment of of the in fields the those exchanges, especially exchange was in rubber, organized very very late late-as rubber, hides, hides, wool, wool, cocoa, as in silver cocoa, copper, organized copper, and silver -there a large of trading for forward delivery a volume of for there had developed large delivery developed trading among the producers, producers, dealers, dealers, and converters the trade. trade. in the converters in among the The question naturally arises-why arises why are are exchanges immediately and naturally exchanges question immediately in commodity necessary in markets which are dealing in forward in are already forward necessary commodity markets already dealing a answer is that the the exchange provides a form of price deliveries? deliveries? The answer is that of exchange provides price and credit insurance which was not previously available. In the physical credit insurance not previously available. In the physical find a a buyer, market it it is is possible possible for for aa producer producer at at times to find usually aa times to buyer, usually a or aa converter, may be willing willing to to pay a satisfactory price dealer or dealer converter, who may satisfactory price pay for specific quantities and specific grades of cotton, rubber, or coffee to for specific quantities specific grades of cotton, rubber, or coffee to be delivered delivered in certain specified specified months in the future. Likewise, the be in certain in the future. Likewise, the at times dealer or may at times be be able to buy from producers certain or converter able to dealer converter may certain buy producers quantities of of the the commodity he needs needs for specific grades and quantities for delivery in commodity he specific grades delivery in certain certain specified months. However, there is never any assurance that months. there is never assurance that However, any specified the buyer will will always be able able to to find satisfactory seller willing and the buyer find a a satisfactory seller willing always be the specific able to grades and quantities able to sell sell the for specific at deliveries at specific grades quantities for specific deliveries of the time the buyer buyer wants wants him. him. The possibility of such forward purthe time when the forward possibility purchases in any any large large quantity times is chases and sales sales in at all all times is very uncertain. quantity at very uncertain. Frequently there there are are sellers sellers without without buyers, buyers, and vice vice versa. versa. Often Often the the Frequently seller not know or or like like the the credit of the buyer, or vice does not credit standing seller does the of or vice buyer, standing the seller in one one country the buyer buyer in versa. is in seller is versa. Frequently in another, another, Frequently the country and the with aa different different currency. Usually each trader wants wants to to do business business each with each each trader currency. Usually in terms his own laws laws and in terms of of his Again, traders under his his own currency. traders do currency. Again, not in deliveries not like like to the risks risks of of defaults defaults in to run the or payments deliveries or for delivdelivpayments for
The Futures Futures or Exchange Contract or Exchange Contract eries eries
12 129 9
and ensuing ensuing lawsuits lawsuits which may may involve action in in forforinvolve taking legal action taking legal eign countries or distant states. distant countries or states. eign In words, in the physical physical markets markets there there is in the other words, is no continuous market In other all sufficiently to absorb all potential potential transactions transactions for delivfor forward delivsufficiently large large to of eries without sharp disruption of prevailing prices. There is assurance eries without no assurance is sharp disruption prevailing prices. that such transactions transactions can ever ever be made in in any that any large large volume when they they are needed. There is no certainty that the contract, if made, made, will is will be are needed. certainty that the contract, if consummated at at contract contract time. time. Default Default by by either buyer or is either buyer or seller seller is to the possible protection to the other against default and heavy losses. without other default losses. against protection heavy possible Finally, in in the physical market, market, except rare cases in rare the physical cases when operating Finally, except in operating without of an disclosure the the through agent disclosure of the principals, the buyer or through agent principals, buyer seller always disclose disclose himself himself as as such and "show his his hand" at seller must always at least least through brokers, when it it may may not not be be to to his his advantage to do so. so. advantage to through brokers, In addition addition to to the the price price insurance insurance function, and the exchange market function, the exchange its clearing house house establish machinery by by which these various defects in its clearing establish machinery these various defects in A the physical market can be be remedied. remedied. continuous market-able market able and the physical all transactions, at willing to absorb at any time during the trading day to time the transactions, during trading any day all willing of regardless of volume, without serious disruption of prices-is assured by serious without of is assured by volume, disruption prices regardless the exchange. to the buyer in in the the the buyer the Its clearing clearing house guarantees delivery to guarantees delivery exchange. Its and to the seller contract months specified guarantees to the seller payment of the of contract the guarantees payment specified of delivery contract price, whether whether or not at at time time of is sharply the market is or not contract price, delivery the sharply up or down from the contract price, thereby protecting buyer contract both the price, thereby protecting buyer and up or seller the other's Finally, if if the buyer or default. Finally, the buyer or seller seller desires other's default. desires to seller from the to act act without disclosure disclosure to to the the trade trade of of his his identity identity or presence in the market, market, or presence in the the of the the exchange enables him to to do so. so. the machinery machinery of exchange enables the trade, In order order to render these these services services to to the the commodity to render In trade, the commodity exchange exchange into its machinery large speculative funds and the professional specugears the into its machinery large speculative gears professional speculator. It makes available to all all members of the trade peculiar kind kind of of of the trade a peculiar available to lator. It aa contract, contract, called the futures futures or or exchange exchange contract. a called the It also contract. It also establishes establishes a clearing house to guarantee deliveries and payments on all its cleared to deliveries house all its cleared guarantee payments clearing contracts. contracts. the Futures Development of of the Futures or or Exchange Exchange Contract. the Contract. A sample of the Development sample of in daily reports in the press of the price movements on commodity exchanges the of the price press daily reports commodity exchanges is in the the following summary (Insert prices on on is shown in of prices following summary (Insert facing facing p. p. 130) 130) of United States of the domestic exchanges of the States on February 5, 1948, as pubdomestic as 5, 1948, exchanges February published in the the following the New York Journal of Commerce the lished in Journal of following day:day: of consummated exchange The quotations the prices prices of contracts quotations are the exchange contracts The for future future delivery. futures contract is the distinguishing contract is the futures for characdelivery. distinguishing characthe teristic of the commodity exchange, with the operations of which this of teristic this commodity exchange, operations of Although time time contracts in the is primarily concerned. book is contracts appear the primarily concerned. Although appear in or the is physical markets, the futures or exchange contract is essentially a contract a markets, modern exchange physical essentially American institution, of necessity necessity in the development of the the vast institution, born of vast development of
.
, • Commodity Futures Trading in Detail • IGrainS-cbl.,....
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The Futures Futures or or Exchange Exchange Contract Contract
131
of grain, grain, greatly greatly augmented receipts at at Chicago the of augmented receipts Chicago and made necessary necessary the establishment of of many many warehouses, warehouses, that that is, elevators for for storing establishment is, grain grain elevators storing faster than they vast supplies arrived faster they could be sold for milling arrived which could be sold for vast milling supplies consumption. consumption.
A
system inspection and grading upon followed close close upon system of inspection grading followed facilities. The elevators the growth growth of terminal facilities. negotiable receipts elevators issued issued negotiable of terminal the receipts of which showing the grade and amount of grain was stored. These receipts, the stored. grain grade showing receipts, of wheat of evidencing title to to so many bushels bushels of a certain so many of a certain quality, were evidencing title quality, were of to lots of capable of transferring title to specific lots grain, passed from of title when transferring specific grain, capable passed trader to to hand by by endorsement from one trader dealer. to another. another. The dealer, hand to could sell his and transfer it to the buyer by mere delivtherefore, sell his wheat transfer it the could to delivtherefore, buyer by ery of the elevator elevator receipt receipt-aa negotiable negotiable document of of title. title. of the ery 1£ a sale be effected by delivery delivery of receipt, then then anyof an elevator elevator receipt, effected by sale could be If a anyturn his body who anticipated declining prices could turn his belief to commercial belief to anticipated declining prices body advantage, even even though though he he owned no grain. to one short to sell short advantage, grain. He could sell for an merchant and borrow from some elevator receipts for elevator warehouse receipts sold. These receipts amount of of grain grain equivalent equivalent to to the the amount sold. receipts he would deliver the buyer, buyer, but he would remain under the the necessity necessity of returnof returnto the deliver to time ing to the lender later, at a time agreed upon, receipts for an equivalent at lender for to the later, agreed upon, receipts equivalent ing of grain. If his grain. If his judgment judgment proved proved to to be correct, buy amount of correct, he could buy a at grain in the same at a later time, the price fallen, in amount later the had when the time, fallen, grain price and turn over to to the the lender the receipt receipt for lender the turn over for this this grain, grain, thereby thereby satisfying satisfying the loan. loan. If, contrary to to his his expectations, expectations, the the price the financial financial the If, contrary rose, the price rose, results would be a loss to the the short his obligation be short seller, loss to results would be seller, but his obligation in discharged in the way. the same way. discharged At first first the elevator receipts receipts represented represented specific lots of grain, but but the elevator of grain, specific lots of later they they represented represented merely merely grain of a given grade without regard to later grain given grade regard to for anyone specific lot, for of each grade is fungible. Thus developed of each is wheat one grade fungible. specific lot, developed any a system of trading trading in in grain for forward forward delivery. a for forward forward grain for delivery. This trading trading for system of deliveries "to arrive" was on the the physical physical market. market. The Civil gave Civil War gave "to arrive" deliveries impetus to the use use of contracts of of this and in 1859 the Chicago this sort, in of contracts 1859 to the the an impetus sort, Chicago in futures. Board of inaugurated the the first first trading trading in futures. Out of this of Trade inaugurated of this the simple development grew the concept of the modern commodity exchange. of the concept commodity exchange. simple development grew In the trade the the development development of the use of futures of the use of In futures contracts the cotton cotton trade contracts similar lines. the earlier proceeded along lines. In the earlier days, cotton days, when both cotton along similar proceeded and news news crossed the Atlantic Atlantic to to Europe Europe in vessels, little selling in sailing crossed the little vessels, sailing selling "to because of uncertainty of the uncertainty in Liverpool of the of arrival. arrive" in arrival. "to arrive" Liverpool was done because The advent the steamship, however, introduced aa new and hazardous hazardous of the advent of steamship, however, the factor the cotton trade between England and the South. The cotton cotton trade into the cotton factor into England faster but still traveled in in sailing sailing ships, ships, the news went by the steamers. The still traveled by faster steamers. of the risk to to the the owner of the cotton cotton was was now much greater, for the the news risk greater, for might have unfavorable effect on prices in England. By the time have effect an unfavorable time England. By the prices might cotton in the slow slow sailing sailing vessel vessel reached reached Liverpool, Liverpool, knowledge in the of factors factors cotton knowledge of
132
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
depressing price would have have preceded preceded it. it became a matter it. Thus it its price depressing its risk of vital necessity to eliminate this risk by marketing the cotton before before of vital necessity to eliminate this by marketing the its price price could be affected affected during during transit. transit. As a consequence, the custom the could be its consequence, arose of of taking bales which were being sail arose being shipped by sail taking samples samples from bales shipped by to Liverpool and offering for sale in New York "to arrive" at them at for in "to arrive" sale to Liverpool offering Liverpool; if a sale sale were not not effected the New York market, market, the effected in in the the samif a Liverpool; to as the vessel be sent by steamer to Liverpool as soon as the sailing ples as sent would be by sailing vessel Liverpool ples In at Liverwith its its cargo cargo of of cotton weighed anchor at the southern port. Liverthe cotton weighed port. pool the the samples the same "to offered on the "to arrive" arrive" basis. basis. samples were offered pool Then came the the trans-Atlantic trans-Atlantic cable cable and, and, with it, it, another step step forward in cotton marketing. marketing. Instead Instead of selling from sample "to arrive," of selling "to cotton in cotton arrive/' cotton sample of two months and in was now offered Liverpool "to sail" in one of in in Liverpool "to sail" offered in was during one named month. Instead of from of selling "to sail" sail" during New York "to selling wellsample, contracts contracts "by established, well"by description" specified an established, description" now specified sample, recognized nothing below low middling." middling." Active Active dealdealrecognized grade-"middling; grade "middling; nothing in New ing in these cotton contracts sprang up in York. Brokers scurried in York. scurried these cotton contracts ing sprang up to sail office to to office, office, buying buying and selling cotton to sail from around from office selling cotton southern ports ports in in various various months. In 1870 the New York Cotton Exchange Exchange was organized. the 1870 the organized. In time the two markets, the physical the exchange, each operating side by side, and the side the markets, exchange, operating physical by side, took on separate functions and characteristics, essentook characteristics, but each remained essenseparate functions tial to to the the other. other. One of the distinguishing characteristics of the exchange of tial of the characteristics the distinguishing exchange is the futures contract. For, as rule, an exchange a rule, the futures contract. For, market is as a furnishes exchange furnishes a in facilities for trading only in a single contract, in the physical whereas facilities for trading only the physical single contract, market trading takes place place in in many many uniform or or standard standard contracts, market contracts, one trading takes for each specific type. for specific type. A Futures Futures Contract Defined. Professor Professor Emery Emery defines Contract Defined. defines an exchange exchange for the future as as "a contract the future future delivery of some commodity, contract for future withdelivery of commodity, without to specific specific lots, lots, made under the the rules rules of of some commercial reference to out reference commercial body, in in aa set form, by by which the the conditions the unit unit of conditions as as to to the set form, of amount, amount, body, time the of are the quality, and the of delivery are stereotyped, and only the deterthe the deterdelivery stereotyped, only quality, left open the total total amount and the the price price is to the contractof the mination of is left to the contractopen ing parties." parties." 22 ing is clear it describes clear and it definition is describes the This definition the nature of of the the futures confutures confollowing description, however, is somewhat compretract. is tract. The following more however, description, comprehensive and brings brings out out those those features features of the futures disof the hensive futures contract contract which distinguish it the every day trade trade contract: it sharply contract: sharply from the every day tinguish futures contract contract may may be defined defined as as a contract the sale a stipulated A futures contract for for the sale of of a stipulated of some commodity of a a fixed fixed price amount of specified grade a future a specified at a at a future grade of commodity at price at date. Typically, it contains contains the the following following special First, the the specific features: First, date. Typically, it special features: specific 2 2 H. C. Emery, Speculation Speculation on the Stock and Imd Produce Produce Exchanges Exchanges of of the States C. Emery, the Stock the United United States (New York: Columbia University University Press, Press, 1896) p. 46. 46. 1896) , p. (New York: ,
The Futures Futures or Exchange Contract or Exchange Contract
133 133
provisions of the contract are determined by by the rules of of the the rules the exchanges, the of the contract are exchanges, the provisions actual bargain being being made in in a highly highly informal way. The rules and practices actual bargain rules way. practices of the are implied in each bargain. bargain. Second, contract is the exchange of the futures is futures contract Second, the exchange are implied in that the aa basis that the commodity delivered it may be which means under it basis contract, delivered be contract, commodity may either of of the the "contract of some other grade may be delivered "contract grade" either delivered grade which may grade" or of at the seller's at aa price price above or or below the price. The method at the the contract seller's option contract price. option at of determining determining the the differential differential varies varies in the seller in different of different exchanges. seller Third, the exchanges. Third, is given ,the option of making delivery at any date between specified limits; of at is the date between limits; making delivery given any option specified in this this country country at date within within aa specified Fourth, the at any in calendar month. Fourth, the any date specified calendar enforcement of of the the contract contract is is insured by by aa provision that a specified amount, that a provision specified amount, as a margin, third party known as margin, shall shall be be deposited with some third by each of the of the deposited with party by contracting parties. deposits are intended to protect the seller against These are to the seller against contracting parties. protect deposits a refusal refusal of of the the buyer buyer to to make good good his his contract in prices, prices, and, and, a in case of a fall fall in case of contract in default the to a seller's case conversely, to protect the buyer against a default on the seller's part in case the buyer against part conversely, protect of for the of aa rise. rise. Fifth, Fifth, delivery is effected by delivery of warehouse receipts for the is effected of delivery by delivery receipts in in a warecommodity, be stored in a specific place-usually in approved warewhich be stored must commodity, specific place usually approved is situatcd. in the in which the situated. 33 the city the exchange houses houses in exchange is city in
It must be be restated restated for for the the sake that the the physical physical markets markets sake of of clarity clarity that of specific at specific ,till trade in for forward delivery specific grades grades at specific in contracts contracts for jtill trade delivery of times and that that such contracts are are standardized terms made uniunitheir terms standardized and their such contracts times and form under organized rules regulations of the trade association active rules of the trade association active regulations organized in trading center, center, just just as they are the exchange as they are under the in each each commodity commodity trading exchange organization. This restatement is necessary, for it is sometimes stated in is it restatement for is sometimes stated in necessary, organization. of some commercial error that all all transactions transactions "made under the the rules rules of error that body, in set form" are or futures futures contracts. contracts. in a are exchange a set exchange or body, Among the distinguishing features of an exchange features of or futures the futures contract contract exchange or distinguishing Among for forward delivery as compared compared with with a contract contract for on the physical the as delivery physical market in the is the the fact, fact, first first of all, that that in the exchange exchange contract the names contract the the date, of all, is date, the of buyer and seller, the price, price, and the the month of are the only of delivery the only are of buyer seller, the delivery terms which remain to to be be determined and filled whereas in the confilled in, in the conterms in, it is tract forward delivery the physical physical markets it is necessary necessary to to for forward tract for delivery on the in (a) of determine fill in the specific grade of the commodity which is the the is determine and fill specific grade commodity (a) the terms the being bought sold, (b) the terms of the sale, whether cash on delivof and cash delivsold, (b) sale, being bought of delivery, ery or cash cash 30, 30, 60, 60, or days from date date of or not or 90 days delivery, (c) (c) whether or ery or contract the contract contract is a "shipment" contract (merely obligating the seller to is a the seller to the (merely obligating "shipment" month deliver ship the parcel within a specific and deliver to the buyer the within to the the the specific buyer parcel ship "arrival" contract shipping documents) or an "arrival" contract (whereby the seller guarthe seller documents) (whereby guarshipping that antees that that the will arrive that in case it not he will arrive and in will it does case does not the ship he will make antees ship good delivery from other other sources) sources), (d) not the or not the conconthe delivery (d) whether or good on the tract is is F.O.B., C.LF., or or otherwise-trade terms which determine otherwise trade terms G & F, determine tract F, C.I.F., F.O.B., C marine will whether freight and insurance will be the responsibility the of the whether responsibility of freight It
,
s 8
Charles Hardy, Risk Risk and Risk Risk Bearing Bearing (Chicago: University of of Chicago O. Hardy, Charles O. Press, (Chicago: University Chicago Press,
206. 1923) pp. 205, 205, 206. 1923) • pp. ,
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
134 134 buyer or or the the buyer
title to seller fix the the time when title to the parcel passes seller and also also fix parcel passes from seller to buyer. buyer. seller to Furthermore, the exchange exchange contract, of the the quantity sold in the contract, delivery Furthermore, in delivery of quantity sold the can be be satisfied by tender tender of anyone of the commodity of of such grades of any one of can satisfied by commodity grades rules as by the exchange its current rules and regulations; current under its as are are specified the regulations; exchange specified by for consequently, the the exchange exchange contract contract is not for is not a specific for a specific grade, grade, but for consequently, as the seller chooses to deliver. Again, the exchange such tenderable grades chooses to deliver. the such tenderable grades as the seller exchange Again, contract requirements for margins to protect the the traders traders from default, default, for margins contract has has requirements to protect whereas the the contracts the physical physical market usually do not. Finally, contracts on the not. whereas Finally, usually of is made subject to the rules the exchange contract is rules and regulations regulations of the exchange contract subject to the in this the exchange, exchange, and all all disputes disputes that that arise the this case case usually arise in usually must be under arbitrated to the rules of the exchange, the to and to the arbitrated according rules of the the exchange, to according for forward delivery exclusion even even of the courts; courts; whereas whereas contracts of the contracts for exclusion delivery rules or may to the the physical physical market may mayor may not not be subject to the rules and on the subject trade not or regulations of a specific trade association and mayor may provide association of may may regulations provide specific for for compulsory arbitration under some such rules. rules. compulsory arbitration The Form of Futures Contract. Every commodity has the Futures Contract. Every of the commodity exchange exchange has aa standard standard or basis contract, adapted to the distinguishing peculiarities the or basis to contract, adapted distinguishing peculiarities in which its of its members trade. trade. The contract of the the commodity contract adopted commodity in adopted is typical of by the Exchange is other exchange York Cocoa of the New other contracts. exchange contracts. Exchange by typical The following the latest latest (1948) by the the by-laws by-laws of is the of that that (1948) form prescribed prescribed by following is exchange, the the observance observance of obligatory when contracts of which becomes obligatory contracts exchange, are executed by by buyers buyers and sellers: sellers: are
CONTRACT NO. 11 OFFICE OF ...................................................... ..
New York ................ 19 19 ....... . SOLD FOR
To 30,000 pounds pounds net net of beans (in bags of of cocoa cocoa beans of average 30,000 original shipping shipping bags average weight (in original weight (s) (s) for the of customary for the growth), the growth of any country or clime, including the or clime, customary growth) growth any country including new or or yet yet unknown growths, growths, deliverable deliverable from warehouses, warehouses, licensed by ·the licensed by the New Exchange, Inc., Inc., in in the the Port Port of York, between the the 1st York Cocoa Exchange, of New York, 1st and last the within last days of ................................ next, inclusive; the delivery within such time such time next, inclusive; delivery days is to be be at at seller's option, upon upon notice notice to to the buyer of six, or five the buyer of either is to either seven, seller's option, or five seven, six, days, as may be prescribed by the By-Laws or Rules; the cocoa is to be of any be the the as cocoa is to of be Rules; days, may By-Laws prescribed by any at the of ............ cents grade permitted permitted by by the By-Laws; at the price per pound pound for for cents per the By-Laws; grade price of the Standard grade and growths, with additions or deductions for other grades the with additions for other grades grade growths, growths according to the the rates rates of of the the New York Cocoa Exchange, Inc., existexist· and growths according to Exchange, Inc., ing on the afternoon of the day previous the date of the notice of delivery. to the the of afternoon of the the notice of delivery. ing day previous ,
The Futures Futures or or Exchange Exchange Contract Contract
135 135
Either to have the Either party party is is to the right right to to call call for variations of the for margins the variations as the of the margins as market for deliveries may for like like deliveries may warrant, warrant, which margins shall be kept good. shall be margins kept good. This contract contract is is made in in view view of, of, and in to, the By-Laws in all all respects the By-Laws respects subject subject to, and Rules and Regulations established by the York Cocoa Exchange, Inc., established the New Regulations by Exchange, Inc.,
and all differences and/or all differences disputes that that may may arise arise hereunder hereunder shall be settled settled shall be and/or disputes arbitration by arbitration pursuant such By-Laws, Rules, and Regulations. to by pursuant By-Laws, Rules, Regulations. For and in in consideration of paid, of one dollar dollar to to the the undersigned, in hand paid, undersigned, in
receipt whereof receipt with
is hereby acknowledged, the is undersigned accepts this contract contract hereby acknowledged, the undersigned accepts this all its all its obligations and conditions. conditions. obligations ........................................ (Seller) (Seller)
........•............................... (Buyer) (Buyer) calls Characteristics the Futures Futures Contract. the contract Contract. As stated, contract calls Characteristics of stated, the of the delivery of of standard and approved exchange grades. The by-laws for for the the delivery by-laws approved exchange grades. of the the exchange exchange provide provide that that one particular particular grade of shall be designated designated grade shall in the in the contract, contract, but but they they further further provide provide that grades may that other other specific may specific grades be delivered at in be delivered at the the option option of of the the seller. in the standard seller. The grade the named grade contract the contract a basis basis contract. basis contract is is the the basis basis grade, contract is is a contract. A basis grade, and the contract means that, that, although specific grade of the commodity contract one of the is commodity is although specific grade in specified in the contract, nevertheless other specific grades are tenderare tenderthe other nevertheless contract, specified specific grades at his his option, subject to price differentials able by the able by the seller, differentials determined to price seller, at option, subject price of the contract grade as the basis. basis. 44 On a physical physical market from the of the the price contract grade as the contract, however, only the specific grade sold can be delivered. the delivered. sold contract, however, only specific grade characteristic of of the the exchange exchange contract delivery may may A second second characteristic is that that delivery contract is be made between between the the first first and last last trading trading days the delivery be of the month, delivery month, days of and the the time time for delivery within within these these limits seller's option. limits is is at at the the seller's for delivery option. The contract unit (so many pounds, tons, or bushels) is always contract unit (so many pounds, tons, or bushels) is always fixed, fixed, and of the the margin margin requirement requirement is is an inherent inherent provision provision of the futures contract futures contract the is designed designed to to protect protect both parties parties from default. parties to default. Both parties to the the and is contract be of the exchange, although they may be acting of be must members the be contract exchange, although they may acting is concerned far for others. In so far as the exchange is as brokers brokers or as for In so the others. or agents as exchange agents all obligaeffect guarantee they are regarded regarded solely principals who in effect as principals obligasolely as guarantee all they are tions of their customer principal, for whom they act. Finally, act. tions of their customer principal, for Finally, delivery they delivery in accordance with with the the exchange by means of of is accomplished contract is in accordance accomplished by exchange contract in to the warehouse receipts receipts evidencing evidencing the the seller's title to the commodity in the seller's title warehouse commodity certificate of of quality by an official that official certificate amount named and accompanied quality that accompanied by it the grades grades recognized recognized by the exchange as acceptable the as for of the it is is one one of by exchange acceptable for a delivery. It should be recalled, however, that only a very small portion that small be It should recalled, however, only very portion delivery. of exchange are consummated by by delivery. contracts are of delivery. exchange contracts * is cotton· 4 Commodity Commodity exchange contracts are are usually usually basis contracts. An exception cottonbasis contracts. exception is exchange contracts to a basis second have, in addition to a basis contract, a second seed and silver. addition in oil and silver. Some exchanges contract, seed oil have, exchanges contract which calls calls for for delivery delivery of a specific specific grade, grade constitutes constitutes aa of a that grade contract which grade, where that of the the annual annual production. production. large majority majority of large
136
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
For each each of of these these contract characteristics there there contract characteristics For
is is a definite definite reason in detail in other chapfor its inclusion. discussed in detail in inclusion. Some of of them are are discussed for its chapit will will be helpful helpful to to state state first the reasons the existence of ters. Here it reasons for for the existence of first the ters. basis contracts. basis contracts. uniReasons for for aa Basis Basis Contract. any commodity were so If any so nearly Contract. If Reasons commodity were nearly uniquality that that every every single single unit unit of indistinguishable from of it it was indistinguishable in quality form in any other, there would be no necessity necessity for basis contracts, for basis other, there contracts, but most comany modities which are traded in in on an exchange many standardized standardized are traded modities exchange have many grades are well recognized in the trade and each of may are in of which well the which trade may be recognized grades farclassified into several several sub-grades. Onc of the most important and farclassified into of the One sub-grades. important reaching problems of of the the exchange of is the the determination of reaching economic problems exchange is the of such such grades shall allowed for tender against the number of which shall for be allowed against grades exchange contracts one shall shall be be the the basis basis grade. contracts and which one exchange grade. able to the various grades, tenderable basis contract A basis contract is is designed designed (1) (1) to make the various grades, tender commerthe against exchange contracts, truly representative of the normal commer· of contracts, truly representative against exchange cial for the cial demand and supply the commodity commodity on the the physical physical markets and supply for in in its its related industry, (2) to provide provide producers, producers, merchants, merchants, and manurelated industry, (2) to facturers with ample ample facilities facilities in the way of satisfactory facturers with in the of trading volume way satisfactory trading to ordinary commercial and for purposes, to both for for ordinary for hedging (3) hedging purposes, and (3) assure a sufficiently large percentage percentage of for tender tender or the commodity assure a of the sufficiently large commodity for delivery against exchange contracts to prevent squeezes and corners. to contracts corners. delivery against exchange prevent squeezes all the however, cannot permit permit dealing the various various The exchanges, in all exchanges, however, dealing in grades of of the the commodity commodity without without introducing introducing needless needless complication. grades complication. On the other other hand, hand, great great discrimination discrimination must be exercised the grades grades so that that the the exercised so are are commercially representative of the commodity and so selected to selected as to so as commercially representative of the commodity guard against the possibility possibility of the use exchange as of the of the use of the exchange as a dumping against the guard dumping not ground for grades not readily salable elsewhere. Commercial demand and for salable elsewhere. readily grades ground supply the foundation on which the the exchanges in deterdeterthus form the exchanges work in supply thus mining the the various various qualities qualities or or grades grades of be of the the commodity commodity which may mining may be in fulfillment fulfillment of a futures tendered in futures contract. such grades are adopted of a contract. Only are Only grades adopted as are are representative representative of of qualities qualities in in substantial substantial use use in the industry, industry, but but aa in the as substantial tenderable grades grades is is necessary to discourage corners of tenderable to substantial number of corners necessary discourage and squeezes. squeezes. are vitally The foregoing vitally important to producers, producers, dealers, characteristics are dealers, foregoing characteristics important to and manufacturers. manufacturers. There is is another group, however, whose activities are are activities however, group, highly important to the successful operation of the exchange, namely, to successful the of the highly important operation exchange, namely, the is not a specialist in grades the speculators. conis conspeculator is speculators. The speculator grades and is specialist cerned primarily primarily with simplicity. simplicity. His need is for a contract contract that that will is for will to or no attention details require attention to details or technicalities, but is clear and definite is clear definite technicalities, require in in its its provisions provisions and unvarying unvarying in in the the conditions conditions and obligations obligations which it it imposes. imposes. Considerations in Establishing Establishing Grades. ideal characteristics Considerations in Grades. "The ideal of characteristics of
or Exchange The Futures Futures or Exchange Contract Contract
a a contract contract grade grade are, are,
137 137
first, that that it it be be as possible, that that is, is, conas narrow as as possible, contain grain tain of as as nearly nearly equal equal quality it as possible, that it and, second, second, that grain of quality as possible, and, to a in contain enough grain to a corner in the contract grade normally make corner the contract enough grain grade normally 5 impossible."5 impossible/' contract grade, as the basis grade, The contract the basis also as is the the one one named grade, known also grade, is in it is in the the futures is usually usually representative representative of that grade grade of the futures contract; of that of the contract; it for which commodity for there is the greatest commercial use or that grade there is the use or that commodity greatest grade far the represents by by far the greater greater portion portion of production or which represents of the the annual production or are other inferior crop. There are other grades, inferior and some superior in quality some in grades, crop. superior quality to the the basis basis or contract grade. problem difficult or contract difficult of of determination and to grade. A problem of great great commercial importance faces the the exchange the in establishing of exchange in importance faces establishing the of grades shall be deliverable. There are several reasons which are number of be several reasons shall deliverable. grades for this. this. for If tenderable One aspect of the the question question has has already already been mentioned. 1£ aspect of a grades too small a proportion of the merchantable commodity, too small of the embrace commodity, grades proportion this is an open open invitation to artificial artificial price price manipulation. The result of result of invitation to this is manipulation. such be to to encourage thus such a a situation situation would be corners, thus encourage squeezes illegal corners, squeezes and illegal a impairing the usefulness of the exchange as a medium for hedging. The of the for the as usefulness exchange hedging. impairing hedger, in selling selling or purchasing relies relics on an orderly price relationrelationor purchasing orderly price hedger, who in his to undo his find it only to it disturbed by by a squeeze, ship, to find squeeze, when he comes to ship, only 66 he seeks may find the protection seeks fully or partly dissipated. hedge, find the or partly dissipated. protection fully hedge, may hand, the the tenderable tenderable grades not be too too numerous. other hand, the other On the grades must not has the the option option of tendering any by the of tendering deliverable by the The seller seller has any grade grade made deliverable a us say, eleven current by-laws of of the the exchange. exchange. If, If, let let us eleven grades of a commodof current by-laws say, grades 1 1 is in quality, ity are deliverable and Grade No. II the poorest poorest in grade is the this grade quality, this ity are deliverable in ordinary may be be the the one one which it hardest to it is to market in is hardest ordinary commercial may of the desirable grades channels. result is that the the less less desirable is that the commodity channels. The result commodity grades of may tend to accumulate for delivery on exchange contracts. The prices prices of of contracts. for accumulate to delivery exchange may tend all grades grades would then then be be adversely adversely affected, for the the buyer buyer would be all affected, for if he tendered apprehensive that he might tendered the objectionable grade, if the be that he objectionable grade, might apprehensive be reflected in and this chose to accept delivery, this apprehension might reflected in the chose to accept delivery, apprehension might price of the exchange contract. Evidently too too wide a range tenderable of tenderable contract. Evidently range of price of the exchange for the grades will have the effect of accumulating, for delivery on the exchange, the effect of have will delivery accumulating, exchange, grades for least those grades for there is the least commercial demand for delivery the there is for which those grades delivery on the physical physical market. in the contracts in on contracts Grades Deliverable on Commodity Exchanges. Yet, Yet, although the Grades Deliverable although the Commodity Exchanges. become undesirable to exchange does not wish to a dumping ground for undesirable wish not dumping ground exchange does for futures trading in grades, the primary object in establishing grades trading is is not the grades for establishing primary object grades, first,
5 L. D. H. Weld, Marketing of of Farm Products Products (New D. H. 5L. Weld, The Marketing (New York: The Macmillan 329. Company, 1924) , p. 329. Company, 1924) p. artificial price 6 For For aa full the problems problems arising movements, see e see of the discussion of full discussion arising from artificial price movements, Chapters XIII XIII and XIV. Chapters ,
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
138
necessarily to to insure delivery of a high high quality the commodity. Millers, of the insure delivery of a commodity. Millers, necessarily quality of or others use the the futures markets do not and should not not spinners, futures markets others who use spinners, or do so ordinarily in in order to obtain obtain specific cotton, or or order to of wheat, so ordinarily do wheat, cotton, specific grades grades of some other commodity which they they need. need. In In fact, the primary function of the function of other commodity fact, primary the exchange exchange is is insurance against market market and credit risks, not the replacecredit risks, the replaceinsurance against the the delivery delivery function function of of the the physical market. Consequently, market. ment of of the only Consequently, only physical less a very very small proportion of of the the total total sales usually less the exchange, a small proportion sales on the exchange, usually in than one per per cent, cent, are ever delivered. delivered. They "offset" and settled settled in are ever than are "offset" They are cash just just as as soon as the the insured risk is necessary or the specuor the insured risk is no longer cash soon as longer necessary specuor loss. lator decides to establish his profit profit or tenderable loss. Grades are are made tenderable decides to establish his lator permit deliveries deliveries in in the the exceptional buyer cases where the the buyer primarily to to permit primarily exceptional cases the seller to deliver to connect futures futures wants also to deliver and also or the seller desires desires to wants them or markets effectively with with the the cash physical markets; markets; that is, since that is, since cash or markets more effectively or physical in the the cash there exchange grades are recognized in are also or physical also recognized cash or market, there exchange grades physical market, futures must be be aa normal price price parity parity between between the the cash market and the the futures cash market market so interests may use both and so that hedging hedging that commercial interests so that so that may use all times effective at at all two markets markets may may be be possible possible and effective times as between the as the two between price and credit insurance. insurance. credit price in the The two sides this question question are are well well summarized in Report of sides of of this the Report of the Grain Trade: the Federal Federal Trade Commission on the the A system narrowly specified specified deliverable deliverable grades facilitates manipulation of narrowly grades facilitates system of manipulation and corners. corners. On the the other hand, if if the broad, millers millers other hand, the deliverable deliverable grades are broad, grades are be will not others will will be be less willing to to take take delivery, because they will not able less willing and others delivery, they to tell tell what sort they are going to get by this means. Contract grades to this sort of of grain are to grain they going grades get by ought, if possible, possible, to to be be such such that that the the miller miller will be ready, ready, if if necessary, necessary, to to take will be take ought, if of Although the of future trading may greater under a system delivery. the future be a volume greater trading may system delivery. Although of broad broad deliverable deliverable grades, because of proporof less less likelihood likelihood of of a a corner, the proporof corner, the grades, because tion will be be less thus the the connection the cash less and thus connection between the tion of of deliveries deliveries will cash market 7 and the the futures may somewhat artificial.7 become market artificial. futures may
the foregoing it will will be be apparent apparent why why the From the the number of of deliverable deliverable foregoing it to the different exchanges varies according to the requirements grades varies on different of exchanges according grades requirements of each trade. trade. each The number of grades tenderable tenderable against is of grades contract is against an exchange exchange contract variously established by the by-laws of each exchange, with the single established the of each by variously by-laws exchange, with the single of in in grades are prescribed by federal federal statute. exception of cotton, which are statute. cotton, grades prescribed by exception in Standards for in the grain trade have established by trade been for grading the have established Standards federal grading grain by federal but the grades deliverable on grain exchanges are selected by statute, deliverable but the are selected by statute, grain exchanges grades the exchanges from those those established established by by federal federal law-grades the exchanges for which which lawgrades for natural the particular particular exchange is a natural hedging market. a is market. the exchange hedging States Cotton for the The United United States Cotton Futures Futures Act provides provides for the classification classification Vol. V, V, p. p. 199. 199.
7 T Vol.
The Futures Futures or or Exchange Exchange Contract Contract
139 139
of cotton. and inspection inspection of cotton. On the the New York Cotton Exchange Exchange seventeen seventeen grades are deliverable. Middling is the basis grade, and Strict Good are deliverable. the is basis Strict grades Middling grade, and Middling, Good Middling, Strict Middling command premiums Strict over Middling, Middling, Middling premiums over the price price for the contract contract grade; Middling, Low Middling, the for the Strict Low Middling, grade; Strict Middling, Good Middling, Tinged, Strict Middling Tinged, and Middling Tinged Strict Middling, Tinged, Middling Tinged, Middling Tinged are deliverable deliverable at at discounts. discounts. are On other markets, such such as the New York Coffee Exchange, as the other markets, Coffee and Sugar Sugar Exchange, the New York Cocoa Exchange, Exchange, and the the New York Produce Produce Exchange, the Exchange, the grades are are established the exchanges in accordance the tenderable tenderable grades established by the with accordance wIth by exchanges in the three following principles: (1) preservation of price parity or unithe three following principles: (1) preservation of price parity or uniformity of grades grades between the the physical physical and futures markets; (2) insurance futures markets; formity of (2) insurance against manipulative corners squeezes; (3) assurance that the grades and corners that the assurance against manipulative grades squeezes; (3) a in delivered shall be of a quality merchantable and useful in the trade. shall be of useful the trade. merchantable delivered quality Differentials. The premium premium or or discount grade deliverable discount for for each grade deliverable Differentials. is in contract cents on an exchange contract is in cents and fractions or decimals of a cent cent. fractions or of a decimals exchange per bushel or per pound. These price spreads the premIUm or or bushel between the per pound. price spreads per premium or discount grades the contract contract grade are known as as differentials discount differentials and grade are grades and the fixed by the by-laws are usually usually determined and fixed by the of each exchange. of are by-laws exchange. where On those both those exchanges grading and inspection to are subject exchanges grading inspection are subject to government regulation, however, how'ever, the the method of of establishing differentials government regulation, establishing differentials law. The may also be prescribed by law. United States Cotton Futures Act be also States Act Futures may prescribed by method for specifically provides a for the determination of differentials the determination of differentials specifically provides basis grade grade and the the various various grades between the the basis between deliverable on cotton cotton grades deliverable If a futures contracts. a market for for spot lots exists on the exchange, is lots contracts. If exists futures the as is spot exchange, as in and sometimes the case in cotton grains, the differentials prevailing in the case cotton the sometimes differentials prevailing in grains, on sixth markets the the various spot markets the sixth business day prior to to the the delivery delivery business the various day prior spot date govern govern the the differentials grades deliverable differentials on grades a futures deliverable on a date futures contract. contract. There is is no spot spot market on the the New York Cotton Exchange. Exchange. Accordingly, Accordingly, the federal federal law requires requires that that differentials differentials on deliverable be the deliverable grades are to to be grades are of governed by average of prices prevailing in ten selected spot or physian in ten selected or average prices prevailing governed by spot physiin the cal markets; thus, prevailing prevailing differentials markets are are the ten differentials in ten spot cal markets; thus, spot markets transmitted by telegraph telegraph to to the the New York Cotton Exchange, Exchange, where where the transmitted by the average differentials are posted on the bulletin board board of of are calculated calculated and posted the bulletin average differentials of the the exchange, with aa notation notation of the delivery to which they the delivery day day to exchange, with they apply. apply. In the contract Unit of Trading. determining the contract unit, the primary the Unit of unit, determining Trading. primary object object exchange is to establish establish the the one which will will be the the most serviceable of is to serviceable the exchange of the to producers, producers, dealers, dealers, and converters converters-that aa unit unit convenient for that is, to convenient for is, the hedging. the other hand, the exchange must guard against making its other On the hand, guard against making its exchange hedging. facilities available for irresponsible speculation. If the unit is so small for If available the unit is so small facilities irresponsible speculation. little capital are tempted outsiders with little that tempted to to trade, trade, the the that uninformed outsiders capital are to exchange doors will open to ill-advised speculation. be thrown ill-advised will doors The open speculation. exchange trading unit, unit, accordingly, accordingly, is is fixed fixed with these these two considerations in view. considerations in view. trading
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
140
in both wheat Chicago Board of the official of Trade the official trading the Chicago On the trading unit in and corn bushels. Trades may be made in contracts for in contracts for 1,000 be bushels. is 5,000 corn is 1,000 5,000 may bushels. bushels. the New futures contracts the New York Cotton Exchange Exchange and the contracts on the The futures in Orleans Exchange call call for for the the delivery of "50,000 pounds in about of Orleans Cotton Exchange "50,000 pounds delivery futures 100 square bales of cotton of growth of the United States." The futures bales of cotton of of the States/' 100 square growth for the contracts the New York Coffee Coffee and Sugar Exchange call the call for contracts on the Sugar Exchange delivery of 32,500 pounds of coffee 112,000 pounds of sugar, respecof of coffee and of 32,500 112,000 sugar, respecdelivery pounds pounds tively. The rubber contract of the the Commodity provides a contract of Commodity Exchange tively. Exchange provides trading unit of of 22,400 pounds; the the New York Cocoa Exchange, Exchange, 30,000 30,000 22,400 pounds; trading unit pounds; the Produce Exchange, 60,000 pounds of cottonseed of the New York 60,000 Exchange, pounds pounds; 40,000 pounds pounds of hides. oil; and the of hides. the Commodity oil; Commodity Exchange Exchange 40,000 Price Decimals. Decimals. Here, Here, as as in other fields, each instrument must be in other Price fields, adapted purpose. For the the delicate the chemist, delicate and exact exact work of of the to its its purpose. chemist, adapted to sensitiveness are scales the greatest precision and sensitiveness are necessary. Futures of the scales of necessary. Futures greatest precision markets are the the centers and world-wide trading, and that of country-wide world-wide that centers of markets are trading, country-wide all called is a composite of intangible personality called the "market" is all types of the of intangible personality composite types of opinion of all degrees of financial resources. resources. Banker, of financial all degrees manufacturer, Banker, manufacturer, opinion and of trader whether producer, merchant, broker, trader-whether large or small, nervous or small, merchant, broker, large producer, resolute-form the market which reflects reflects their judgment. It is is form the their composite resolute composite judgment. It in sensitive in the highest degree to every development which bears upon the to sensitive bears upon every development highest degree the bargaining bargaining power power of merchants. Mr. W. P. of merchants. P. Hamilton comments that that the "the represents, in in a crystallized crystallized form, the aggregate of all all of stock market represents, "the stock form, the aggregate about its business." 88 Similarly, the commodity the its own business." America knows about Similarly, commodity all that exchanges represents represents the the ";':::1 (gat (' of in normal of all that America-or, America or, in jitr.'KjjJilr exchanges in which trading times, the world world-knows the commodity commodity in trading is is carried knows about the carried times, the on. on. Price variations between bids bids and offers to offers must be small small enough Price variations enough to market. These minimum variations are reflect accurately this sensitive sensitive market. variations are reflect accurately this established by by the the by-laws by-laws of Prices of and corn of each exchange. Prices of wheat corn established exchange. may fluctuate in of aa cent per bushel. Price fluctuations in eighths cent per bushel. Price fluctuations of of 1/100 1/100 eighths of may fluctuate the and of a cent per pound record the shifting buying and. selling pressure record of a cent per pound for shifting buying selling pressure for coffee, cotton, hides, pepper, pepper, rubber, zinc, and rubber, copper, cotton, sugar, cocoa, hides, coffee, zinc, sugar, cocoa, copper, cottonseed oil. oil. cottonseed contract usually The Delivery Delivery Months. The futures futures contract permits delivery usually permits delivery during anyone of twelve twelve successive successive calendar calendar months. months. In some markets markets the the during any one of limit is is eighteen eighteen months, months, or or even more. more. The active may active trading limit months trading may in the be few, few, however, however, as as in the grain grain trade, trade, where active trading is active trading is confined be confined largely to the May, May, July, July, September, to the futures and as as in in September, and December futures largely are normally the others cotton trade, the cotton active and others trade, where some months are normally active inactive. inactive. 8*W. W. P. P. Hamilton, Hamilton. The Stock Stock Market Barometer (New Harper & & Brothers, Brothers, (New York: Harper 1922) p. 182. 182. 1922) • p. ,
The Futures Futures or or Exchange Exchange Contract Contract
141 141
is explained as The choice choice of the four referred to primarily four months referred to is of the follows, primarily explained as follows. with reference reference to to wheat. wheat. July July is is the the month when the the new winter winter wheat begins with begins to the market. market. The elevator in the the Southwest elevator man who is is buying to come on the buying in before the the end of of May May-perhaps contracting ahead with the farmer-can protect the farmer can protect before perhaps contracting himself by by hedging hedging for for July delivery. Much of his wheat will will go of his to market in in himself go to July delivery. that month. The July July price price is reflect the of winter the crop is supposed to the size that size of of the crop of supposed to reflect wheat. September. the other hand, reflects other hand, reflects spring conditions and wheat. September, on the spring wheat conditions represents the the initial initial movement of of the the spring hedging of of spring wheat crop. crop. The hedging represents spring purchases begins begins to to be be important important just just before the middle of before the of August. August. spring wheat purchases represents the the winter winter storage the winter and spring of both the December represents storage of spring wheat
crops. Navigation is only the the more costly rail facilities are available available facilities are is closed, closed, and only costly rail crops. Navigation It in for shipment to the seaboard. It is generally considered that wheat in store in is that for shipment to the seaboard. store in generally is there till time for December will will remain there till spring. May is the clean-up time for the old the old the spring. May clean-up is an inclination to ship crop. Navigation opens opens and there there is inclination to ship out accumulations crop. Navigation is also also influenced influenced by to way for for the next crop. crop. But May May is of the the the next the volume of to make way by the crop.99 new crop.
Thus, by reason reason of of causes causes affecting affecting the the growth. harvesting. shipping. Thus, by growth, harvesting, shipping, warehousing of of the the commodity, trading in grain is concenfutures is concenand warehousing commodity, trading grain futures in these trated these four delivery delivery months. trated in as a rule, On the the New York Cotton Exchange rule, trading, trading, is is concentrated Exchange as in six months, though though two other other months are are occasionally in active. The six months, occasionally active. and November February, April, June, futures are relatively inactive. The futures are inactive. February, April, June, relatively reason for this less apparent. authority suggests that "the peculiariis less this is reason for "the peculiarisuggests that apparent. One authority of the movement of of cotton cotton in the the days of sailing vessels had something ties of vessels of the ties days sailing something to do do with of trading trading in in certain to the the exclusion certain months to with the the custom of exclusion of of to 10 10 others. others. that all In other other markets markets it it will will be found that months may may be be all In if is not equally active, especially if the commodity is not a seasonal or crop the seasonal or active, commodity especially crop equally commodity. commodity. Delivery at Seller's Option. has the the entire seller has at Seller's entire trading Option. The seller trading month Delivery that in his his contract contract during during which to his to make delivery is specified that is delivery on his specified in contract. reason for for this this is that commodities brought brought to to the the market market is that contract. The reason by steamship railway may may be delayed delayed by by circumstances the circumstances beyond beyond the by steamship and railway at seller's control. Permitting time during the month milimiliseller's control. delivery at any any time Permitting delivery during the tates against penalizing a seller by reason of shortage in the deliverable a of in seller reason the deliverable tates by shortage against penalizing is made. it is is effected stocks of the delivery is by the effected by the commodity. the stocks of made, it commodity. When delivery transfer of a warehouse warehouse receipt receipt from seller to buyer, buyer, accompanied by seller to of a transfer accompanied by an exchange certificate of of quality. exchange certificate quality. Warehouse Receipts. Receipts. At the the beginning beginning of present chapter of the present it was chapter it mentioned that the practice practice of grading and issuing warehouse receipts of grading that the mentioned issuing receipts in the at an early been established established in the grain trade at use of of date. The use had been early date. grain trade 9
Vol. V, Report of of the Federal Trade Commission on the V. p. p. 62. the Grain Trade, the Federal 62. Trade, Vol. Report H. York: D. D. Appleton Appleton Se the Cotton Market (New Cotton and the & H. Hubbard, Hubbard, Cotton (New York:
10 W. ioW.
Company, 1923) p. 240. 240. 1923) , p. Company, ,
142
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
warrants, or warehouse warehouse receipts, receipts, was was known to the Phoenicians the to the Phoenicians and the warrants, or Italian traders the Mediterranean. time that that the same time of the Mediterranean. At about the Italian traders of in grading the use of warehouse receipts in the grain trade became the warehouse trade use of and the grain grading receipts current in United States, warrants representing representing iron into iron in in store store came into in the the United current States, warrants use in in Great Britain. Britain. use negotiable warehouse warehouse receipt, receipt, which passes passes by negotiation from The negotiable by negotiation of is to be made, is evidence of the seller's title seller to buyer when delivery be is evidence the seller to buyer seller's title made, delivery is to Its transfer transfer passes passes title. title. On the to the cotton exchanges, to the grain the goods. goods. Its grain and cotton exchanges, and grading are carried on under government carried inspection are government supervision, grading supervision, inspection IV. For other as in detail detail in in Chapter other commodities, as has has been explained commodities, Chapter IV. explained in and weighing are carried on by a staff of in inspection, grading, carried a staff are of experts weighing by inspection, grading, experts in the of or licensed by the exchange. the employ licensed the of or by exchange. employ of a a commodity warehouses in in which lots lots of a to be delivered The warehouses delivered on a commodity to futures contract contract are are "official" warehouses; that that is, they are are stored are are stored "official" warehouses; futures is, they licensed by by the the exchange. By setting the machinery approved exchange. By machinery setting up up the approved and licensed for grading grading and by by licensing licensing warehouses warehouses in in which the the commodity for commodity may may all within the exchange exchange does does all within its to insure that each lot be stored, its power to that insure lot stored, the power contract shall be certified as delivered on an exchange contract shall certified as a and a known delivered exchange definite tenderable tenderable quality quality and verified verified as to its weight or measure. as to its weight definite or measure. and weight certificates Warehouse receipts, receipts, accompanied by quality certificates accompanied by quality weight the authority of the the exchange, exchange, are issued under the in full issued are accepted full conconauthority of accepted in the commodity they represent exists and is of the grade fidence that the which exists fidence that is of the commodity they represent grade measure specified. and weight or measure weight or specified. of title The warehouse warehouse receipt receipt is the document of title to is the to the the commodity. commodity. In the grain grain trade trade it not represent represent any specific lot; it represents defiit does does not the it a defilot; any specific represents a nite quantity of any lot of a given grade or of a of tenderable lot of a or a of of number nite of tenderable any given grade quantity grades. other commodities, however, the represents the warehouse receipt commodities, however, grades. In other receipt represents identified lots, identified by serial number, chop, brand, or definite serial definite and specific or lots, number, by specific chop, brand, forth other identifying set forth the face of the receipt. marks set on the of other face the identifying receipt. a promissory Other negotiable negotiable instruments, instruments, such as promissory note note or of as a or a a bill bill of to exchange, represent a promise to pay money; the warehouse receipt repthe warehouse exchange, represent pay money; promise receipt represents in store, store, subject to delivery note or resents commodities in or subject to delivery on demand. The note bill of exchange may may be endorsed endorsed and passed passed from hand to to hand; bill of exchange the hand; the negotiable warehouse warehouse receipt receipt is transfer by by endorselikewise capable is likewise of transfer endorsenegotiable capable of ment and delivery. delivery. The transfer transfer of of the the negotiable negotiable warehouse warehouse receipt receipt and of accomplishes delivery passage of title just as effectively as physical title as as passage accomplishes delivery just effectively physical of the goods. delivery of the goods. delivery
CHAPTER ti CHAPTER
VIII ~
Organization Organization and Operation Operation of a Commodity Commodity Exchange Exchange of a
fairs and Ancient Markets Markets and Modern Exchanges. Exchanges. Without the the fairs Ancient in markets which spread over England and the European continent in the the markets over the England spread European
Middle Ages, Ages, internal internal trade trade would have remained entirely local. Comentirely local. munications depended depended upon upon travel, travel, which was difficult, difficult, dangerous, dangerous, and slow. in the the products products of distant places awaited the of slow. Commerce in of distant the growth growth of places places where buyer buyer and seller meet. Once established, the market places seller could meet. established, the medieval fairs fairs spread with rapidity, dotting England France and other with and France other rapidity, dotting England spread European countries countries with with busy busy centers centers which afforded afforded the the chief chief means of of European carrying on internal internal commerce and offered practically the the sole of offered practically sole means of carrying trade in products products of lands. lands. of foreign trade in foreign the thirteenth thirteenth century the commodity Between the the fair fair of of the century and the commodity exchange exchange in of today today there there appears to be be little little in common. Yet Yet both were born of the of of the appears to same economic necessity. necessity. Modern liners liners cross Atlantic in in less less time cross the the Atlantic time than medieval travelers travelers required required to to journey journey one hundred miles. than miles. Modern communications by by cable, cable, radio, radio, and trans-oceanic trans-oceanic telephone communications enable the the telephone enable Manchester spinner to reach his markets quickly than the itinerant reach markets more than to his the itinerant quickly spinner merchant could could travel travel from house house to to house. house. Nevertheless, Nevertheless, throughout all throughout all the economic development of the centuries the need of central markets of the centuries the of central markets the development has steadily increased-their nature changing, their scope increased their nature has remained and steadily changing, their scope until today and functions widening-until today "the stock produce exchanges stock and produce functions widening exchanges are nerve centers the industrial body, and are themselves as as of the industrial body, centers of in themselves the nerve are in are the x necessary institutions the factory the bank." bank." 1 as the institutions as factory and the necessary briefly define define a commodity exchange as an organized One can briefly market, commodity exchange as organized market, in "market" is fully if is comprised comprised in the the word is fully comprehended. all that if all that is comprehended. The exchange provides provides an active active market place place where its its members actually actually exchange meet to trade in its standard standard or basis basis contract under established in its established rules to trade rules and meet sellers from every regulations buyers and sellers globe of the the globe every quarter quarter of regulations and where buyers can transact business business through through member brokers or commission agents can transact agents who i 1
H. C. C. Emery, Emery, Speculation Speculation on the the Stock Stock and Produce Exchanges Exchanges of the United United H. of the (New York: University Press, 1896), p. 12. Columbia 12. York: , Press, 1896) p. University (New
States States
143 143
144 144
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
represent them. them. represent
The exchange, exchange, as Ages, estabfair of the Middle Ages, did the the fair estabas did of the its trading room or floor floor on its lishes rules to to govern all transactions all transactions made lishes rules trading govern in the and endeavors endeavors to to secure enforce uniformity uniformity in the customs of secure and enforce of the the trade. trade. , Cash Markets and Futures Futures Markets. Markets. A sale physical or the sale on the the physical Cash Markets or the of the cash market contemplates contemplates delivery delivery of the commodity. The physical cash commodity. physical market trades trades only in contracts contracts for specific grades. grades. Comfor delivery of specific only in delivery of in contracts or futures markets trade trade in which allow modity exchanges exchanges or futures markets contracts which allow modity under a basis contract. Some of the various a basis delivery of various approved grades of contract. of the delivery approved grades for trading in physical trading in commodity exchanges have facilities facilities for deliveries commodity exchanges have physical deliveries of ready for immediate delivery. exchanges for of merchandise "on spot," Most spot/ ready exchanges delivery. not, however, however, for for that that is not aa proper proper exchange but rather rather is not do not, function, but exchange function, aa function function of the physical physical market. market. In In the trading in of the the grain in "spots" trades, trading grain trades, "spots" of in permitted on the the exchanges. Samples of grain contained in cars is is permitted cars which grain exchanges. Samples have arrived arrived at at central central markets markets are are displayed on tables, and purchases have tables, displayed purchases are made on the the basis basis of and sales sales are of samples carload samples representing representing each carload lot. On the the other other hand, hand, spot spot markets markets exist and apart lot. exist separately separately apart from in the cotton trade. However, though the largest organized exchange the in cotton trade. the However, though largest organized exchange some exchanges may provide provide facilities trading, the the primary primary purpurfor spot facilities for exchanges may spot trading, a for future is to serve market is to serve as a for future delivery pose of the commodity exchange of as the commodity exchange delivery pose for delivery under standardized futures contracts. contracts. Their quotations in are for standardized futures under delivery in quotations are are made, specific future months; their sales are from sample, sample, but but by demade, not from by despecific future months; their sales scription on the basis of standardized grades. basis the standardized of grades. scription This chapter is concerned with the the operations of such futures or comfutures or concerned with This operations of chapter is modity exchanges. their organization, their purposes, shall examine their organization, their modity exchanges. We shall purposes, their aims, aims, the in which they they regulate regulate trading trading among members, the manner in their among members, and how that trading is conducted upon upon their or "rings" their "floors" is conducted "floors" or or "pits." that trading "rings" or "pits." Organization of Exchanges. older commodity exchanges The older were of Exchanges. commodity exchanges were Organization in the in chartered by special acts (of the legislature in the various states in which various states acts the chartered by legislature special (of of any the exchanges exchanges are are located) not because because of peculiarity of of comthe any inherent peculiarity located) not modity exchanges, exchanges, but but because because they they came into being before before the into being the adoption adoption modity of the corporation laws which the later exchanges under the later laws the membership of exchanges membership corporation have been organized. organized. The Chicago Chicago Board of of Trade, have been Trade, which commenced in 1848 as operations in a spot in 1859, as a its charter received its charter in is 1859, is spot market and received operations the oldest of the the commodity commodity (futures) exchanges, although the St. Louis St. the oldest of the Louis (futures) exchanges, although Merchants' Exchange was organized organized before before the of Trade developed the Board of Merchants' Exchange developed in futures in 1865. Produce Exchange, at first futures trading at 1865. New York first only The Exchange, trading only in 1862. The York Cotton Exchange a spot market, was incorporated in New a was 1862. spot market, Exchange incorporated chartered as year. organized in was organized in 1870 the following as a a corporation 1870 and chartered corporation the following year. Various as those for trading in New York York-such Various exchanges, exchanges, mostly mostly located located in such as those for trading in rubber, in cocoa, silk, silk, hides, hides, and metals metals-were in the the decade were organized decade rubber, cocoa, organized in following the the First First World War. following 1
Organization and Operation Organization and Operation
145 145
The Commodity consolidation and merger of the the Inc., was a consolidation Commodity Exchange, Exchange, Inc., merger of Rubber Exchange Exchange of York, the the National National Silk Exchange, the the National National of New York, Silk Exchange, Metal Exchange, and the the New York Hide Exchange. merger became Metal Exchange, Exchange. The merger in 1933. the date date of the merger the Rubber Exchange a effective in of the 1933. At the effective merger the Exchange had a futures market for for rubber; rubber; the the National National Silk had a futures Silk Exchange a futures futures Exchange market for for raw silk; silk; the the National National Metal Exchange Exchange had aa futures futures market market for copper, and silver; the New York Hide Exchange for tin, silver; and the tin, copper, Exchange had aa market for for hides. hides. All All these these futures futures markets were were absorbed into futures market futures absorbed into the Commodity Commodity Exchange, Exchange, Inc., Inc., and subsequently that exchange estabthat the subsequently exchange estabzinc. Trading lished markets for for trading trading in lead was lead and zinc. futures markets in silver lished futures silver was Trading in in federal suspended in 1934, the federal government nationalized silver and when the nationalized silver 1934, government suspended tax on sales "transaction" tax sales of imposed prohibitive "transaction" in all all of silver. silver. Trading Trading in imposed aa prohibitive of this other commodities of this exchange the Second other commodities exchange was suspended suspended during during the zinc markets rubber, hide, hide, copper, copper, and zinc markets have have since since been World War. The rubber, in lead tin and has resumed, but trading in tin lead has not been as yet. resumed as but resumed, yet. trading States arc are non-profit All exchanges in the the United States non-profit organizations. They All organizations. They exchanges in facilities merely establish the machinery and facilities through which their memthe their establish machinery through merely operate for for their their own profit, profit, but they they themselves not transact bers may may operate themselves do not transact bers for profit. business for profit. business list of of commodities in in which futures of the the list futures trading is A casual casual survey survey of trading is that in conducted will will suggest that operating and practices in the varivarimethods the conducted suggest operating practices in every ous markets markets cannot cannot be be identical Wheat, corn, identical in ous corn, rye, every respect. rye, and respect. Wheat, oats are traded in in for for future Cotton, coffee, sugar, cocoa, rubber, future delivery. are traded oats Cotton, coffee, rubber, cocoa, delivery. sugar, cottonseed oil, hides, hides, and various various metals metals also also have organized futures cottonseed oil, organized futures of these in the the characteristics characteristics of these two groups markets. Differences of comDifferences in markets. groups of modities, however, necessarily necessarily make for of for minor differences in the differences in the rules rules of modities, however, trading in the terms of contracts of their respective exchanges. of their in terms contracts the of and respective exchanges. trading of organization Yet broad, fundamental plan plan of the same the same broad, Yet the organization and the in all commodity operating techniques are found in all exchanges. Their rules are rules commodity exchanges. operating techniques it is particulars, but not not in essentials. Hence it present differ in in essentials. is possible to to in particulars, differ possible present aa composite composite picture picture of the commodity commodity exchange, of the as an example exchange, taking taking as example one market market and noting noting in in other markets only other markets material variations variations from one only material and the general rules practices. rules the general practices. Objectives. objectives of exchange are in a commodity The of a are set set forth forth in commodity exchange objectives Objectives. it its it is organized to provide, regulate, and maintain is to charter. Primarily, its charter. Primarily, organized provide, regulate, afford its and through aa market place place and to to afford members-and proits members through them any any producer, dealer, dealer, converter, or speculator speculator-efficient trading in in efficient facilities facilities for for trading converter, or ducer, specific commodities. In order to further these aims, its purpose to further these its declared declared order commodities. aims, purpose specific is establish equitable equitable and just just principles principles governing governing the the conduct of of to establish is to in contracts, trade business by by its its members; members; to to maintain uniformity business contracts, trade uniformity in in to effect terms, trade customs, usages, practices in order to effect standards of and standards of trade customs, usages, terms, practices classification or grading in commodities in which its members deal; to in its classification or grading in deal; to
146
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
its members and the acquire disseminate useful useful trade trade informaton to to its the acquire and disseminate establish machinery public; to to arbitrate arbitrate disputes; to establish machinery whereby traders may, may, whereby traders disputes; to public; if they so minimize or insure against various market and credit various or insure credit so desire, if they desire, minimize against risks; and to to co-operate co-operate with with other markets and exchanges in other markets risks; exchanges operating operating in the having similar similar aims. aims. the same commodity commodity and having Membership. The membership list of is list of each commodity commodity exchange membership exchange is Membership. representative of every division and element of the industry and trade trade division of of the every industry representative and, in normal normal times, times, of of every every country the commodity is an importand, in country where the commodity is important factor trade. Flour Flour mills, mills, grain elevators, exporters, importers, in trade. factor in ant elevators, grain exporters, importers, dealers in grain in parts of are farmers' in grain all parts in all of the the world are farmers' co-operatives, co-operatives, and dealers in England, of Trade. Merchants represented the Chicago Chicago Board of Merchants in England, represented on the Europe, Asia, and Africa manufacturers, dealers, commission agents, Africa and manufacturers, dealers, Asia, agents, Europe, and brokers brokers in England and the the South hold hold membership membership on the the New in New England Exchange. Seats the same exchanges York Cotton are owned by Seats on the Cotton Exchange. exchanges are by memin France, England, England, Italy, Switzerland, India, and China, in bers residing residing in in France, bers India, Switzerland, China, Italy, a number farm manufacaddition to a large of co-operatives, dealers, and of addition to large co-operatives, dealers, in the the United United States. turers in States. turers requirements for for exchange exchange membership that a candidate are that chief requirements The chief membership are finanmust be be of of good good character character and must have have demonstrated his his sound financial responsibility. responsibility. Applications Applications for for membership membership must be endorsed by by cial of two members of of the the exchange. The names of applicants must be posted be two exchange. applicants posted a specified on the the bulletin bulletin board board of of the the exchange exchange for period before before action for a action specified period is taken taken by by its membership committee. committee. This committee conducts aa thorthorits membership is ough investigation into each applicant's qualifications, both financial and into each financial applicant's qualifications, ough investigation to personal. All members are requested to advise the committee, in conthe are requested advise committee, in conpersonal. All the they know of objection to the candidate. the applifidence, of any to candidate. Both the if they fidence, if any objection applithe cant his sponsors are orally by the membership committee. examined are committee. cant and his orally by membership sponsors If the applicant applicant meets meets the the test test of character and financial of character financial responsibility, If the responsibility, the favorable favorable finding of the committee is reported to the board of of the is of to the the finding reported governors, elects in accordance with the terms of its charter, by him in with elects accordance the terms of which its charter, by governors, or otherwise. his election, election, the majority vote or otherwise. On his the new member must subsubmajority vote to the the exchange's by-laws rules and thereby agrees to abide by scribe and rules to scribe to abide exchange's by-laws thereby agrees by all subsequent subsequent amendments. all existing existing regulations regulations and all all A partnership, partnership, at least one of of whose general partners is of at least is a a member of general partners the exchange, may may be be extended extended membership membership privileges privileges and have its the exchange, have its at the the commission rates exchange business transacted transacted at rates prevailing for exchange business prevailing for exchange members. The same privilege privilege may may be be accorded accorded to to a a corporation, exchange members. corporation, one of officers is is a member of the exchange. Actual executive officers of the of whose executive one Actual memexchange. bership, however, is confined to individuals. confined to is individuals. bership, however, Seats. In addition to qualifying qualifying by is necessary necessary for addition to it is Seats. for each each election, it by election, "seat." A seat obtain a "seat." to obtain seat is is a member's interest new member to interest in in the the in to exchange, similar to a share in a corporation, evidenced by a stock share exchange, similar corporation, evidenced by a stock
Organization Operation Organization and Operation
147 147
seat by certificate. obtains his his seat purchase certificate. The new member obtains by negotiating negotiating a purchase other member; member; since since the the seat privileges seat involves involves valuable from some other valuable privileges it possesses at at to exchange members, it all times aa definite all to times definite which accrue accrue only members, exchange possesses only to time. value, which varies time to time. The relative prices of seats from time relative of varies seats on value, prices different exchanges exchanges are are determined by by the the current current volume of of business different business transacted, the of authorized seats, the financial resources of financial resources of the number of seats, and the transacted, each exchange. exchange. The number of seats is is fixed the charter of each exchange each of seats fixed by the charter each of by exchange and may be increased decreased only only with consent its members. increased or or decreased consent of of its may be Dues. of an exchange Dues. Members of pay annual dues sufficient to cover sufficient to exchange pay its ordinary ordinary operating expenses. These dues are based on the its the budget are budget operating expenses. estimate for for the year. Whatever may the method of levying the ensuing of levying estimate ensuing year. may be the in view view is never to to establish profit for the exchange, but dues, is never the end in establish a for the a profit dues, the exchange, but to merely to assure the collection of sufficient revenues to permit it to conassure the collection of to it consufficient revenues to merely permit its services duct its its work efficiently efficiently and perform perform its services effectively. effectively. Government. The central central control in aa presipresiof an exchange is vested control of vested in exchange is dent, a vice-president, a treasurer, and a governing body as the a a known as the dent, governing body vice-president, a treasurer, of governors, directors, or managers. The governors board of are usually or managers. governors, directors, governors are usually elected annually annually by by the the members. On some exchanges, however, the elected the however, exchanges, that the terms of of board members are arranged so that onc-third of the board is are arranged so one-third of is elected annually. annually. Although Although . various various committees by the the board elected committees appointed appointed by in play an important part in administering the exchange's operations the administering exchange's operations and important part play in machinery, the in each case exercises final board case exercises final control. control. machinery, the The Secretary. Secretary. The secretary secretary of of an exchange is aa salaried salaried officer officer exchange is chosen by the board. On his his shoulders the responsibility responsibility shoulders rests rests much of of the chosen by the board. working of the exchange machinery. He is for the of the is usually the for the smooth working exchange machinery. usually the superintendent of the the exchange. In addition addition to the duties duties to performing all the exchange. In performing all superintendent of a ordinarily imposed the secretary of a stock corporation, he is responthe of stock on is secretary corporation, ordinarily imposed responproper operation operation of the trading trading floor. sible for proper of the floor. He collects collects dues, sible for assessdues, assessments, and fees fees from the the members and supervises the keeping of the books of the the books ments, supervises keeping and the records of of the the exchange. membership are of membership are effected Transfers of effected the records exchange. Transfers is through his his office. office. He is charged with the the posting mailing of of notices notices charged with posting and mailing through to members on all all matters matters of of importance. importance. to as may He performs performs such other duties as may be assigned to him by the board other duties assigned to by the is the and its its various various committees. committees. The secretary the most active of the the active officer officer of secretary is exchange possess high executive ability. is submust executive He is aided by a a and subability. by exchange possess high stantial the work of his office in the maintenance and superof his office and in the maintenance in the staff in stantial staff supervision of the the official official records records and statistics the exchange. of the statistics of vision of exchange. Committees. the active active administration of exchange is is of an exchange of the Committees. Much of carried by committees committees appointed by the of governors. work board of the carried on by The governors. appointed by little more than mention. of of these these is formal and requires requires little mention. The is formal of some of function of other committees is is connected intimately intimately with the of other function the highly highly specialized operations of a commodity exchange. of commodity exchange. specialized operations
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The Arbitration Arbitration Committee. provide Committee. Organized uniformly provide Organized exchanges exchanges uniformly for adjustment, by by voluntary volUIltary or or compulsory compulsory arbitration, for adjustment, all disputes of all arbitration, of disputes between members without all members without recourse recourse to to courts Usually all courts of of law. law. Usually when they join the the exchange required to to bind bind themselves themselves to to comare required they join exchange are arbitration to subject themselves to all its rules and regulapulsory arbitration and all rules to its themselves to regulapulsory subject the In general, general, however, however, one of of two policies the tions. In tions. is adopted: adopted: (1) (1) policies is exchange may merely provide the machinery for voluntary arbitration arbitration for the exchange may merely provide machinery voluntary and leave to disputing disputing parties parties the the option to it; the leave to or (2) of resorting it; or resorting to (2) the option of arbitration may be be compelled to act on the complaint of one arbitration committee may act of to the compelled complaint of of the parties and to to serve notice on the party and summon him the parties serve notice the adverse adverse party to arbitrate to arbitrate (as he is is required required to to do by by the most exchanges). the rules rules of of most (as he exchanges) The rules of of the of Trade, however, provide merely the Chicago Board rules of that "the "the Trade, however, provide merely that Chicago of the policy of Association is to encourage, but not to compel, the arbitrais to arbitrathe Association not to policy encourage, but compel, the tion of disputes." tion of disputes." All members of of an exchange the provisiom All exchange subject themselves to to the of its its subject themselves provisions of to charter to the the by-laws by-laws of of the the exchange exchange adopted, but subject to change charter and to change adopted, subject addiby its its members in in accordance with the the provisions in addiaccordance with of the the charter; charter; in by provisions of all members are tion, all are bound by by all regulations all subsequent rules and regulations tion, subsequent rules promulgated by the exchange in accordance with the provisions in of its the accordance the its with exchange provisions of promulgated by a member objects charter and by-laws. by-laws. If objects to rule or If a to any charter his or regulation, any rule regulation, his to is to resign, though such resignation does not release him only recourse is such recourse not does release resignation resign, though only from existing obligations (including (including compulsory any existing obligations arbitration) under any compulsory arbitration) exchange rule, rule, so long as that rule rule is is ,within the scope of as that within the so long authority of exchange scope and authority the the exchange. exchange. Arbitration of of Controversies. In voluntary voluntary or is more comcomArbitration Controversies. In or (what (what is arbitration the procedure is to that of an action mon) compulsory is similar similar arbitration the that to action of mon) compulsory procedure formalities and rigidity. at law, but it it is is stripped of legal rigidity. A complaint at law, but legal formalities stripped of complaint which is is aa written written recital recital of of the the subject subject matter of controversy of any any controversy arising arising out of exchange transactions, is filed with the arbitration committee by the arbitration filed with is committee by out of exchange transactions, the complaining party, and aa duplicate duplicate is the other party, who is served served on the other party, the complaining party, is required required to to file file his his answer within within a specified of days. number of is days. Three specified qualified members of of the the exchange, panel as as arbitrators, arbitrators, chosen from a panel exchange, chosen qualified in controversy then proceed to to hear hear and determine determine the the matter in then proceed controversy according according to the rules, practices, customs of the exchange. and customs of the to the rules, practices, exchange. arbitrators possess possess judicial judicial powers powers which are are ample for conducting The arbitrators conducting ample for for them and for bringing to rapid, just, final, binding hearings promptly to bringing rapid, just, final, and binding hearings promptly determination. They may may compel the production production of papers by of papers exdetermination. They by any any excompel the member to they may subpoena any to attend hearings change member, attend and hearings they may subpoena any change member, and give give testimony. testimony. Disregard Disregard of of aa subpoena subpoena issued by the issued by the arbitration arbitration committee by other other committees committees empowered to conduct hearings renor by committee or hearings renempowered to ders a member subject to suspension or even to expulsion from the to expulsion the ders a subject to suspension or .
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exchange. exchange.
hearings in in arbitration arbitration proceedings private, unless unless The hearings are private, proceedings are sessions. sessions. arbitrators concludes of the The decision decision of the arbitrators concludes the the entire matter, unless unless an entire matter, a within appeal is taken promptly within a specified time to the board of appeals is taken time to the board of promptly specified appeal appeals -another appointed by by the the board board of decianother committee appointed of governors-whose governors whose decifinal and conclusive. proceeding is sion is conclusive. Whether the sion is final the arbitration arbitration proceeding of the the is of the voluntary or involuntary type, the findings constitute an award which is or constitute is which voluntary involuntary type, findings binding upon upon the the parties. parties. In In the the voluntary voluntary type type of parties of arbitration, the parties arbitration, the binding agree to abide by the award through a voluntary execution of the arbitraa to abide the execution of the arbitrathrough voluntary by agree tion before the the hearing hearing is held. is held. tion agreement agreement before by-laws of the exchange exchange provide provide for of the for enforcement of all all arbitratiop enforcement of The by-laws arbitration its action decisions by disciplinary action on its members. The threat of expulsion, threat decisions by of disciplinary expulsion, sufficient penalty in extreme cases, is is aa sufficient penalty to of the in to insure insure acceptance extreme cases, of the final final acceptance in cases Only in cases where the the constitutional constitutional rights of the parties decision. 22 Only of the are decision. rights parties are alleged to to be be in jeopardy or or where where the the exchange is claimed in jeopardy claimed to to alleged exchange procedure procedure is to the charter or by-laws of the exchange can there be biased biased or to charter or or contrary the the of be there contrary by-laws exchange be an appeal to the the courts. courts. Once arbitration has been agreed arbitration has the be on, the agreed on, appeal to courts refuse refuse to until the the arbitration arbitration process been exhausted. intervene until has been to intervene exhausted. courts process has It to understand understand that, that, though the arbitration is between the arbitration is between It is is essential essential to though exchange members, members, in most' cases cases these these members have bought bought and sold in most sold exchange for the the account of their their customers, customers, who are the principals and are responare the account of are for principals responsible to the exchange members for for all all commitments on behalf the exchange behalf of of their their sible to the other hand, the the customers customers. other hand, customers of of each member are, at law law customers. On the are, at the exchange and under under the relationship between between the member and contract relationship the contract exchange acts of of their his customers, customers, bound by by the the authorized authorized acts their agent his agent (the (the member) member) are to the member all and, consequently, are responsible to the for all awards of for of the the and, consequently, responsible all exchange arbitration committee committee with with respect respect to to all entered into contracts entered into arbitration exchange contracts by the on instructions of his customer-principals. In effect, instructions his of member the effect, customer-principals. by therefore, exchange exchange arbitration arbitration awards awards are all memare binding therefore, binding not only only on all of members, bers, but but also also on all the customers in turn turn have have full all the customers of full members, who in bers, all awards against law against against their their customers as recourse at for all at law customers for them as recourse against memLers with with respect respect to to contracts contracts made for their customers. for the the account of of their customers. members in Every year, a great number-in fact, hundreds-of controversies involvof a number hundreds controversies involvfact, Every year, great ing large and small sums of money are thus disposed of with a are a of thus of minimum small money disposed ing large The of arbitration makes for for a of expense delay. machinery of arbitration a speedy and of machinery delay. speedy expense and just just determination, its rules of evidence are calculated to insure and are its rules of evidence insure calculated to determination, a full fair hearing, hearing, untrammeled by technicalities. The rule of evievirule of full and fair a by technicalities. dence given below, below, taken taken from the the rules rules governing arbitration arbitration is given dence which is governing both parties parties request request open open both
arbitration proceedings in arbitration 2 Under Under statutes, most states, states, an award in dockin most statutes, in proceedings may may be docka court of law and may in a court of eted with the the full full force a judgment judgme~t obtained in of a force of eted with may be of the enforced by by sheriff's execution processes processes against the property property of the losing sheriff's execution enforced losing party. against the party.
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of disputes in Commodity Commodity Exchange, Exchange, Inc., of Inc., sums disputes in arbitrations are conducted are conducted arbitrations
in which all up the spirit all up the spirit in
Liberality of procedure is is to to be observed, observed, and such methods are to be folfolare to of procedure Liberality lowed by the Arbitrators as will be best calculated to elicit all the evidence all best calculated to elicit the evidence lowed by the Arbitrators as will ]j)( 11 Il.ri 11 i 11;': to to the the case. case. The arbitrators arbitrators shall the arbitration the arbitration with the shall conduct the n, sluing in matters end in view of of establishing establishing and enforcing enforcing equity matters in view fair dealing end dealing in equity and fair the least of trade commerce. irrespective irrespective of of technicalities least possible possible of technicalities and with the trade and commerce, delays expenditures consistent with aa comprehensive investigation of of each consistent with comprehensive investigation delays and expenditures controversy presented. presented. The spirit spirit of the Arbitrators Arbitrators of conciliation conciliation should guide guide the controversy all to remove all in their their conduct of proceedings. and they in of the the proceedings, they should endeavor to doubts misunderstandings between the the parties to effect, if possible, as to so as doubts and misunderstandings effect, if possible, parties so a a harmonious disposition disposition of of the the controversy. controversy.
Frequently lawsuits drag drag through through the the courts courts for several years trial for several of trial years of Frequently lawsuits and appeals, leaving the parties uncertain as to the outcome and involvthe uncertain as the to involvappeals, leaving parties of disputes ing heavy expenses. arbitration of in commodity trades, commodity trades, ing heavy expenses. The arbitration disputes in the great exchange or trade association has the great whether under exchange or trade association procedures, procedures, has and settlement of merit prompt, cheap, efficient settlement of disputes by experts merit of of prompt, efficient cheap, disputes by experts rather than by familiar with trade trade customs, customs, terms, terms, and practices by aa jury jury familiar with practices rather or familiar familiar with in no sense trade terms of laymen sense experts with trade terms and of are in laymen who are experts or conditions. conditions. Arbitration of or Quality Disputes. Arbitration as of disputes Arbitration Arbitration of of Grade or Quality Disputes. disputes as to grades grades or of deliveries deliveries in the physical physical trades trades under under trade trade in the or qualities to qualities of association has been treated elsewhere. It should be noted here It has been elsewhere. should association auspices treated here auspices that experts quickly samples of the disputed delivagain, however, of delivthat draw the samples disputed experts quickly again, however, promptly determine determine whether whether or the tenders tenders are are up to the eries or not not the the eries and promptly up to quality sold and, if not, whether the buyer is entitled to demand a if not, a whether sold the is entitled to new and, buyer quality of the proper grade grade or the contract take the the inferior inferior tender of or under the contract must take the proper tender quality at allowance fixed by the the arbitrators the absence in the fixed by arbitrators in at an allowance of a a absence of quality mutual agreement agreement of the parties. parties. Thousands of disputes are thus of the of grade are thus grade disputes arbitration procedure, procedure, thereby thereby relieving relieving the settled by the the arbitration courts the courts settled quickly quickly by of many cases which otherwise tend to to swamp their dockets. otherwise would tend cases which dockets. of many swamp their On the the exchanges, however, arbitration of disputes on qualities arbitration of of however, disputes qualities of exchanges, official deliveries is not not necessary. necessary. Such disputes are avoided by official certificaare certificadeliveries is by disputes tion of of all all deliveries deliveries (as (as to to quality quality or before any lot of or grade) tion of grade) before any specific specific lot the is tendered for delivery on an exchange contract. This tendered for contract. is the commodity delivery exchange commodity certification by federal federal officials the cotton or officials (in is made either either by cotton trade) certification is (in the trade) or for that by officials licensed for that purpose purpose by the exchange. officials licensed by the exchange. Any Any exchange by exchange on an exchange contract, secures member, before tendering tendering a delivery secures member, before contract, delivery exchange is quality which, which, once issued, is binding on all parties a certificate certificate of of quality all a issued, binding parties and case there there is is disagreement between must be accepted accepted without without dispute. must be dispute. In case disagreement between the certifying the owner of of the the parcel parcel offered offered for certification and the for certification the officials, certifying officials, the owner may appeal to an official committee, the decision is to official the decision of of which is the committee, may appeal
Organization Organization and Operation Operation
151
conclusive and binding. conclusive binding. Provision Provision is is made for for recertification all cerrecertification of of all cer3 tified tified lots, lots, when conditions this necessary. necessary.s conditions make this as arbitration Discipline. Just arbitration provides provides aa means of of settling Discipline. Just as settling disputes disputes that is is analogous to civil that to civil actions at law, so the exchanges enforce their at actions so the their law, analogous exchanges enforce own rules rules with with respect respect to to the the ethical ethical or professional conduct or professional conduct of of their their members by by aa procedure procedure analogous analogous to to that that of the criminal After of the criminal courts. courts. After hearings and appeals the decisions decisions of the disciplinary of the are hearings appeals the disciplinary committee are enforced by by suspension enforced or expulsion. suspension or expulsion. the extensive the exchange To indicate indicate the extensive disciplinary powers which the exchange disciplinary powers over its the by-laws by-laws of Exchange, exerts members, aa section section of its members, exerts over of the of Commodity Commodity Exchange, Inc. is quoted quoted below. below. A member may may be be suspended Inc. is or expeUedsuspended or expelled
(a) For violating, violating, disobeying, disobeying, or or disregarding disregarding any Rule, or RegulaRegula(a) For By-Law, Rule, any By-Law, tion tion of the the Exchange. Exchange. (b) refusing to to submit submit to abide by by any decision of any of any to and abide (b) For refusing any award or decision the Board of of Appeals, the Quality Arbitrators, the Arbitration Arbitration Committee, Appeals, the ComArbitrators, the Committee, the Quality mittee, the the Quality Quality Board of of Appeals, Appeals, or the the Supervisory made, Committee, made, mittee, Supervisory Committee, of Rules. signed, filed the provisions of these By-Laws or Rules. and filed under the these signed, By-Laws provisions for the the delivery of a commodity contracts for (c) For buying buying or selling 'Selling contracts a for a (c) delivery of commodity for for of clerk or of clerk memclerk of the Exchange or for a clerk or employee of another or employee the Exchange employee employee ber of of the the Exchange Exchange without without 'the written consent his employer. the written consent of ber of his employer. (d) For the publishing, or permitting to be published, in his his own name, name, the be to (d) publishing, permitting published, in or that of or in the of any officer of his corporation, or that of of his or in the officer of his his firm, name of that of or or that firm, any corporation, any of his partners, employees, or agents, whether with or without his consent, or his his of consent, agents, any partners, employees, in newspapers, newspapers, circulars, circulars, or otherwise, any advertisement or article that contains advertisement or article that in contains otherwise, any any misstatement facts, or is otherwise otherwise calculated public, of facts, calculated to to mislead mislead the the public, or is misstatement of any whether by by direct direct or implied misrepresentation, or unfair concealment of facts, unfair or of concealment whether facts, implied misrepresentation, as margin for operating or that request for for money money to to be be sent margin for on dissent as disa request or that contains contains a operating that shall to cretionary orders, or any other matter that shall tend to bring discredit upon tend or other matter discredit bring upon cretionary orders, any the business of of dealers dealers or or brokers brokers in in commodities, upon the the Exchange, Exchange, or the business commodities, or upon that by aa majority majority of of the the Board after after such member that shall shall have been disapproved disapproved by has had an opportunity to be heard. heard. has opportunity to (e) For any other misconduct in in his his relations relations to to the the Exchange Exchange or any any member (e) For any other or members thereof. thereof. or (f) For For any or fraudulent person not not aa transaction with any fraudulent transaction any person any disreputable disreputable or (f) member of of the the Exchange. Exchange. best interest interest of the the Exchange For any conduct detrimental to to the the best Exchange or to (g) to (g) For any conduct detrimental the welfare of the United States. States. of the the welfare is defined in in these these By-Laws. (h) For becoming insolvent as the term insolvency as the insolvency is By-Laws. (h) For becoming insolvent in or (i) For suspension or expulsion from membership in any other security or or For any security membership expulsion suspension (i) commodity exchange. commodity exchange. v
for his is responsible responsible not only acts and his own acts An exchange only for exchange member is his of the conduct his omissions, but also for the conduct of his employees and his partners omissions, but also for employees partners IV. a For For more more detailed Chapter IV. see Chapter discussion see detailed discussion
a
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Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
or the the corporation with which which he is is affiiliated. prohibited If any of the the prohibited affiiliated. If or any of corporation with acts committed by by an associate associate or agent of the latter's latter's or agent of the the member, are committed acts are member, the protection against penalties. non-participation affords affords him no protection against disciplinary disciplinary penalties. non-participation rendering a member subject to discipline may Charges of misconduct a to of misconduct rendering discipline may subject Charges of governors, the board of be preferred preferred (1) (1) by by the be any committee or by any governors, (2) (2) by arbitrators having having the the power power to to complain, complain, or or arbitrators non-member of the exchange. of the exchange.
(3) any member or by any (3) by
Business Conduct Committee. This body body resembles jury. Business Committee. This resembles a grand grand jury. Its is to investigate any misconduct on the part of a member. It may a It Its duty misconduct the of is to may duty investigate any part on its own initiative or by direction of the board of governors. do so initiative or by direction of the of governors. so its findings of of the the business business conduct committee are reported to to the the are reported The findings board, and, and, if the facts so warrant, warrant, aa formal against the memif the formal complaint the facts so board, complaint against ber is ber is preferred. preferred. Supervisory Committee. a complaint is filed, the supervisory Committee. When a filed, the Supervisory complaint is supervisory committee assumes assumes jurisdiction. jurisdiction. The complaint is in writing, in is writing, setting setting complaint a list list of of witnesses detail the the accusation. It is is accompanied witnesses and forth in in detail accusation. It forth by a accompanied by by any evidence bearing bearing upon upon the the case. receiving the the case. On receiving by any documentary documentary evidence the a complaint, the supervisory committee serves a copy of it, together with committee serves of with it, together complaint, supervisory copy the documents and the the list of witnesses, witnesses, upon is accused member. He is the the accused list of upon the at the furnished at the same time time with with aa copy of the by-laws and rules, and his furnished his of the rules, by-laws copy attention is is specifically to the the by-law rule alleged to have have been attention or rule alleged to specifically drawn to by-law or the by-law violated, by-law or or rule rule under which the made, and is made, the complaint violated, the complaint is the provisions provisions governing procedure. The defendant member is required the defendant is governing procedure. required to answer answer within within aa given time and to accompany his reply with aa list of to time to list of with his given reply accompany his witnesses and any documentar}' evidence to offer. his witnesses evidence he may offer. any documentary may have to as practicable practicable after after the the answer has As soon as if no answer has been filed, or if answer filed, or the time time for for filing filing has has elapsed, the supervisory has been filed filed after after the has been the supervisory comelapsed, mittee proceeds proceeds to a hearing hearing and notifies notifies the parties and their their witnesses. the parties to a mittee witnesses. Neither party party may may be be represented represented by counsel at any hearing. After aa at Neither counsel by any hearing. After the committee reports reports its to the of formal hearing, hearing, the formal its conclusion the board of conclusion to governors, with with aa summary the facts the docuof the all the established and all facts established docugovernors, summary of If the supervisory committee finds against mentary evidence submitted. If evidence the finds submitted. mentary supervisory against fixes the the the board of of governors governors fixes the penalty penalty to to be be imposed. imposed. the defendant, defendant, the When aa member undergoes undergoes either either voluntary or involuntary bankvoluntary or involuntary bankthe supervisory committee conducts an investigation to ascertain ruptcy, the conducts committee to ascertain supervisory investigation ruptcy, the reasons reasons which occasioned occasioned his his failure. unbusinesslike or unethical the If unbusinesslike failure. If or unethical conduct has a contributing contributing factor, factor, the the committee so reports to to the the has been a conduct so reports of governors and the becomes ineligible for reinstatement. board of member for the becomes reinstatement. governors ineligible Floor Committee. The committees described have jurisdiction jurisdiction Floor described above have over of business business conduct. conduct. The floor over broad questions floor committee committee is the is the questions of It is exchange'S constabulary. It is charged with preserving order on the floor order the floor exchange's constabulary. charged preserving or ring or or pit pit of the exchange the rules of the or ring rules applicable exchange and with enforcing enforcing the applicable
Organization Organization and Operation Operation to to trading trading
153 153
to the the conduct conduct of of members on the Misleading or and to or the floor. floor. Misleading
ambiguous bids or or offers may be be the the subject of disciplinary offers may and, action, and, ambiguous bids subject of disciplinary action, in the in the case case of of any any disputes disputes arising arising from bids, bids, offers, in the in the or acceptances offers, or acceptances regular trading, trading, the the question question is the spot by those course of regular course of is decided decided on the those spot by committee who are present. the floor of the floor committee are present. members of Quotations Every transaction transaction on the the floor of an exchange floor of exchange Quotations Committee. Every must be be made by by outcry outcry across across the the ring ring or and the time price or pit, the time and price pit, be reported reported immediately upon its must be its consummation. The quotations immediately upon quotations is charged with committee is with enforcing this rule the floor this committee rule and settles settles on the floor any charged enforcing any of all trades and their prices disputes regarding price quotations. record A of all record trades their prices disputes regarding price quotations. is kept, kept, and aa summary summary of of these these is published daily. is is published daily. The quotations quotations com"bid and asked" quomittee meets meets each to establish official closing mittee "bid each day to asked" quoestablish official day closing tations for inactive inactive months. These quotations tations and nominal quotations quotations quotations for are informative for the are informative to to the the public public and necessary necessary for the working working of the of the clearing house. house. clearing On the the ticker ticker of of most most exchanges, as reports the market's market's close of the close come reports of exchanges, as It is reader sees that the the close or "weak." It is out, the the reader or sees that close was "firm," out, "firm,*' "steady," "steady," to this the duty duty of of the the quotations committee to give this characterization or the or characterization give quotations "tone" the closing of each each day. to the "tone" to day, closing dealings dealings of to Committee on Commissions. The minimum rates of commission to rates of be charged by are rigidly prescribed. Since the pressure of comare members be the of rigidly prescribed. Since charged by pressure petition precludes the charging of rates above the minimum, the the rates of the the estabestababove minimum, charging petition precludes transaclished minimum schedules lished standard for all exchange schedules become standard for all transacexchange of all tions. Any Any rebate rebate to to aa customer customer of all or or any the prescribed tions. of the any part part of prescribed coma first first offense mission is is punishable by suspension for mission offense and by by expulsion punishable by suspension for a expulsion rules regulate regulate competition by placing placing for a second. for a second. 44 The commission rules competition by plane of of equality equality in in their their dealings the public. members on aa plane dealings with the public. This prevents competition on a price basis by the splitting of commissions. basis the of commissions. by price splitting* prevents competition It benefits benefits the the public public by by precluding precluding the the possibility possibility of of discrimination It discrimination in each 44 "The above-mentioned rates shall be in commission that shall be each case the minimum commission case the that above-mentioned rates of may be charged by any of the Exchange, and shall be absolutely net and shall member net be the be Exchange, may charged by any absolutely free of all any rebate, rebate, in in any any way, way, shape, or manner; nor shall any bonus or nor shall or all and any free of manner; shape, any pro rata percentage of commission be given or allowed to any derk or individual for or to of be or for commission individual rata clerk given any percentage pro business procured procured or or sought sought for for any any member of of the the Exchange. business Exchange. "The penalty penalty for violating or evading, or or seeking, or evading, for violating seeking, offering, offering, proposing, proposing, promising, promising, or agreeing agreeing to to violate violate or or evade the the provisions provisions of this Section or in any of this Section in or way, shape, any way, shape, or manner whatsoever, whatsoever, whether whether by by an agreement, agreement, arrangement, or understanding, exor exarrangement, understanding, or indirectly, indirectly, in in person person or through any any firm firm or or pressed or or through or implied, either dirctly dirctly or implied, either pressed co-partnership of of which aa member may may be be or may appear to be aa partner partner or or through through or may appear to co-partnership for the any agent or otherwise, shall be, be, upon upon conviction first offense, offense, susconviction for or agents susthe first otherwise, shall agents or any agent or term period not exceeding twelve months, the of suspension to be be fixed fixed the of pension for a for a not twelve months, period exceeding suspension to pension at the the discretion discretion of of the the majority majority of of the the Board of present at thereat a a meeting of Managers at Managers present meeting thereSection 3.01, and for the second expulsion." (Extract By-Laws of of the the of, for the second olfense, 3.01, By-Laws offense, expulsion." of, and (Extract from Section Exchange.) Yoik Cotton Exchange.) New YOlk
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Commodity Exchanges Exchanges and Futures Futures Trading Trading Commodity
that for for between the the charge for service service rendered rendered to to large between large operators charge for operators and that all service to to small operators. The committee decides all small operators. commissions decides service committee on commissions interpretation of of the controversies the commission regulations. controversies which involve involve interpretation regulations. Committee on Information Information and Statistics. Statistics. In markets highly highly sensitive sensitive the to changes changes in in demand, accurate and up-to-date up-to-date information about the to demand, accurate visible of for the commodity and about visible and future future supply and demand for of the commodity supply all factors all factors which may may influence influence prices prices are the utmost utmost importance. importance. are of of the Information that that is is gathered gathered and published published regarding regarding weather weather condicondiInformation
in crop areas, supplies takings by by consumers, tions tions in consumers, afloat, takings crop areas, supplies on hand and afloat, and so forth is described elsewhere. elsewhere. 55 so forth is described compiling and publishing publishing statistics into the the The work of of compiling that flow flow into statistics that exchanges by telegraph and cable is of the of the cable direction is performed under direction exchanges by telegraph performed a but the the committee on information secretary, information and statistics exercises a statistics exercises secretary, but of the activities. the exchange's exchange's activities. general power over over this this phase phase of general supervisory supervisory power and a Warehousing Committee. The stocks of a commodity Grading of stocks commodity Grading Warehousing which may may be delivered delivered against against aa futures be stored in stored in futures contract contract must be warehouses which have have been approved approved and licensed the exchange. warehouses licensed by exchange. by the lot of the commodity intended for delivery must be weighed, Every lot of be the intended for weighed, samEvery delivery commodity graded either by government by the the official weighers. pled, and graded either by officials or or by official weighers, pled, government officials of the inspectors of the exchange. The receipt the waresamplers, and the which receipt samplers, inspectors exchange. house issues issues passes passes from seller to buyer buyer as as the the representative representative of goods. the goods. of the house seller to The grading warehousing committee has has the the important important duty of duty of grading and warehousing 66 This bureau has supervising the inspection bureau of the exchange. has the bureau of the exchange. supervising inspection of the tenders of the charge of all tenders of the the inspection, of all charge grading, and weighing weighing of inspection, grading, commodity for certification. certification. The committee also the warealso supervises warecommodity for supervises the housing of certificated stocks. of stocks. certificated housing Other Committees. The foregoing have been been described described foregoing committees have in detail, for their work is the specialized for their is peculiarly related in some detail, to the peculiarly related to specialized operopercommodity exchange. exchange. There are ations a commodity of a are other other committees which ations of require no more than than mention, mention, for for their their work is that of is paralleled by of paralleled by that require similar committees in in many many other other corporate corporate bodies. bodies. The executive executive comsimilar committees control over mittee has has general general administrative administrative functions, the control over the mittee functions, including including quotation service, management of the exchange building, hiring of the of exchange building, hiring of quotation service, management finance committee has purchase of of supplies. supplies. The finance general employees, has general employees, and purchase of the fiscal affairs of the exchange and the auditing of supervision over fiscal the the affairs over the exchange auditing of supervision A the books of the treasurer. committee on by-laws rules considers of the treasurer. and rules the books considers by-laws all to existing existing by-laws by-laws and rules rules and frames all amendments to frames any any amendment or regulation submitted to to members to to be be voted on. on. The nominating or new regulation nominating committee nominates the slate of proposed officers and members of the the of slate of the committee nominates proposed officers at annual elections; board to to be be voted voted upon upon at elections; it it is is essentially a selection board selection essentially a s 5
See V. See Chapter Chapter V. Chapter IV. IV. Chapter
66 See See
Organization Operation Organization and Operation
155 155
committee, and in in most most instances instances committee,
field its ticket is the only the field is the its ticket only one in the a matter of course. its nominees nominees are usually elected elected as as a of course. are usually and its are to most committees are those are common to those which are committees The foregoing foregoing in the If more than one commodity is traded in on the exchange, exchanges. is traded If than one exchange, commodity exchanges. for is established for each commodity. Whenever some a separate committee is established a committee commodity. separate of the of an exchange assumes more than passing importance, phase of of the work exchange passing importance, phase its supervision will be formed. aa committee committee charged supervision will charged with its The Exchange Exchange and Its Its Facilities. Facilities. Trading in a large large is carried carried on in Trading is room or or hall hall in which the the floor, ring, or pit occupies the central and or pit the central in which floor, ring, occupies than one most prominent prominent place. place. On exchanges exchanges where more commodity commodity is traded in, in, there there may may be be aa separate pit or ring for each commodity. or for is traded ring commodity. separate pit floor connect Private wires wires from from telephone telephone booths booths on the the exchange connect with Private exchange floor the offices dealers and commission houses, houses, and from aa rostrum rostrum raised raised of dealers the offices of trading ring ring quotations quotations are the ticker ticker system above are sent sent out over over the the trading above the system in full full view telephoned to to attendants posting on a blackboard blackboard in attendants for for posting and telephoned are bulletin of the trading ring. ring. On the the exchange there are bulletin boards floor there the trading boards for of for exchange floor statistical data the posting of data and notices notices to to members. Exchanges having of statistical the posting Exchanges having of samples for cash a spot provide tables tables for for the the display trading. cash trading. a samples for display of spot market provide offices and cOII;lmittee arc within within easy the Executive offices Executive committee rooms are access of of the easy access room. trading trading The Trading Ring. Trading Trading on the the New YOllk is Stock Exchange Youk Stock Trading Ring. Exchange is posts, each post being trading point carried carried on around posts, each post the trading for certain certain being the point for stocks. trading ring ring is is the the counterpart of a trading post futures trading of a stocks. The futures counterpart trading post on the stock exchange. The following following description of the trading ring of the stock exchange. of the of description trading ring a representative the Cotton Exchange and graphic the New York Cotton Exchange gives gives a representative graphic picture: picture:
The future trading ring ring is is located located near near one end of future trading of the the cotton.exchange room, cotton-exchange room, of the affording easy of the blackboard space, which is provided on adjacent view blackboard an is affording easy space, provided adjacent in the walls well well above the the heads heads of of the the men in the ring ring or pit. It is about to 35 35 or pit. It is walls about 30 30 to feet diameter and consists consists of of aa ring-shaped ring·shaped platform rising from the floor by in diameter feet in the floor platform rising by a series three to to five five steps steps to to aa height height of inside of about 2i feet, a series of of three the inside feet, and on the descending again by aa tier tier of four four or or five five steps to the the floor. floor. The central central floor floor descending again by steps to is kept clear feet in space of the ring, about 12 feet in diameter, is by a railing, behind of the clear a 12 behind diameter, ring, kept by railing, space of steps, the traders traders stand upon upon the the tiers tiers of across the which the other across the facing each other steps, facing trader so seen open center space, so that each trader may be clearly seen and may see all the that center all see the may clearly space, open may other traders traders gesticulating shouting their their bids bids and offers acceptances offers or or acceptances gesticulating and shouting ring.?7 across the the ring. across
2,
Trades. Exchange Reporting Trades. Exchange rules rules usually usually provide that the the time, time, provide that Reporting quantity, price of each transaction must be reported immediately and each transaction of be price reported immediately quantity, is done by a upon its reporting is its consummation. The reporting staff of of uniformed uniformed by a staff upon
? The Cotton I, Cotton Trade, 68th Congress, Senate Document No. No. 100, 1st Session, Part I, 100, 68th Trade, Senate Session, Part Congress, 1st p.107. 7
p. 107.
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Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
attendants the ring. ring. As As soon as is concluded, at the stand at as a attendants who stand a transaction transaction is concluded, the reporter takes note note of of the the price, price, the the amount sold, the delivery delivery the sold, and the reporter takes data are immediately flashed flashed by signals to a clerk stationed are immediately month. These data to a clerk stationed by signals clerk telephones the rostrum. rostrum. The clerk telephones the the particulars particulars of on the of each sale to to the each sale the attendant, who posts posts quotations the blackboard, blackboard, and the the transaction is transaction is attendant, quotations on the entered by by another another clerk the exchange's record sheets. The prices entered clerk on the record sheets. exchange's prices the tape, so reported simultaneously appear on the tape, wherever tickers tickers are are so reported simultaneously appear installed. Frequent summaries of of the the day's the installed. Frequent also on the day's trading trading appear appear also tickers. news tickers. It It is interesting to to contrast contrast this this procedure procedure with with that the physical physical is interesting that of of the there is is no common meeting meeting place grain exmarkets, where there exmarkets, place (except (except on grain changes provide facilities for trading in spot lots) , for all business is in all is facilities business which for for changes trading spot lots) provide transacted by telephone, telegraph, cable, or mail either through brokers either through brokers transacted by telephone, telegraph, cable, or and commission commission agents agents or or directly principals. between is no directly principals. There is publicity of transactions, all of are confidential, unless disclosed of all are unless disclosed of which transactions, confidential, publicity with the principals on each contract. the consent of of both principals contract. with orders come in Telephone Booths. Throughout the trading in to to Booths. the trading day, day, orders Throughout Telephone the exchange exchange floor houses, which have branch offices offices the floor from commission houses, in various various parts parts of of the the country country and even abroad. Around the the floor in floor of of the exchange exchange are rows of telephone booths booths which are members. are leased to members. are rows of telephone leased to the delivers it it to to the An attendant attendant receives receives the the order order and delivers the broker at the ring. at the ring. facilities permit After the order has has been executed, executed, the the same facilities permit the the attendant After the order to report to the the commission house house (that the order) price at the price to at gives the (that gives order) the report to which the purchase purchase or sale has has been made. or sale which the Hours of of Trading. All exchanges hours for for trading. trading. fixed hours Hours exchanges have fixed Trading. All o'clock the at ten open at ten o'clock and the trading day ends at three at three Most exchanges trading day exchanges open is at if o'clock, except on Saturdays the close is at noon, if they remain close when the noon, o'clock, except Saturdays they open at all. all. There are are practical practical reasons reasons for the limited for the limited trading trading day. open at day. at the brokers are five hours at the ring, brokers are likely to quit the hours to five Even with only ring, only likely quit the thoroughly exhausted, if the the market has been active floor thoroughly active and the the volume floor exhausted, if of orders orders large. large. A second reason reason is is closely closely linked with the the fundamental linked with of purpose of the exchange's existence. To fulfill its economic purpose, fulfill existence. of the its exchange's purpose, purpose prices registered the exchange floor should be representative of actual on floor the of actual exchange representative prices registered session would not only supply lethfor lethlong session only make for supply and demand. A long argic trading during part of the day but would also increase the of the also increase the day argic trading during part for opportunity for price manipulation. The more active the market, the active the market, the price manipulation. opportunity more likely likely are are prices prices to to be representative representative of of effective effective demand and supply. supply. It that execution execution of ring is is only at the It must be remembered that orders at of orders the ring only of a a of the a part part of the story story of a trade. trade. After After trading trading has ended for the day, day, all all for the trades remain to to be be cleared cleared and margins margins must be be adjusted with the cleartrades with the clearadjusted ing house. Long after the the brokers brokers have left the exchange, will be be left the Long after ing exchange, lights lights will ,
Organization and Operation Organization and Operation
157 157
burning in in the of commission houses, bookkeeping staffs staffs the offices offices of houses, where bookkeeping burning are posting credits credits and debits to customers' preparing are posting debits to customers' accounts accounts and preparing day. that day. which have been carried carried out that hours correspond to banking hours. Finally, exchange to hours must hours. correspond banking Finally, exchange Limitation on Daily Daily Price Price Fluctuations. Fluctuations. The exchange rules also fix also fix Limitation exchange rules aa limit limit on price price fluctuations fluctuations during anyone trading day. The limit varies one limit varies during any trading day. among the the Chicago of Trade, for example, it the exchanges; Trade, for exchanges; on the Chicago Board of among example, it in the is per bushel bushel for for wheat. wheat. When prices 10 cents the course cents per course of is 10 of anyone any one prices in of the day have risen or fallen above or the closing prices of the preceding or fallen below the risen closing prices day preceding further trading day to full extent of the the limit, limit, no further trading is the is permitted on the to the extent of the full day permitted are within the exchange for that day day except prices which are limit. The at prices the limit. for that exchange except at purpose of this rule is to allow operators to obtain a objective to a allow market obtain more rule is to of this operators objective purpose have factors the underlying factors precipitated the heavy perspective on which the the heavy underlying precipitated perspective either buyers fluctuations, to to prevent prevent panic panic among buyers or to permit permit or sellers, sellers, to fluctuations, among either as well as the the clearing to the exchange exchange commission commission houses, houses, as house itself to well as itself the clearing to variation prepare additional calls for variation margins, and to enable for market additional calls margins, prepare calls. exchange traders to to prepare prepare to to meet such calls. exchange traders origin of of this this limit limit on price price fluctuations fluctuations on any is interinterThe origin any given given day day is in esting can be traced to the First World War. Late in 1916 there had First 1916 there and traced to the can be esting in the been frequent frequent rumors of of peace. peace. Large Large amounts of of cotton cotton in the South, been South, in of held in anticipation of higher prices on the cessation consequently, were held cessation were the anticipation higher prices consequently, of hostilities, because because during during the the war relatively relatively little little cotton cotton had been of hostilities, shipped to Europe Europe through through lack lack of of cargo 1917, 1, 1917, cargo space. space. On February February 1, shipped to was issued by the the German government that submarines that an announcement was issued by government all allied would sink sink without without notice notice all allied and neutral ships found in in certain neutral ships certain at the zones. the morning morning following following this this announcement at the opening of zones. On the opening of the New York Cotton Cotton Exchange the price of cotton dropped $25 a bale the of cotton bale the a Exchange price dropped $25 (5f cents per per pound) pound). This was, was, until until then, then, the the most drastic drastic drop within drop within (5^ cents a single day in in the the history history of cotton prices the exchanges. of cotton a a prices on the single day exchanges. Within a few days a very substantial part of the price decline was regained. substantial of the a few decline days very part regained. price Subsequently, the federal federal government to the cotton cotton exchanges government requested requested the exchanges to Subsequently, the fluctuations. Since provide for for limitation in daily price fluctuations. that time similar limitation in similar Since that daily price provide limitations have have been been adopted by all exchanges. The following rule, all limitations most following rule, adopted by exchanges. which relates relates to to limits, is typical: is which limits, typical: notices of of the of orders orders the execution execution of notices
.
of hides Trades for future delivery hides in in any not be made during for future shall not Trades delivery of any month shall during anyone day at prices varying than two cents per pound more than one at cents or below day prices varying per pound above or any the lowest lowest price price of the closing range of of such by the such month as as established established by the Comof the the closing range mittee on Quotations Quotations at the close close of of the the preceding preceding business of the the at the business session session of mittee in Exchange. The foregoing limitations shall not apply to trading in the delivery shall not to the limitations foregoing trading Exchange. apply delivery for delivery month during the period period in in which Transferable Transferable Notices therein Notices for during the delivery therein the may be issued, unless otherwise determined by the Board. otherwise determined unless issued, by may At the of the the Board, Board, any limit of trading herein herein provided provided for may of trading the discretion discretion of for may any limit
158
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
from time time to to time tin.e and without without previous previous notice notice be changed from suspended or changed or suspended temporarily modified. modified. temporarily note of of aa majority majority of of those those present, less than in no event event less The affirmative affirmative note present, but in in twelve of the the Board, Board, is is necessary necessary to change in the foregoing to effect the twelve members of effect any foregoing any change provisions. provisions. It is aa strict rule, enforced enforced under penalties, penalties, that trades on the the It is that no trades strict rule,
exchange may be be made before before or after trading trading hours. Brokers gather gather hours. Brokers or after exchange may the sets at the ring at the opening opening awaiting awaiting the the stroke the gong which sets the at of the the ring stroke of at the gong the of the exchange in motion. Promptly at the closing hour, the machinery in the of at the motion. hour, closing machinery exchange Promptly cessation of of trading trading is is proclaimed proclaimed by by the the sound of the gong. All unexecessation of the gong. All the cuted the opening opening of on the following cuted orders of the orders must await await the the exchange following exchange business business day. day. Statistical Information. After After the the close the business session Statistical Information. of each each business session the close of exchange publishes sheets, compiled under direction of the secretary, in the of direction under sheets, secretary, in exchange publishes compiled with a complete summary of the day's trading is given, together with which a of the is given, together day's trading complete summary the latest latest statistical relating to to the production, movement, the statistical information information relating the production, movement, of and supplies of the commodity. These sheets are for the convenience of of the for sheets the are commodity. supplies members. In addition, many exchanges publish periodical compilations addition, many exchanges publish periodical compilations in great great detail. of of information in of statistical statistical information detail. An extended description description of this this phase phase of of the the exchange's exchange's activities activities will will be found elsewhere. elsewhere. s8 Standard Contract. commodity exchange of a fixed fixed unit Contract. Each commodity has a unit of exchange has trading. The unit unit is is prescribed prescribed in in the the by-laws in the the trading. by-laws and incorporated incorporated in futures contract. contract. The amount traded traded on each contract futures thus always contract is is thus always fixed and certain. for the fixed certain. One contract receipt of contract calls calls for the delivery or receipt of one delivery or unit of Every trade trade is unit. 99 unit is made in in terms the conimodity that unit. of the terms of of that commodity..•JEvery Price Price Quotations. the trading trading unit unit is in the as the the interest is prescribed interest Quotations. Just Just as prescribed in of uniformity, uniformity, so limits of of price price quotations in fractions or in fractions deciof so minimum limits or deciquotations are established. established. Offers in terms terms mals of of aa cent mals cent are Offers are are made and accepted accepted in of cents fractions of of aa cent cent per per pound pound or bushel of the standard unit. cents or of fractions of the of or of or bushel standard unit. illustration will will make this this clearer. clearer. The New York Cotton Exchange An illustration Exchange in fractions to be be made in per requires bids bids and offers fractions of offers to of 1/100 of a a cent cent per 1/100 of requires pound. Let us say that a broker sells "ten at 21.85. This "ten Let sells November" at that a broker us 21.85. say pound. in November, means that that his his contract is to to sell, November, ten ten lots lots of of contract is for delivery sell, for delivery in 100 bales each, each, at at aa price price of of 21 21 and 85/100 per pound. pound. Or, 100 bales cents per let us us Or, let 85/100 cents say a rubber exchange broker sells "five December" at 18.05. His contract a broker sells "five at rubber His contract 18.05. say exchange is to to deliver pounds of of rubber rubber-five is deliver 112,000 five lots-and lots and for for this this the the buyer 112,000 pounds buyer will pay pay at at the the rate rate of of 18.05 cents per per pound. pound. will 18.05 cents Trading Months. At the the beginning beginning of month, futures be of each month, futures may Trading may be in anyone sold for in that that month or or in for delivery a stated sold of a stated number of of any one of delivery in succeeding calendar months. In some commodities, active trading is months. calendar active commodities, succeeding trading is 88 See V. See Chapter Chapter V. 9 For contract 9For contract units units on various various exchanges, VII. see Chapter exchanges, see Chapter VII.
Organization Organization and Operation Operation
159 159
carried carried
on in in every every month of the year. year. In others, of the either through others, either through custom or of harvesting or because because of harvesting and marketing peculiar to conditions peculiar to marketing conditions the commodity, the active trading is centered in a few months and there is active is in a centered few there is commodity, trading
little buying buying or or selling of contracts contracts for the inactive months. in the for delivery inactive months. selling of delivery in Thus, the Chicago of Trade futures trading is is concentrated futures trading concentrated Thus, on the Chicago Board of in in four four months of of the the year year-May, July, September, and December; that that December; May, July, September, a vast is, a vast majority of the contracts are made for delivery in one of these of the contracts are for in these of is, majority delivery four four months. On some exchanges exchanges trading trading is far as is conducted as as far as eighteen eighteen in the the future. months in future. for Trading for delivery in in the the current to an end on the the current month comes to Trading delivery last day issued for last transferable notices notices may for delivery day on which transferable may be issued delivery during during the current next calendar becomes the the earliest the current month. The next calendar month then then becomes earliest for trading; month for trading; meanwhile the the most remote calendar of calendar month of in which trading those trading is is carried month. those in carried on moves up the last last delivery as the delivery month. up as most Calls. Trading on of the exchanges is opened daily by a Calls. of the is "call," exchanges Trading opened daily by "call," which resembles It is is an orderly means of by months. months. It estabresembles an auction auction by o estaborderly in at the the opening opening for for each each delivery month in turn, instead lishing prices at instead turn, lishing prices delivery of at once into into general of plunging plunging at general trading. trading. As soon as the opening as the gong opening gong the of current month the name of the current or the first month in which has sounded, or the first in has sounded, the trading is being being conducted conducted'is by card buy exhibited by is exhibited card or or indicator. indicator. Bids Bids to to buy trading is that month only. and offers offers to'sell then made for for that These mayor may to sell are are then or only. may may not result result in in trades. trades. In In either either event event the not the market quotations for the call the call quotations for in terms hours are are thus thus publicly publicly established terms of of actual actual transactions established either either in hours transactions or in in terms terms of of bids bids and offers. After all bids and offers for one month all bids offers. After offers for or have been concluded, the call proceeds to the next month, have so on concluded, the call proceeds to the month, and so in which the through the list until until the the last last month in the commodity be the list commodity may may be through call is is then adjourned and regular trading traded has has been reached. reached. The call traded adjourned regular trading a third, begins. A second, is held during call is third, call second, and on some exchanges exchanges a during begins. each day. each day. at the or pit Trading Rules. The scene scene at the ring ring or to the the onlooker onlooker pit must seem to Trading Rules. one utter confusion. confusion. Numerous brokers brokers are out simultaneously are crying of utter one of crying out simultaneously in what appears their bids bids and offers. voices mingle mingle in to be aa meanoffers. Their voices their appears to ingless babe!' Excited brokers shout and gesticulate, reiterating shout brokers babel. Excited the same gesticulate, reiterating the ingless all that to all bid or offer and apparently oblivious to that is is going bid or offer them. going on around them. apparently oblivious waved, and two two brokers brokers jot jot something on pads. Nobody else are waved, Hands are something pads. Nobody else But is one of of attention to them. the scene is confusion only pays any to them. the scene for attention only for pays any those not understand understand the the machinery machinery of is the ring. of the those who do not ring. An airplane airplane is in an incomprehensible device to the tyro in aeronautics; knows that he device to the that aeronautics; tyro incomprehensible the machine is understands little of or nothing little or is capable of the flight, but he understands nothing of capable of flight, in general the reasons reasons why why the the monoplane monoplane has has replaced replaced the biplane in the biplane the use, general use, it it the form of the plane is it is, why it flies, or it is navigated why how is is what it the form of the flies, is, why navigated plane why it is in flight. flight. Similarly, the spectator that an while it is in while here, who knows that Similarly, the spectator here, little
160
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
exchange is nation-wide-or, rather, a world-widemarket world-wide-market place, place, may is a nation-wide or, rather, exchange may bewildered by by what he he sees. sees. be bewildered As aa matter matter of of fact, fact, the the written written and unwritten rules rules which govern govern trading at the the ring ring make for for the the highest highest degree of certainty fairness trading at degree of certainty and fairness first place, every offer in trading. In the first to sell and every bid to buy buy the offer in to sell bid to trading. place, every every be announced by by outcry across the ring. This rule causes a babel must be across the rule a causes babel outcry ring. of voices, for an open Every trade trade and the the price price it makes for of voices, but it open market. Every is certain certain of at it is is made is of registration. registration. The market becomes becomes an at which it accurate recorder recorder not not of of some prices, prices, but but of a function it of all all prices, accurate a function it could could prices, if never never perform, perform, if private private trades trades or or trades trades away the ring ring were away from the permitted. permitted. What happens happens when a bid bid or or an offer the din' voices, offer is is made? In the din of of voices, the acceptor how is is the to be determined? The by-laws by-laws provide for every acceptor to provide for every An to contingency. offer to sell is open to the first buyer meets the offer sell is to the first the who meets contingency. open buyer A bid must closed price. bid be closed with the first broker who offers a lot at the with the first broker be lot at offers a the price. price. Knowing that, much of of the the apparently named price. shoutmeaningless shoutKnowing that, apparently meaningless A ing and gesticulation simple of comprehension. shout or becomes of or a gesticulation simple comprehension. ing the hand may may be only the effort of a broker to attract another's effort a broker to another's wave of of the the of attract only attention so that aa transaction transaction may may be made between them. them. attention so that buying and selling prices being cried out simultaneously by cried With buying selling prices being simultaneously by market at many brokers, can there be a representative price at any be how there a many brokers, representative price any given time? May not not trades trades be be consummated on opposite sides of of the the time? May given opposite sides ring at wide variations in price? Again the rules govern. All trades All in at variations rules trades must wide the govern. ring price? Again be made at market. At any given time time the the market rests rests between an at the the market. be any given upper and aa lower For illustration, the lower lower limit be taken taken limit may lower limit. limit. For illustration, the may be upper as highest price price which any buyer is bidding and the upper limit as the limit is as as the the highest bidding any buyer upper to A is the lowest price at anybody is offering to sell. Say is offering is sell. at lowest which the offering Say anybody price offering to sell a lot May cotton cotton at at 29 cents. So long as he continues continues this lot of of 10 10 May this to sell a 29 cents. long as B cannot be be made at higher figure. figure. Similarly, if is bidding offer, aa trade if at a a higher is trade cannot offer, Similarly, bidding for May May cotton at 28.90 28.90 cents, trade can be be made at lower price, price. at a a lower cotton at for cents, no trade while he he maintains maintains his his bid. bid. The lowest highest bid bid conlowest offer offer and the the highest conwhile stitute the price limits limits for for the the market at the moment. The purpose purpose of of at the the price stitute the rule, of course, is to fix prices as closely and definitely as possible. fix is to as as the rule, of course, definitely closely possible. prices In describing describing the the work of of the the floor in settling floor committee, its function in committee, its settling priority in the case of disputes over simultaneous acceptances of bids the case in of of bids or or disputes acceptances priority offers was mentioned. There is one case in which the matter may be in case is the offers may decided without without recourse recourse to to this this committee. A offers May cotton offers 10 10 May decided cotton and X and Y simultaneously simultaneously meet the the price, price, X bidding bidding for for 10 10 contracts contracts All or any of a lot and Y for for five. has the the priority. priority. All part of lot which five. Here X has any part his lot offer his lot "all "all or or none." is offered may be be accepted. seller cannot offer none." is offered may accepted. The seller all and the for all If there are acceptances, one for part If there are simultaneous acceptances, the other other for for part of aa lot, lot, the the former former prevails. prevails. of
Organization Organization and Operation Operation
161
in a transaction The two brokers brokers involved in transaction make notes notes immediately immediately of particulars of the trade trade which which has has been consummated, both of the the particulars of the consummated, and both to buyer seller are careful to compare these. In case the notes do not and are careful seller In these. case the not notes buyer compare member to agree, the who claims to made the purchase or sale is the have the agree, purchase or sale is required by rule rule to to close close out the the contract contract immediately market, at the the market, immediately at required by of leaving the question of responsibility for loss to be determined by arbithe for loss to question responsibility by arbileaving A more informal tration. informal in common practice is for the method tration. practice is for the two to share the brokers to the responsibility responsibility by by halving halving the the profit loss resulting resulting brokers or loss profit or from closing out the disputed trade. out the trade. closing disputed Commissions. Minimum commissions are prescribed for for all are prescribed all exchange exchange is established terms of the standard unit unit in terms members. The commission is established in of the not a of trading. Thus, a resident of the States is not a member a resident of United is States who of the trading. Thus, of of Trade and wishes of the the Chicago Chicago Board of pays a commiswishes to to trade trade there there pays sion of $15.00 the purchase purchase or sale, for bushels for the for his his account, of 5,000 sion of or sale, 5,000 bushels account, of $15.00 for all exchanges for of commissions for orders executed on account of wheat. On all orders exchanges contract unit of a foreign foreign buyer buyer or seller are higher per unit than the the rates of a or seller are higher rates per contract prescribed for residents, the commission charged a member of for whereas the of residents, charged prescribed the exchange is one-half that is by the the that is paid by the is one-half which non-member. exchange paid On many instead of flat rate all contracts exchanges, instead of aa flat rate applicable to all contracts many exchanges, applicable to at all prices, prices, aa graduated scale of commissions is On the is established. at all of scale established. the graduated the commission is $17.50 per minimum is New York Cotton Exchange, the $17.50 per Exchange, all orders of 30 contract orders executed executed at at aa price price of less. contract on all 30 cents cents per pound or less. per pound If the price price exceeds exceeds 30 per pound, pound, there If the there is is an additional additional $2.50 for 30 cents cents per $2.50 for in price. each cents or portion of 5 cents such excess 5 cents or portion of 5 cents of excess in of such each 5 price. for other Floor brokers, who make aa specialty orders for of executing other Floor brokers, executing orders specialty of members and who "give up" or their principals for clearing house for their name or clearing "give up" principals rates of commission. These brokers brokers correspond purposes, receive receive lower lower rates of commission. correspond purposes, with the the "two-dollar brokers" on the the stock orders "two-dollar brokers" stock exchange. They execute orders exchange. They at the ring for for fellow members, but they they do not become obligated at the ring fellow members, obligated on are the contract. Instead, Instead, when confirmation confirmation slips are exchanged, give the contract. they give exchanged, they slips up the the names of of their their principals principals and then then step the transaction transaction of the step out of up for X, entirely. A, a floor broker, buys from 10 May rubber for X, an B 10 a floor broker, A, May buys entirely. exchange Normally the buyer, A, and the seller, B, the the member. seller, B, would buyer, A, Normally exchange exchange confirmation the real real member as the confirmation slips. "gives up" up" X as exchange slips. When A "gives B. Since the floor floor in interest, contract will will be be signed signed by by X and by by B. in the contract interest, the his broker's work is thus confined confined to to the the making making of the trade trade at ring, his of the at the the ring, broker's is thus the member commission is is lower. lower. On Commodity Exchange, Inc., Inc., where the commission Commodity Exchange, floor rate is is $10.00 per contract for hides and rubber, the floor brokerage for hides contract rate rubber, $10.00 per brokerage member rate is $2.25. On the New York Cotton Exchange, where the the rate is $2.25. Exchange, rate closed at at 30 pound or under, cents per rate is is $17.50 for contracts contracts closed 30 cents under, the $17.50 for per pound transaction floor brokerage brokerage rate rate is the price of such transaction does not of is $1.75, the floor when $1.75, price exceed 30 cents per pound; when the price of such a transaction exceeds of the price exceed 30 cents per pound;
162
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
for each 5 cents 30 cents per pound, pound, there there is is an additional cents or or cents for 25 cents 30 additional 25 cents per in portion of 5 cents of such excess in price. of 5 cents of such excess price. portion
to another. Contracts are are often often switched from one delivery switched from Contracts delivery month to his to maintain his May may may decide, before May 10 May of 10 seller of The seller arrives, to decide, before May arrives, does so by "covering" buying 10 May and selling, short position. He does 10 May or buying short position. so by selling, say, say, "covering" or 10 October. Although this is but a continuation of his original position a of his 10 October. Although this is continuation original position so far as principal is is concerned, the subsequent purchase and the the as the the principal so far concerned, the subsequent purchase to sale are regarded as transactions and therefore subject to regular sale are new therefore as transactions regular regarded subject commission rates. rates. Floor. Though may Members On The Floor. of an exchange exchange may any member of Though any carried execute orders orders at at the the trading trading ring, ring, in practice the trading is is carried in actual execute actual practice the trading in the the ring. by specialists. of exchanges rarely appear ring. on by Many members of exchanges rarely specialists. Many appear in classes In the group of of traders traders around the the ring ring will will be be found two two broad classes the group those whose whose business business it orders of brokers: brokers: one one consists consists of of it is of those is to to execute execute orders for customers of the houses which they represent, for for other other members or or for customers of the houses they represent, the other of operators deal on their other of operators who deal their own account. the account. or floor their Ring or floor brokers brokers representing representing commission houses devote their houses devote Ring time entirely to executing the orders which come in from customers to of the in orders customers of entirely executing their trade for for their their own account usually floor floor their houses. are usually houses. Members who trade account are at a in contract the buy or sell in anticipation of closing the contract at a speculators who or sell of buy closing speculators anticipation in a is higher or lower price within a short time. The floor speculator is in and or lower price within short time. floor speculator higher out of of the the market market continually. is alert to close his if the the price price to his trade, He alert close is trade, if continually. goes against him. does not seek large profits on a single transaction, a him. not seek He does transaction, goes against large profits single but is is content content with with small from many transactions. but small gains gains from many transactions. floor speculator rarely trades trades at bid or price, but but at the or offered offered price, first bid The floor the first speculator rarely him the he tries tries for for aa more advantageous figure that will enable to the that will to make he enable advantageous figure turnover of his trade quickly and profitably. In Chapter Ill, on specuturnover of his trade quickly specuprofitably. Chapter III, lation, the the part part played played by by those those who make the market are in considered in the market are considered lation, floor speculator is a useful factor in making the market. market. a in the more detail. detail. The floor is useful factor making speculator When trading inactive, the the market thin, far apart, is inactive, bids and offers offers far thin, and bids trading is apart, an important part of the buying power floor speculators may supply floor the of may buying power and speculators supply important part the selling pressure bring bids and offers together which a the bids offers bring together and make a selling pressure closer market. closer market. at the Contract Slips. Trades are the ring but brokers brokers do are made at viva voce, Contract Slips. voce, but ring viva not rely rely solely on their for details of the transaction. their for not of the Each memories details transaction. solely a broker carries with a trading card, one side of which is ruled in him side of is broker carries in trading card, red and the in black. black. Sales noted on the red, in red, side in Sales are are noted the side side ruled ruled in red the other other side on the side ruled in black. These are given purchases ruled in black. are side memoranda to the purchases given to during the the day, day, and contract them. The clerks during clerks contract slips are made up up from them. slips are are slips are short forms, with spaces for the of short memorandum with the of seller for seller names forms, spaces slips buyer, the the number of of contracts traded in, month, and buyer, the date, contracts traded the delivery date, the in, the delivery month, and the the price. price.
Organization and and Operation Operation Organization
163
the close close of of the the day's day's trading, trading, slips slips properly properly filled filled in in with with the the data data At the for each each trade trade are are ready ready for for the the brokers' brokers' signatures. signatures. The seller seller will will for present his his slip slip to to the the buyer buyer for for signature, signature, and the the buyer's buyer's slip slip will will be be present signed by by the the seller. seller. The signing signing of of the the slips slips constitutes constitutes an enforceable enforceable signed the parties. parties. Later Later the the particulars particulars of of the the contract, contract, as as contract between between the contract the slip, slip, are are posted posted on the the books books of of the the commission house. house. evidenced by by the evidenced slips are are also also used used for for aa purpose purpose more germane germane to to our our interest. interest. DeDeThe slips tails of of the the contracts contracts they they represent represent are are also also entered entered on separate separate sheets sheets tails of purchases purchases and sales, sales, which are are sent sent to to the the clearing clearing house. house. This This is is aa of the of separate organization, but one exists for the purpose of simplibut which exists for purpose simpliseparate organization, between members fying expediting the settlement of contracts and, contracts of and the settlement and, fying expediting in addition, addition, of of guaranteeing guaranteeing all all deliveries deliveries and all all payments payments on all all in cleared contracts. contracts. The clearing clearing house house and its its work will will be be the the subject subject cleared of the the following following chapter. chapter. of
[
CHAPTER
CHAPTER
IX J )
The Clearing Relationship Its Relationship House and Its Clearing Rouse to the the Exchange Exchange to
Just as the medieval fair fair was aa prototype prototype of of the the commodity the medieval exchange, commodity exchange, Just as a clearing in these ancient markets markets appear appear the rudiments of so of a these ancient the rudiments so in system. clearing system. a means of debts growth of current debts and current the growth of commerce, of offsetting With the commerce, a offsetting fair credits among among merchants merchants and bankers bankers became as necessary to to the the fair as necessary credits as fair had become indispensable to the the economic life life of of the people. people. as the the fair indispensable to The fairs fairs of Ages achieved their their greatest growth in the twelfth of the the Middle Ages greatest growth centuries, and toward the period an efficient efficient this period the end of of this and thirteenth thirteenth centuries, of the four clearing at the the fairs fairs of Lyons. After After each of of Lyons. evolved at clearing system system evolved fairs held there there during the year, year, settlement settlement days established on fairs held days were established during the which . . . Every Every banker came to to these these settlements settlements prepared a balance sheet sheet prepared with a in of his debits and credits. Three steps were required in completing settlements; of his debits credits. required completing settlements; steps first, the acceptance acceptance of bills by by those those upon the of bills first, the they were drawn . . . the upon whom they in comparison of accounts, -and finally, .the settlement in money of which very of -and settlement of accounts, money finally, *the very comparison little was ultimately ultimately required. required. 11 little .
.
.
.
.
.
Clearing houses for the offsetting offsetting of banks for the of debits credits among debits and credits among banks Clearing houses have long established institutions in the banking field. Efficient in been institutions have established the field. Efficient long banking at aa later later date date established clearing houses houses were at in commodity established in commodity markets clearing in They clear clear both the the standard contracts in the States. They the the United States. contracts and the money accounts of each commodity exchange to expedite both deliveries of to accounts deliveries money commodity exchange expedite such contracts. contracts. and collections collections under such The exchange clearing house house of bears the of each each commodity the same exchange clearing commodity market bears relationship to its affiliated exchange that the financial clearing house to its affiliated that financial the relationship exchange clearing house bears to the bears to banks. the banks.
The exchange exchange clearing however, performs sevhouse, however, clearing house, performs sev-
eral additional additional functions. functions. It not only money accounts eral all money It clears clears not accounts (debits only all (debits and credits) all offsetting members, but also contracts of of its its members, also guarantees credits) and all offsetting contracts guarantees performance of of them them-aa function that that no other house system other clearing performance clearing house system undertakes. This function function isa part of insurance services undertakes. is a part of the the important insurance services important i 1
Vol. Vol.
C. A. C. A. Conant, Principles of Money and Banking Banking (New York: Harper Conant, Principles of Money (New York: Harper & Brothers) Brothers) , 11, pp. 239, 239, 240. 240. II, pp. ,
164 164
The Clearing Clearing House
165
of of
commodity exchange exchange markets markets-the payment the insurance insurance of of delivery commodity delivery and payment on delivery delivery under under every every cleared cleared contract. contract. a work the of During the course of a day's on the course the exchange, a broker broker executes executes day's During exchange, a and sale many contracts of purchase sale between of the exchange. contracts of between of the members many purchase exchange. Some of of his sales for his sales for certain certain customers for for deliveries in specific deliveries in months, specific months, will probably be to to a member from whom he also has bought bought during also has will probably the during the of other day, for the account of the account other customers, other contracts contracts for for delivery in customers, other day, for delivery in the Since the the same future months. months. Since the purpose purpose of to facilitate of an exchange is to facilitate exchange is the business business of of its its members, members, under such circumstances the offsetting of the circumstances the offsetting of in the such purchase purchase and sales contracts in the same delivery delivery months months against against sales contracts one another is mere common sense, sense, for for "it insist upon upon "it would be as as idle another is one idle to to insist an actual actual delivery delivery and counter-delivery counter-delivery between the the members of of the the banks it to exchange as it be to compel the to carry to each other's bankas be the to would to bankother's carry exchange compel for by ing house the actual money money called called for received the actual the checks checks severally by the severally received ing house 2 by each upon the other." 2 each the other." by upon Contracts. Before Direct and Ring Ring Settlements Settlements of Before describing the work Direct of Contracts. describing the it may well to of house, it may be be well methods to mention briefly of the the modern clearing clearing house, briefly methods of settlement (of offsetting contracts) which prevailed before modern before of settlement (of offsetting contracts) prevailed houses exchange clearing houses were developed. Without clearing were houses, developed. clearing houses, exchange clearing with one one brokers were were accustomed accustomed to to settle their offsetting contracts with settle their brokers offsetting contracts another by what they they called called direct "rings." "washes" and by direct "washes" another by by "rings." in April Suppose broker on aa grain April has has on his his books books sales a broker sales exchange in grain exchange Suppose a contracts to deliver many thousands thousands of May wheat and also of bushels of May deliver many bushels of also contracts to purchase contracts for the receipt of many thousands of bushels of May of of bushels contracts for of the many receipt May purchase wheat wheat. Many Many such offsetting contracts contracts of of purchase sale of of May such offsetting wheat. purchase and sale May wheat to day for the have by other other members from day the accounts also been made by accounts have also day to day for of their various various customers the month preceding the delivery the the customers during of their during preceding delivery month-May. settlement by by offsetting sales and purchases were sales If no settlement month May. If offsetting purchases were maintained on all possible before delivery, margins would have to be to all possible before delivery, margins until delivery delivery time, time, that May. Then such contracts until that is, the month of of May. such contracts is, the of would come the the business business of of the the making making and receiving of deliveries and deliveries would receiving for and counter-deliveries paying for such deliveries counter-deliveries deliveries counter-deliveries counter-deliveries and paying and for them. weighing, billing, collecting for them. If, however, and of of sampling, If, however, collecting sampling, weighing, billing, for the broker A has has sold sold for for certain the delivery of contracts for certain customers contracts broker delivery of has May wheat to broker and for other customers has purchased from B B for other to broker purchased May contracts for for delivery of May May wheat, wheat, these these contracts contracts between A and B contracts delivery of can be be settled without the the expense and delay of duplicate deliveries and settled without can delay of duplicate deliveries expense of like duplicate collections by the offsetting of like purchases against the like sales sales purchases against like offsetting duplicate collections by and by by the payment of merely the the differences prices based on the of merely differences in prices the payment the volume involved contracts. in such such contracts. involved in volume sold his contracts to If the prices prices at his May May contracts to B are higher than than are higher at which A sold If the 2 Springs v. lames, 137 137 Springs v. James,
no
App. Div. Div. 110 (121 N.Y. Supp. (121 N.Y. Supp. 1054). 1054). App.
166 i66
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
the prices prices at at which which he he made his his May May purchases bill B the B, he can bill purchases from B, will payment by by B of the differences merely for the the cash cash difference, of the differences will difference, and payment merely for close these transactions transactions between between them. them. Thus, to B A's sale sale to close these Thus, assuming assuming A's to been 5,000 bushels of May at $1.50 a bushel and his purat a bushels of wheat bushel his to have have been 5,000 $1.50 May purchase from n to have have been been 5,000 bushels of wheat at bushel, of May at $1.48 a bushel, chase from B to 5,000 bushels $1.48 a May wheat or $100, per bushel, bushel, or by B to to A avoids all the the payment payment of of 22 cents avoids all cents per the the $100, by of and counter-delivery and payment and unnecessary \!xpense of delivery delivery counter-delivery payment unnecessary expense counter-payment. the simple, simple, common-sense method of is the of settlement settlement counter-payment. This is of all such the method formerly used for direct for such contracts. used direct setof all contracts. This was the setformerly of out of purchases against corresponding sales. tlement or It tlement or "washing" "washing" purchases against corresponding sales. It or a could be effected readily, whenever aa sale purchase of sale or a purchase of a a definite could be effected readily, definite in quantity of a commodity in any delivery had been offset by aa a month of offset commodity any delivery by quantity the in quantity in the same month between the counter-transaction for the same the for between the counter-transaction quantity same parties. parties. of making direct or practice of making direct or "wash" settlements, Under this this practice settlements, however, however, only occasionally purchases and sales between the brokers balsales would the between brokers balpurchases only occasionally ance as to to quantity. might have have bought bought 100,000 bushels of of ance exactly 100,000 bushels exactly as quantity. A might B and have sold him 110,000 bushels. 100,000 May wheat from have sold bushels. wheat The 110,000 100,000 May direct settlement bushels could by direct settlement and the the mere payment closed by could be closed of bushels payment of short 10,000 the in cash, cash, leaving leaving A still still short bushels for for delivery differences in the differences 10,000 bushels delivery to B. toB. still obligated Though is thus thus s.till bushels of May to deliver deliver 10,000 of May 10,000 bushels obligated to Though A is as the wheat B, A's A's books books may may show that, that, as result of of a the result a similar similar settlesettleto B, wheat to of contracts contracts with with C, C, A is is aa net net purchaser of 10,000 bushels from of bushels ment of 10,000 purchaser C. A's books, consequently, show his present position to be one in his to in be which C. A's books, consequently, present position he has no real real interest in delivery. delivery. He has to B and bought bought from has sold sold to interest in has no he in in the same month. If (10,000 bushels) for delivery for the If month. like quantities C like delivery quantities (10,000 bushels) that will A can can bring bring Band together, so that C will deliver directly to B, A can so to C deliver can B and together, B, directly withdraw completely completely from these these transactions. transactions. withdraw these contracts through aa three-party processs contracts through settlement processs The clearing of these clearing of three-party settlement which could could not not be be effected effected by by direct direct settlement settlement was accomplished accomplished (before (before through the formation of "rings." clearing houses were developed) of houses were the formation If, developed) through "rings." If, clearing for example, Smith Jones $10, Jones owes Brown $10, and owes Brown for $10, Jones $10, Jones example, all three three debts without paypayowes Smith aa like like amount, debts can be canceled canceled without owes amount, all all three of any any money money if if all three parties parties come together and agree to offset to offset ment of agree together all three debt however, all three parties their debts, were to to pay debt. If, debt against If, however, debts, pay their parties lWere against debt. each one would be be aa mere mere conduit for for transmitting transmitting each debtor's debtor's $10 each one $10 to his his creditor. simplification of of the by having all three all the procedure creditor. The simplification three to procedure by having is obvious. obvious. Just pressing parties come together together is as obvious obvious and much more pressing parties Just as was the the need need for for some such such system, the article be cleared article owed or or to cleared to be was system, when the not money, money, but but standard standard contracts deliveries of large quanwas not of deliveries was contracts covering covering large quanof standard grades of wheat or cotton or any other bulky, but tities of or of standard or tities cotton wheat grades any other bulky, but
The Clearing Clearing House
167
homogeneous commodity which is is transferable transferable only by time-consuming time-consuming only by homogeneous commodity samplings, weighings, weighings, loadings loadings and unloadings unloadings into wareand expensive into wareexpensive samplings, houses, and payment payment and counter-payments after deliveries and counterafter deliveries counterhouses, counter-payments deliveries. deliveries. old form of ring settlement settlement did not not differ principle from the the in principle The old of ring differ in simple financial transaction described above. It involved one more eledescribed financial transaction above. It involved elesimple as well well as prices, were were to to be ment, however, however, since deliveries, as since deliveries, as prices, be adjusted. ment, adjusted. illustration of ring settlement by the payAn illustration of ring the paysettlement by the offset offset of of contracts contracts and the price differences differences is is given in the following typical transaction: in ment of of price the transaction: given following typical sells 5,000 .... . . A sells 5,000 bushels bushels of of wheat to to B for bushel, B sells sells to to C for $1.01 a bushel, $1.01 a sells to C sells sells to to D for for $1.02, $1.02, D sells to E for for $1.05, for $1.04, to F for sells to $1.05, $1.04, E sells and F in in turn turn sells sells to A for for $1.00. $1.00. Of course, to A $5,050, the course, B could pay $5,050, the pay to his of B purchase price of 5,000 bushels at $1.01, and C could pay $5,150, his purbushels at 5,000 $1.01, $5,150, purchase price purpay chase price price and so so on. involve the passing of larger chase the passing of considerably on. This would involve considerably larger in funds than than if checks were drawn simply price differences. differences. A in funds if checks to represent simply to represent price this case this case has has aa profit profit of of one cent bushel, B aa two-cent profit, D aa cent on each bushel, two-cent profit, two-cent six one-cent profit, profit, the profits of two-cent profit, profit, and E aa one-cent all being the total total profits of all being six cents. But C had a a five-cent losses five-cent loss, the total cents. one-cent loss loss, making the total losses a one-cent loss and E a making six cents, All that those the profits profits and losses losses being being equal. that is is necessary six for those is for cents, the equal. All necessary is to pay pay the the differences to those and settlement who have losses those who have profits losses to differences to profits 3 of the ring is of the ring is made. 3
for for $1.03, $1.03,
As aa consequence, consequence, those those transactions transactions which could not be be offset offset directly could not directly were cleared the "ring" by "washes" cleared through "washes" -with with other other members were by through the "ring" wherRing settlements, however, could be be made only by aa volunvolunever possible. possible. Ring ever settlements, however, only by by comparison of all trades. After exchange hours, broktary effort all After of trades. and effort tary exchange hours, brokby comparison all contracts repair to to the the "ring ers' clerks to compare contracts ers' clerks would repair compare all "ring room" to on their books. After rings were formed, offsets made, which were were open books. offsets their After were made, formed, rings open checks and differences fixed, clerks clerks ran ran about about to delivering checks to other other offices, differences fixed, offices, delivering for balances for balances balances owing collecting payments payments for balances due from for owing and collecting various members. members. various exchanges assumed assumed an ever ever increasing As trading increasing magnitude, magnitude, howtrading on exchanges ever, became apparent apparent that that this this method of of clearing it became ever, it clearing was both cumbera large for of a some, al1d inadequate for the clearing large volume the some, time-consuming, arjd clearing of time-consuming, inadequate in of of contracts. Consequently, in order to facilitate settlements of differences order to settlements differences facilitate of contracts. Consequently, on both both direct direct washes washes and rings, rings, central central associations associations were eventually eventually member established to to which payments payments due from from one exchange to to another established exchange could be be delivered delivered and through through which which balances balances due to to other members could one. could be collected. this development slow one. collected. But this a slow could be development was a In the coffee, for for instance, instance, the was an arrangement In the case of coffee, first step was case of the first arrangement step under which the by the Coffee and Sugar Exchange (of York) the the Coffee New York) Sugar Exchange (of by s 8 Albert Atwood, The Stock Stock and Produce Produce Exchanges Exchanges (New York: Alexander Albert W. Atwood, (New York: Hamilton Institute, Institute, 1927) pp. 309, 309, !HO. 310. 1927) , pp. ,
168 i68
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
Corn Exchange in New York acted the central acted as as the central clearing Exchange Bank in agency clearing agency for the for the settlement of such such differences, the payment payment of of which which automatically settlement of differences, the automatically the exchange exchange contracts. contracts. Rings Rings were still by closed the closed still worked out, out, however, however, by the voluntary co-operative efforts the part of exchange members. Repreon efforts of members. voluntary co-operative exchange part Representatives of member firms the exchange firms met daily in a sentatives of a room of of the after daily in exchange after close of trading trading and endeavored endeavored to to trace through the the various close of trace contracts contracts through various in order present in to complete complete as many rings rings as members present order to as possible. as many possible. This was a a difficult in active active markets, markets, since be difficult operation since there there would be operation in so many so many contracts contracts outstanding not directly offset that a seller, in and not that a in offset seller, outstanding directly attempting to trace a contract back, might find that as many as 20 or contract as trace find that as or to more 20 back, might many attempting If even one of firms were involved. involved. If these firms of these firms had no representative to firms representative to firm approve the ring, it could not formed. A firm had a large the it could not be which ring, large approve of funds could, position in in the the market and was short therefore, conceal short of conceal could, therefore, position its its position position and prevent prevent the the formation of not revealing revealing of rings rings merely merely by by not all its to all its outstanding contracts to other members or simply by not sending other contracts outstanding sending simply by
a representative representative to to the the ring ring room. At the in earlier the same time, time, although although exchange permitted rules in earlier days days permitted exchange rules members who were parties parties to to aa contract contract to upon each other to call call upon other for for as margins to cover daily or hourly variations, as well as original to cover or market as well variations, daily hourly original margins variation If both it call for margins, it customary to call for variation margins only. If to became customary margins only. margins, variation and original margins were uniformly required, it it was claimed, were variation claimed, original margins uniformly required, financial requirements requirements would have have been so that none but the so great the financial great that most highly capitalized firms could do business. This disinclination to firms business. could disinclination most to highly capitalized call for original margins, margins, however, however, not not infrequently infrequently occasioned disasoccasioned disascall for original through failures failures and bankruptcies, bankruptcies, which expedited trous losses losses through the trous expedited the development of efficient clearing clearing system. of an efficient system. development Furthermore, since the ring the only the since Furthermore, ring frequently only means members frequently was the the failure a firm had of of adjusting differences speedily failure of firm of a effectively, the speedily and effectively, adjusting differences have been aa link in the the settlement serious which would have link in settlement chain produced serious which produced all in the proportion in the the chain. best, the of financial consequences to to all chain. At best, financial consequences proportion of and small contracts liquidated by by direct washes rings direct washes contracts liquidated relatively small comrings was relatively at anyone in pared to the total of outstanding contracts at time in of contracts total volume the to any one time outstanding pared each active month. active trading trading }i'unctions of the Modern Commodity functions of the Clearing House. The cumberCommodity Clearing of wash and ring settlements some, unorganized, and voluntary voluntary method of ring settlements some, unorganized, affiliassociations been replaced replaced by by settlement settlement through through clearing associations affilihas now been has clearing ated with with the various exchange exchange markets. markets. Instead forming rings rings or of forming or Instead of the various ated to house clerks making direct washes sending clerks from commission to and washes direct sending making all commission house to make payments and collect differences, all exchange collect commission house to differences, exchange payments affiliated with each contracts passed through through the the clearing are now passed contracts are clearing house affiliated exchange as an an intermediary. of commodity commodity exchanges today exchanges today intermediary. Members of exchange as with each other no under the modern clearing house system longer deal the longer clearing house system
The Clearing Clearing House
16 9 169
after the the contract contract has has after
the floor slips been made on the floor and exchange contract slips exchange contract have been exchanged. exchanged. Each member thereafter thereafter deals have with deals exclusively exclusively with the association, assumes the contracts of every member which assumes the clearing the contracts of association, clearing every as against against every contracting member. For For instance, the Rubber other contracting as instance, the every other Clearing Association Association Rules (Section the Association that the Association (Section 11) 11) provide provide that Clearing and assume the obligations imposed thereby." "may accept contracts contracts the "may accept obligations imposed thereby." In other words, the the modern exchange house becomes buyer In other words, becomes the the buyer exchange clearing clearing house the seller all purchase purchase conconsales contracts contracts of of its its members, members, and the seller on all on all all sales all tracts its members; consequently all offsetting contracts can be readily tracts of its contracts members; of consequently offsetting readily washed out, out, and rings rings are are no longer necessary. All All contracts are between contracts are longer necessary. or a the clearing buyer or seller. All All offsetting offsetting a member seller. the house and a a member buyer clearing house <( out." In In addition, house, by the clearing contracts are are merely merely "washed contracts washed out." addition, the house, clearing by as against other 'contracting the contract of every every member as against other assuming contract of ^contracting assuming the all his his purchases that all purchases will will be be delivered delivered members, each member that insures to to each members, insures at contract price and that all his sales will be paid by the clearing house that all his sales at contract will be paid the house by clearing price for at contract price by the clearing house. at contract the house. for price by clearing Organization of aa Clearing Association. The modern exchange clearexchange clearOrganization of Clearing Association. the ing association is usually a corporation organized separately from the association is usually ing corporation organized separately a of it. As a it exchange independent of it. rule, it is a stock corporation, the and is a stock rule, independent corporation, the exchange may be be sold to exchange Its business business is is stock of which may sold only stock of only to exchange members. Its conducted under the the management management and supervision of its own board of of its board conducted of supervision directors purpose, however, however, is to act officers. Its Its sole sole purpose, is to act as a central directors and officers. as a central a specific specific commodity clearing agency for for members of of a commodity exchange. clearing agency exchange. Every Every member of the exchange, exchange, and only only a member of is priviof the of the the exchange, is exchange, privileged to a clearing house member, contingent on his compliance a house his to become member, contingent clearing leged compliance with certain conditions. generally include: conditions generally conditions. These conditions include; with certain
(I) The purchase purchase of the clearing of one or or more shares of stock stock of of the shares of house clearing house corporation. corporation. deposit of a substantial substantial sum of money in guaranty fund (2) in the of a of money the guaranty (2) The deposit of the association, association, say say $10,000. of the f 10,000. (3) Agreement by contract to clear all exchange to clear all contract transactions through exchange transactions through (3) Agreement by the house. house. the clearing clearing (4) Agreement Agreement to to abide abide by by all all the the by-laws by-laws and rules rules of the clearing of the clearing (4) house and all all subsequent amendments, house subsequent (1)
Partnership firms, firms, having having aa partner partner who is is an exchange exchange member and Partnership also in the the clearing house, may a stockholder stockholder in also a clearing privileges may enjoy privileges on clearing house, enjoy clearing firm canthe same terms terms as as aa clearing clearing member, member, though though technically the firm the canthe technically not be aa member. On most most exchanges are accorded the the not be exchanges where corporations corporations are privileges of of exchange membership, the the corporation likewise obtain obtain may likewise exchange membership, corporation may privileges all the the clearing privileges on compliance with all foregoing conditions with conditions foregoing compliance clearing privileges of the is also through one of of its officers who is the exchange. its officers also a a member of exchange. through
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges Having thus thus briefly briefly outlined outlined the the legal legal status the clearing clearing house and status of of the Having the requirements for membership, membership, let let us us proceed proceed to to consider consider its its operathe requirements for operations respect to to the the clearing clearing of of exchange exchange contracts. in respect contracts. tions in the Clearing Reporting to to the House. At the day's the conclusion conclusion of of each each day's Clearing House. Reporting the exchange, trading exchange, the the brokers brokers exchange contract slips exchange contract trading on the slips evidencing evidencing their purchases and sales sales made on the the floor. floor. These slips then go to the the their purchases slips then go to offices of the exchange member on whose behalf the brokers' contracts behalf the brokers' contracts offices of the exchange required to to file reports with with were made. All All clearing house are members file reports house are were made. clearing required of the house at the close of each day. The clearing houses, close at affiliated clearing house the the affiliated houses, day. clearing clearing the right right to to refuse refuse to however, reserve the to accept contract offered offered for for however, reserve accept any any contract notifying the the parties parties on or before eleven clearance by by so or before eleven or or eleven-thirty clearance so notifying eleven-thirty o'clock in the the forenoon forenoon of of the the following following business the filing business day. o'clock in day. On the filing and all accepted acceptance of these reports, all contracts between clearing these reports, accepted contracts clearing memacceptance of bers are by the the clearing clearing house, house, which thereupon are thereafter thereafter assumed by bers thereupon seller on the becomes the buyer from every the exchange to the seller the buyer seller to becomes exchange and the every seller contracts. In effect, on the the exchange exchange of of all all cleared cleared contracts. therefore, every buyer on effect, therefore, every buyer of all the clearing house guarantees performance of all cleared contracts by cleared house contracts the guarantees performance clearing by a to as a contracting party to each contract. substituting itself itself as contract. contracting party substituting sold to To clarify clarify this this whole operation: has sold to B across across the the exchange operation: A has exchange of the trading ring 10 contracts of May cotton. At the conclusion of the day's contracts of cotton. conclusion the May day's trading ring and B, and trading, contract slips are exchanged between the brokers, A between the are contract brokers, B, exchanged slips trading, are noted noted the the names of of the the respective respective clearing on these these slips clearing membersslips are say, Rand S-for the brokers have consummated the trades S R and for whom the brokers the trades or or the have the say, names of of the the clearing through the non-clearing house the members whom house names clearing through non-clearing member traders traders have have arranged arranged to to clear transactions. When the the clear their their transactions. named in file reports of clearing house in these contract slips file of their members contract these house their slips reports clearing respective transactions with the the clearing the latter latter becomes the transactions with the house, the clearing house, respective the seller, it becomes the the seller R, the the purpurpurchaser from from S, seller to to R, S, the seller, and it purchaser chaser. So far as as S is concerned, concerned, R, R, the the buyer, buyer, is party to to is eliminated S is as a a party eliminated as So far chaser. house assumes the contract and takes the his transaction. transaction. The clearing contract takes house the the his clearing S is as the R. In the the same way way S eliminated as to R and the place of of R. is eliminated seller to the seller the place clearing house replaces him. The clearing house, therefore, stands in the him. in the stands house house, therefore, clearing replaces clearing seller to relation of of the from every seller and of the seller to every buyer. seller the It relation the buyer of every buyer. It buyer from every becomes the party to to every by aa member contract cleared cleared by the other becomes other party exchange contract every exchange through the clearing house. Consequently, the exchange clearing the house. the exchange clearing house clearing Consequently, through in addition not expedites deliveries and collections, but also, to effectaddition to effectdeliveries not only also, in collections, only expedites in effect ing direct or "washes" of all all offsetting effect guar"washes" of direct settlements settlements or contracts, in offsetting contracts, guaring as both to as to delivery antees all exchange contracts (cleared through it) contracts antees all delivery and exchange (cleared through it) so It of the payment of contract price delivery. It can do so only because of the of on contract price only delivery. payment other sanctions rigorous and strict margin requirements requirements and other sanctions which it it strict margin rigorous enforces upon upon its its members. enforces The brokers' brokers' reports reports to to the the clearing clearing house are preare made on forms pre-
The Clearing Clearing House
171
scribed by the clearing house. house. There are reports: one, printed scribed by are two separate the clearing one, printed separate reports: ruled in red ink, setting forth list of broker's sales the and ruled forth a a list in red of each each broker's sales for for the ink, setting in black and the other, printed in black or blue, giving a list of each broker's day; or the a list of each broker's other, blue, giving day; printed purchases for for the the day. day. purchases On the report of of sales, sales, the the clearing house member firm's is the report firm's name is clearing house entered top of of the the sheet. sheet. On separate lines, each sale during entered at at the the top each sale made separate lines, during the day to aa clearing the name of member, is listed, the of the the member, listed, with the clearing member is day to the number of of contracts contracts sold, sold, the the delivery delivery month, month, and the the contract price. the contract price. daily "settlement price," which is the figure to which all trades are "settlement price," to The daily is the all trades are figure margin and settlement adjusted for for margin at conclusion of each conclusion of each day's settlement purposes adjusted day's purposes at and is noted to trading, is noted the from each to the clearing the due member the amounts clearing trading, house, or in the or from the the clearing house to to each member, recorded in the are recorded member, are house, clearing house debit or debit and credit debit credit columns, columns, respectively. respectively. The debit or credit credit for for each each transaction is the difference difference between the and the day's transaction is the the contract contract price the day's price last price in the settlement price, which usually usually is is the the closing the day's or last settlement price, closing or day's price in trading future month bought or sold the specific sold and cleared. cleared. The for the trading for specific future bought or report of purchases is out. out. of is similarly made similarly purchases report addition to In addition to these these reports, reports, aa more elaborate the In elaborate one, as the one, known as is is required. This is a recapitulation Clearing House Recapitulation Sheet, a recapitulation Recapitulation Sheet, is required. Clearing of each clearing of the purchases and sales sales reports reports and aa tabulation tabulation of the purchases of clearing market position position with with the house (long member's open or short) the clearing clearing house short) (long or open market the debit debit or credit balance balance of each member with with the of each or credit the clearing house and the clearing house contracts for for each month. all contracts each delivery on all delivery of this In order give aa more comprehensive understanding of this report, order to to give comprehensive understanding report, it is necessary to to become familiar familiar with with the margin requirements the margin it is necessary imposed requirements imposed itself from possible by the the clearing house on each transaction to to protect possible each transaction protect itself clearing house by house. of aa member on his his commitments to the clearing house. default of to the default clearing Original Margin Requirements. Requirements. The operation of the the clearing house, clearing house, operation of Original Margin in addition addition to to making making possible possible the the direct all offsetting of all conin direct settlement settlement of offsetting confinancial guard against the remotest possibility of financial tracts, is designed to of the remotest is to tracts, guard against possibility designed in the latter stands or the the clearing clearing house. house. When the the loss any member or stands in the latter to any loss to shoes every buyer, buyer, thus thus bound to to fulfill seller, of every fulfill his contract with every his contract shoes of seller, every in the seller, thus thus obligated his contract with of every to fulfi11 fulfill his contract with shoes of and in the shoes every seller, obligated to every buyer, it it guarantees performance to to each and, to to of every contract and, each of every contract guarantees performance every buyer, it to to do so, it must require require from from each enable a money of its its members a each of enable it so, it money deposit for for each each contract contract cleared cleared and not not offset. offset. deposit For every contract contract listed listed by by the the clearing the report, to For every report, made to clearing member on the not offset, offset, there there must be be posted posted with with the the clearing the clearing house house and not the clearing clearing house a cash cash deposit, the amount of by the the rules of rules of of which is is determined by house a deposit, the the clearing clearing house house and is is known as of as the the original the by-laws of margin. The by-laws original margin. the clearing house house usually usually establish establish the the the minimum amount which the the clearing the board clearing member is is required required to to post post against contract, and the against each contract, clearing
172
Commodity Exchanges Exchanges and Futures Futures Trading Trading Commodity
or lower these of time to to time time may may raise raise or margin requirethese margin of directors directors from time requirelimitation. Some clearing houses may ments, subject to this limitation. houses minimum this to ments, subject clearing may a establish original margin requirements on a graduated scale, based on based on establish original margin requirements graduated scale, the total long or or short position of each member with the the clearing house. of each short position total long the clearing house. of Current margin requirements of various clearing associations are various associations are Current original clearing original margin requirements given in the following following tabulation: tabulation: in the given
ORIGINAL MARGIN REQUIREMENTS REQUIREMENTS OF OF ORIGINAL AsSOCIATIONS CLEARING ASSOCIATIONS (January 15, 1948) 15, 1948) (January Commodity
Clearing Association
Cocoa
New York Cocoa Exchange
Coffee
New York Coffee and Sugar Exchange
Copper
Commodity Exchange
New York Cotton Exchange Cottonseed New York Produce Exchange Oil
Net Interest (Contracts)
Amount per Contract
1- 500 501-1,000 1,001-1,500 1- 500 501-1,000 1,001-2,500 1- 200 201- 400 401- 600
$1,800 3,000 4,200 $ 750 1,000 1,250 $1,000 1,200 1,400 $1,000
Cotton
Hide
Commodity Exchange
Rubber
Commodity Exchange
Sugar
New York Coffee and Sugar Exchange
Wheat Corn Oats
Chicago Board of Trade
" "
" " " "
" "
Under 2500 2,501-2,799 2,800-3,099 Every 3~ advance or fraction thereof 1- 200 201- 400 401- 600 601-1,000 1- 200 201- 400 401- 600 601-1,000 1- 500 501-1,000 1,001-2,000 2,001-3,000 3,001-4,000
Straddle or Spread Interest $600
$100
1- 500 501-1,000
$100 200 $100
$1,200 1,800 2,400
$250
600 $1,500 1,700 1,900 2,200 $ 400 550 700 900 $ 600 750 950 1,150 1,350 25~ per bu. 25~ " " 12~ "
"
1- 500 $100 501-1,000 150 1,001-1,500 250 1- 500 501-1,000
$100 150
$200
None None None
The Clearing Clearing House is one in A straddle spread) position position is in which aa long long position position of a straddle (or of a (or spread) in in one delivery delivery month is is balanced balanced by by aa short in another member in short position another position both are are held held by by the the same clearing margins must and both clearing member. Original Original margins maintained on aa straddle straddle position, position, but the less than than be maintained is less be the requirement requirement is short that fixed fixed for or short position. that a net net long for a position. long All figures All in the the above table table are are minimum original margin requirerequirefigures in original margin all net net interests interests or or long or short trading positions, as well as ments on all or short ments as well as long trading positions, with the clearing house. Some straddle positions, of of each member each clearing the with straddle positions, house. clearing clearing their it board of clearing houses it discretionary with their make board of directors directors to houses to fix fix discretionary clearing the margin requirements requirements within within the prescribed by by the the the limits the maximum margin limits prescribed by-laws. The directors may at time, on twenty-four twenty-four hours' hours' written written at any directors may by-laws. any time, or oral notice notice delivered to the the offices members, require or oral delivered to offices of of clearing members, clearing require the additional additional original original margins. margins. Sometimes the margins are readditional margins are readditional quired to cover the premiums premiums at cover the at which future future months are are selling selling above quired to the current month. month. Often, too, they are required because of sharp because of the current are flucOften, too, they required sharp fluclevel. tuations in in the the price price level. tuations
ADDITIONAL MARGIN MAROlN REQUIREMENTS REQUIREMENTS AND IN ORIGINAL MARGIN NOTICE OF CHANGE IN (January 15, 1948) 1948) (January 15,
Additional Margins Commodity
Clearing Association
Cocoa
New York Cocoa Exchange
Coffee
New York Coffee and Sugar Exchange Exchange Commodity Exchange Commodity Exchange Exchange New York Cotton Exchange
Copper Copper Cotton Cotton
Cottonseed Oil Hide Rubber Sugar
New York Produce Exchange Commodity Exchange Commodity Exchange New York Coffee and Sugar Exchange
Current Month
Premium Month
Up to three times requirement on net interest See Cocoa
Amount of premium
" to " Up Up to per $2,500 $2,500 per contract contract See Cocoa
" " "
"
"
"
"
"
" "
"
"
"
" " "
"
"
" "
Notice of Change in Original Margin 24 hrs.
24 hrs. hrs. 24 hrs. 24 hrs. hrs.
24
hr~.
24 hrs. 24 hrs. 24 hrs.
calculation of these various various margin requirements is is made as The calculation of these as margin requirements follows: & Co. may appear on the books of an exchange clearing house A of follows: & Co. may appear the exchange clearing house
174 i%
as long long 300 300 as
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
May contracts short 300 contracts. There is, 300 May contracts and short thereis, thereMay contracts. May net interest and, consequently, original margin requirement. fore, no net no interest and, fore, original margin requirement. consequently, If long 300 the same contracts for as long 300 and short short 200 for the If A & Co. appeared & Co. 200 contracts appeared as month, there would be be aa net net long long interest interest of of 100 100 contracts, contracts, which would month, there the require a deposit of, say, $1,000 per contract unit, or $100,000. contract If the a unit, or $100,000. If require deposit of, say, $1,000 per 200 July its company were were long long 200 May contracts contracts and short short 200 200 May contracts, its July contracts, company position be a straddle. It is long and short a like amount, but for It is long short a be a like straddle. but for would amount, position in different different months. months. Its Its straddle straddle position totals 400 delivery 400 contracts, contracts, delivery in position totals per conwhich would, would, strictly speaking, require a deposit of, say, $1,000 conof, $1,000 say, strictly speaking, require deposit per short, or or aa total total of of $100,000; but the by-laws, tract for for contracts contracts long long and short, but tract the $100,000; by-laws, as indicated above, above, make special special provisions provisions for for straddle as indicated straddle positions-say, positions say, $100 per contract, or $40,000. or contract, $40,000. $100 per Variation Market-Difference Margins. Margins. As previously previously stated, Variation or or Market-Difference the stated, the member report of each clearing must be accompanied by a check daily of each a check daily report clearing accompanied by for the the original original margin margin for for each each contract contract offered for clearance offered for clearance and not not for offset. In In addition addition to to the the original original margins, margins, each each clearing is offset. clearing member is calls for on each contract subject to hourly calls for payment to the clearing house to the to house each contract hourly payment clearing subject of the so-called market-difference or or variation variation margin, the equivaso-called market-difference of the is the margin, which is equivalent of of the difference between betlWeen the the contract price and the the current contract price current market the difference lent or settlement price, if if the the market market price price from day to day or hour hour to.hour or settlement price, to, hour day to day or shows a loss loss on his his open position with the clearing house. On the other with the house. the other shows a clearing open position hand, if the difference between the contract price and the daily market the if the difference between contract the market hand, daily price or settlement price reflects reflects aa profit profit on his his open settlement price or the clearing open position, position, the clearing upon has aa corresponding right to draw (on the following day) to the member has (on corresponding right following day) upon the clearing house for the market market difference position. In for the his open In this the difference on his this clearing house open position. is kept fully margined to to current daily market way every contract is the contract the current kept fully margined daily way every of each trading month, month, thereby thereby protecting protecting each the price of each member and the each trading price clearing house losses. house from losses. clearing Each contract contract in in any be adjusted to the the daily case must be settleday to adjusted each day daily settleany case for this price established established by by the the clearing clearing house house for this specific purpose-or, ment price specific purposeor, a substantial if necessary, from hour to to hour. hour. Should there price flucthere be a substantial price if necessary, flucof tuation during the day, the by-laws by-laws of the the clearing house provide provide that that tuation day, the during the clearing house members against against whom the the market market is may be called upon to called be is running running may upon to in the the price price by by certified which be delivered meet variations variations in certified check, must be delivered check, to the clearing clearing house house within within aa specified time-a half or an hour, a time half hour or to the hour, specified a call. of a call. Should any member default in meetusually, after the delivery after the of in default meetdelivery any usually, ing a call, the clearing house must close his contracts out all close out all his contracts with with call, the clearing house ing such a the clearing house by buying or selling on the floor of the exchange house of the or the floor the at by buying exchange at clearing selling prevailing prices, prices, thereby thereby immediately immediately determining the losses the all the losses on all prevailing determining the member's contracts. contracts. Such losses losses will will be recouped from the margins and be recouped the margins other security with the the clearing clearing house house by the defaulting other security lodged lodged with by the defaulting member.
The Clearing Clearing House
175 175
The method of computing the the margin margin requirements requirements may may be be further of computing further elucidated by by the the following following illustration: illustration: elucidated A is, is, say, of 10 contracts (100 bales of pounds each) 10 cotton short of cotton contracts 500 pounds of 500 say, short (100 bales each) 10 contracts is long long 10 with the house. with the the clearing clearing house; house; B is with contracts with the clearing house. clearing
A
Assuming that minimum original original margin margin requirements requirements of per of $1,000 $1,000 per Assuming that in the contract are force in the New York Cotton Exchange Exchange Clearing House, in force contract are in Clearing House, the time time he he files his report report to post $10,000. be required required at A would be at the files his to post B, $10,000. B, the buyer buyer of contracts, is is required required to to post with the the a like 10 contracts, like amount with the 10 the of the post a the price price of the close clearing If the of cotton at the cotton at of the the day house. If close of clearing house. day on which A bought and sold should have have advanced 1I cent per pound, pound, A, and B bought sold should cent per A, the seller, the market, in order order to to keep keep his his position position margined margined to to the market, would the seller, in a market-difference be required post an additional additional $5,000 market-difference margin margin to post as a be $5,000 as required to in 100 100 bales; with the clearing house. house. There are 50,000 pounds pounds of cotton in bales; the clearing are 50,000 of cotton with a pound is is $500 $500 per contract. Ten contracts, therea variation variation of of 1I cent cent per per pound contract. therecontracts, per in whose favor fore, call for for $5,000. the other other hand, hand, B, B, in the market favor the fore, call $5,000. On the is running, running, could the clearing clearing house house on the the following is could draw on the for following day day for $5,000, because his open position with the clearing house entitles him to because his with the house entitles to $5,000, open position clearing a for that a credit credit for that amount. amount. As the the price price fluctuates fluctuates from day to day, day to day, A in like like manner maintain maintain their their respective respective net net positions positions with with and B must in the clearing house fully margined to to the the settlement price of day. of each the settlement price each day. clearing house fully margined a The daily report, containing a recapitulation of the member's trades the of trades daily report, containing recapitulation debit or credit balance balance with with the house, is up is his debit or credit the clearing made so as as and his clearing house, up so to indicate precisely precisely not not only only his his net net open interest or market position position or market to indicate open interest with the the clearing house, but also his position in respect to original in but also his to with house, clearing position original and respect variation margins. margins. variation This detailed report is is made up up as as follows: detailed report follows: One column shows This shows the the in in each delivery month at the close of position of the clearing member each of the at the close of delivery clearing position the previous day. next column is purchases is for his total total purchases the previous for entry of his day. The next entry of in each for the current day. The column "Carmonth for and sales sales in each delivery the current "Cardelivery day. ried Over for for Tomorrow" gives gives the the net position of with firm with of the the firm net market position ried the clearing clearing house house for each delivery month. for each month. the delivery at the will make this this clearer. clearer. Jones Jones & the close of An illustration Co. at illustration will & Co. close of March Monday are short with the clearing house six contracts of coffee. short six contracts of are with the house coffee. clearing Monday thirteen. These & Co. Co. sell four contracts sell four On Tuesday, contracts and buy Tuesday, Jones buy thirteen. Jones & entries under "Today's coupled with the position position at the close at the with the close entries Trades," coupled "Today's Trades," of show six March short Monday, thirteen bought and four six thirteen short on four of Monday, bought Monday, Monday, Tuesday. Jones Jones & net purchases purchases of sold 8c Co.'s of March coffee Co.'s net coffee at at the the close sold on Tuesday. close this amount is is entered of Tuesday, Tuesday, therefore, therefore, are three contracts, are three entered of contracts, and this under the of the the column "Carried for Tomorrow." the "long" side of "Carried Over for under Tomorrow." The "long" side net position position shown in in this this column is is the the basis basis on which the the amount of of net the original margin is established. definite time within reports within which is established. A definite time the original margin reports
176
Futures Trading Commodity and Futures Exchanges and Trading Commodity Exchanges
is subject to must member is is fixed, and the the clearing delivered is must be be delivered fine, fixed, and clearing member subject to aa fine, is delayed. if his his report if is delayed. report of the The reports in the the clearing the books books of of the the members are are entered entered in clearing reports of all long an house. show an exact balance between all exact books must always balance house. These books long always and short of the also an the clearing with all all members and also contracts of house with short contracts clearing house all exact to the exact balance balance between the the clearing the amounts due to clearing house from all its the credit of all all its it holds to the credit of its memholds to its members and the the amounts which it or short of the bers. bers. The clearing never can be short of the itself is is and never be long house itself long or clearing house market. The individual market. of each member-his total net interest, his net individual position each member total of interest, position or short or long short position, in each his interest interest in each delivery long or delivery month with position, and his houseis always the clearing clearing house-is always known. Margin Requirements of Exchange Margin Requirements Imposed Imposed on Customers of Exchange Members. upon its own members should not Margins imposed by the clearing house the its not Margins imposed by clearing upon be confused with those those which the each of the exchange itself requires of its its exchange itself requires each to impose his members to on his customers, for whose accounts he consummates for accounts customers, impose contracts upon the exchange. contracts upon the exchange. The exchange fixes the the minimum original exchange usually usually fixes original margin margin requirerequireif he deems it advisable, impose ments, if it he deems ments, but each member may, advisable, may, higher impose higher upon his customers, either individually or generally. requirements his customers, either individually or generally. The requirements upon minimum original margin on commodity is usually smaller original margin commodity exchanges exchanges is usually smaller that on stock stock exchanges, than that for the traders in commodities are for in traders the commodities are dealing exchanges, dealing in futures futures rather rather than than in in spot spot transactions, transactions, which usually usually are out are closed closed out before before delivery. delivery. Consequently, Consequently, the the commission is not not commission agent agent member is to take or to borrow to delivery on short sales, required to take delivery, or to to borrow make short sales, required delivery, delivery and, therefore, therefore, does does not not need need to to furnish furnish the the total total value value of the purchase purchase of the and, or or sale sale when it it is is made. made. Hence, Hence, he he needs needs protection protection only only against against adverse adverse market fluctuations. fluctuations. Such protection protection is is secured secured through through original original and market-difference market-difference margins, paid paid to to the the exchange exchange member by by his his customers, customers, in in much the the margins, same manner as as they they are are administered administered by by the the clearing clearing house house in in its its relarelations rule, the the original original margins margins range range between between 10 10 tions to to its its members. members. As aa rule, and 33 33 per per cent cent of of the the value value of of the the contract contract of of purchase purchase or or sale, sale, and and each each transaction transaction must be be kept kept margined margined to to the the market, market, as as it it moves moves against against either either the the buyer buyer or or the the seller. seller. Lower rates rates are are permitted permitted in in straddle straddle In some some exchanges exchanges no no margins margins are are required required for for hedging hedging transtransoperations. In operations. on other other exchanges exchanges lower lower rates rates are are applied. applied. Failure Failure of of actions, whereas whereas on actions, the the customer customer to to respond respond to to aa demand for for original original or or additional additional marketmarketdifference difference or or variation variation margins margins permits permits the the commission commission house house member to to close close out out the the commitments commitments of of the the defaulting defaulting customer. customer. The conditions conditions relating to to the the marginal marginal requirements requirements of of customers customers are are incorporated incorporated in in relating the the purchase purchase or or sales sales contract. contract.44
*4 See See
Chapter XVI. XVI. Chapter
The Clearing Clearing House
177
Some exchanges exchanges at times have granted to its members, where their high its members, at times their high granted to to extend credit credit to cuscredit warrants it, it, the the right right to to various various cuscredit standing standing warrants tomers in connection with original margins. When this this variation margins. connection with tomers in original and variation is done, done, however, however, the the exchange exchange fixes a maximum limit limit on such credit-say, fixes a credit say, is credit may $10,000 per accountbeyond account-beyond which credit $10,000 per may not be extended by any by any one member to to any anyone regulation, however, however, does does not customer. This regulation, one customer. one foreclose the the right right of to obtain the maximum credit credit of anyone foreclose any one customer to his from several exchange with he deals, provided his credit credit whom members with several exchange deals, provided standing warrants it. After all, all, the the arrangement it. After arrangement between each exchange exchange standing warrants primarily based on the the financial financial standis primarily standeach customer is member and each ing of the customer. the customer. of ing the prevention prevention of of speculation by those Responsibility those for the exchanges, by speculation on exchanges, Responsibility for rests on each exchange who can to suffer speculative losses, losses, rests suffer speculative ill afford afford to can ill exchange memdefaults of of those ber, whose whose interest interest in in protecting protecting himself himself from defaults those with ber, of limited resources resources is the most effective effective method of eliminating limited is the eliminating such unwise speculation. speculation. of Trade of A statement by by J. O. McClintock, president of the Board of of J. O. McClintock, president of the the the City of Chicago, before the Joint Congressional Committee on the before the of City Chicago, Joint Congressional a hearing at a proEconomic Report hearing in connection with proReport (December (December 1947) 1947) at posals that Congress authorize the Commodity Exchange Authority that authorize the to Commodity Exchange Authority to Congress posals determine the margin requirements requirements of all exchange operators, states the margin of all determine states exchange operators, vigorously concisely the the function margin requirements of margin function of vigorously and concisely requirements from customers: customers: The system of margins margins in in the the futures futures markets markets has has become essential to the the essential to system of in the entire system of credit credit necessary necessary in the fast-moving proof modern proentire fast-moving operations operations of system of duction and distribution Margins on grain required futures contracts contracts are are required distribution...•. . . . duction grain futures Margins
as a guarantee guarantee that both the the buyer buyer and seller seller of contract will will conform to of the that both the contract as a to all the the commitments set set forth in the the terms contract. Margins the contract. terms of of the forth in in are, in Margins are, effect, what is is commonly commonly referred referred to to as as "earnest money," as bind "earnest money/' as employed to bind effect, employed to aa contract contract on real real estate estate which might might be contracted today with delivery for today contracted for delivery to be be effected effected at later determined date. representing margins, margins, a later date. The funds, to at a funds, representing are handled handled very very much the the same as these "earnest money" payments payments are handled, as these "earnest money" are handled, are in a that is, they are placed in a segregated or escrow depository pending final conthat final conare placed is, they segregated depository pending clusion of of contractual commitments_ . . . clusion contractual commitments. Credit is is the the life-blood life-blood of of our national national commercial existence. existence. Trading in Credit Trading in grain futures contracts requires a system of credit. This credit is established a of contracts credit is futures credit. established grain system requires by the rules and regulations regulations of of the the grain grain exchanges in connection the rules connection with with the the exchanges in by in of requirements and application of margins. Values involved in terms of money, Values of margins. requirements application money, less the margin required, required, become an item or credit buyer and credit between the the buyer less the margin seller, pending final at contract maturity, when transfer final consummation at contract maturity, transfer of of seller, pending title of the the commodity commodity involved is effected effected and settlement in full made. This full is is made. settlement in title of involved is of credit is necessary necessary for for the the reason reason that that documents of of title title which signify form of credit is signify ownership cannot be transferred the buyer and seller until the the date be transferred the seller between until date buyer ownership all
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178
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
collateral value of contract maturity. maturity. Accordingly, Accordingly, no documents of value are of collateral are availavailof contract able, in >tile interim, between the date of the contract -and the date of maturity of contract the between the and of date 'the the date in interim, able, maturity at a a commercial bank. of the contract, contract, with with which credit might be established bank. credit might established at of the be the results of of the the lack lack of above described? It credit system of a a credit It the results described? What would be system would mean ,that those dealing in futures contracts be compelled, in in contracts would be in futures that those would dealing compelled, the cast cast of per cent margin. to to provide provide capital in an amount and without without of 100 cent margin, 100 per the capital in in dollars to match the the value value in the grains to be the benefit benefit of dollars of of all all the the of credit credit to grains to hedged. hedged. For example: example: The grain grain merchant is million bushels bushels of of wheat to to is selling a million For selling the government government or or aa processor; processor; the the merchant would then then want to to buy buy futures futures the trade he made to to the processor. The contracts to to offset offset the the cash cash trade contracts the government government or processor. value of a million million bushels bushels of of wheat wheat at present is three million order is three million dollars. at present dollars. In order value of a a person, for the merchant to to accommodate his needs, he he must must find or aa group find a his needs, for the merchant person, or group in margins million dollars dollars in of persons. readily readily capable of putting putting up up three three million margins on of persons, capable of situation would apply sale to fill fill his his need. need. The same situation in case case contracts made to sale contracts apply in the farmers would wish wish to to sell sell wheat or or corn; the merchant merchant buys buys it, he the farmers corn; when the it, he wish to to sell sell protective protective futures futures to to offset purchase of the cash In offset the the purchase of the In cash grain. would wish grain. this instance, merchant, wishing wishing to to sell have to to seek seek this sell the the merchant, the futures, futures, would have instance, the in the deterare of futures are capable of putting up margins in the amount deterbuyers of futures who of margins buyers putting up capable ten mined by by the might mean aa million or ten million dollars, the volume involved. involved, which might dollars, or the period of million dollars, million even much more, more. within within the of one day ..•. dollars, or even period day. II believe believe you you realize, realize. as anyone concerned concerned with with the the realities realities must realize, realize. as anyone than that form of of commerce cannot cannot be be carried without credit more than credit any carried on without that this this form any can commercial commercial activity activity of of any any kind kind be be pursued without credit. 1£ margins If credit. margins pursued required amounted to to 50 50 per per cent, per cent, 100 per the difficulties of 100 difficulties resultresultinstead of cent, the cent, instead required of ing from stagnation constriction of interest because of a lack of proper because of a interest lack of and constriction ing stagnation proper credit would be be only proportionately less less serious. point is, however, that that serious. The point credit is, however, only proportionately any restraint placed credit, over and above that required for safety, is that for a restraint over on credit, any required safety, is a placed and could finally result in the complete deterioration of the commercial blight in of result deterioration the the could blight finally complete activity being being undertaken. undertaken...• activity You are are treating structure of the nation's the the credit credit structure nation's agriculture with the of the treating with agriculture and the very existence of the entire system of marketing which, born of economic necesentire necesthe existence of of system of marketing which, very to meet the the nation's sity, has has been decades to nation's needs. needs. the decades been evolved evolved through through the sity, In this connection, I wish to point out that the use of the margin I wish to that the use of the In this connection, margin authority authority point out be by the executive branch branch of the government government could it would of the could be so so applied that it the executive applied that by ultimately destroy completely our marketing marketing system change and ultimately as now conconsystem as destroy completely change stituted. this done, it would throw throw distribution prodof our agricultural stituted. With this distribution of done, it agricultural prodthe lap lap of the government, government, which would automatically possess ucts solely solely into of the into the ucts automatically possess of grains the power power to control the the allocation allocation and use use of determine itself of to control itself of the to determine grains and to the the price. price. .
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Protection of Accounts. Although Although the house proprothe clearing Customers' Accounts. Protection of Customers' clearing house members, tects clearing members from possible possible defaults defaults of of other other clearing tects clearing clearing members, it does not protect protect customers of clearing customers of or exchange it does not exchange members from clearing or default by by their their commission commission agents. agents. The Commodity Act, default Commodity Exchange Exchange Act, in to passed by Congress in 1936 to regulate futures trading in domestic agri1936 futures in domestic agriregulate passed by Congress trading
The Clearing Clearing House
179
as wheat, cultural products, products, such such as wheat, cotton, cotton, and the imposes certain the like, certain cultural like, imposes restrictions on all all futures futures commission merchants merchants in trades with in these these trades restrictions
respect to to treatment of of their their customers' customers' margins. margins. 56 respect It would appear Guaranty appear from the the foregoing the clearthat the clearGuaranty Fund. It foregoing that as each ing house itself, well as each of of its its members, has ample protection as as well as members, has itself, as ing house ample protection a result result of of original original and market-difference market-difference or variation margins margins against a or variation against any loss by default of aa clearing default of loss occasioned occasioned by clearing member. Margin Margin deposits, any deposits, in an impregnable however, form only financial bulwark however, only one element in impregnable financial it possible for the which alone possible for to guarantee all all alone makes it the clearing house to guarantee clearing cleared contracts contracts both as as to to delivery delivery and payment. payment. As aa further cleared further safesafeguard, before an exchange exchange member may member, he guard, before may become a clearing clearing member, to the the guaranty guaranty fund of the clearing house. The amount must contribute contribute to of the clearing house. in of will required of each clearing will vary in different clearing member different houses, clearing vary clearing houses, required in as indicated the table table that that follows. Usually three-fifths deposit as indicated in the follows. Usually three-fifths of of this this deposit may in United States government bonds. States government bonds. may be in the deposit deposit has has been made, made, it When the it cannot be withdrawn by the by the a member, as a general rule, until nine months after he ceases to a until after ceases to be a member, as general rule, clearing member and all all his his fixed fixed and contingent liabilities have been clearing contingent liabilities the of liquidated. Throughout the period of his membership, the deposit his stands liquidated. Throughout period membership, the deposit stands in as his share in the underwriting of the financial stability and integrity as his share the underwriting of the financial stability integrity of of the the organization organization which is is assuming assuming and guaranteeing all contracts all contracts guaranteeing which it it clears. clears. is not lodged with the is deposdeposThe guaranty the clearing house, but is guaranty fund is lodged clearing house, ited in the the form of of cash cash or or government in an approved ited in securities in bank. government securities approved bank. cash or or bonds cannot be be withdrawn for or delivery either to for payment or The cash to either payment delivery the clearing house house or or to to the the clearing clearing member except on an order bearing the clearing order bearing except the signature of three of the clearing house directors. The deposit of of the three house directors. the of each each clearing signature deposit of into the the guaranty guaranty fund guarantees his individual transactions his member into individual transactions guarantees is used, with the the clearing house, but the the aggregate used, where necessary, aggregate fund is clearing house, necessary, one member's account which may to absorb any any losses anyone may exceed to absorb losses on any exceed all the credits to that that member's account. words, all account. In other all the credits to other words, all members of all guarantee the accounts of all other other members. guarantee the Still another financial Clearance Fees and the the Surplus. Surplus. Still resource of of the the financial resource Clearance Fees in clearing house-one in clearing houses is being continually one which some is house clearing clearing being continually augmented-is the surplus is the fees charged for clearclearsurplus fund accumulated from fees charged for augmented billed to each ing each contract billed to monthly. In comparison and contract member In monthly. ing comparison with the the services the clearing these clearing services which the with fees renders, these clearing house renders, clearing fees the are small, small fees paid on the many contracts cleared by all clearbut fees contracts small cleared all are small, clearmany paid by the ing members every business day of the year amount to impressive totals business of to totals day year every ing impressive at the the end of of each year. year. at A member of the Cotton Exchange of the 5 cents cents for for Exchange Clearing Clearing House pays pays 5
/; See Chapter XIII XIII for for details details on these these restrictions. restrictions. See Chapter
6
180 i8o
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading GUARANTY FUNDS AND CLEARANCE FEES FEES (1948) (1948)
Commodity
Clearing Association
Guaranty Fund
New York Cocoa Exchange $ 5,000 15,000 New York Coffee and Sugar Exchange 10,000 Commodity Exchange Copper 7,500 New York Cotton Cotton Exchange 5,000 Cottonseed New York Produce Exchange Oil 10,000 Commodity Exchange Hide 10,000 Commodity Exchange Rubber New York Coffee and 15,000 Sugar Sugar Exchange Corporate shares @ Chicago Board of Trade Wheat $3,500 per shareshare $3,500 per or not less than 11 or less than not Corn " " " " pro12 in in promore than 12 portion to the estito the estiOats portion " " " " mated volume of clearing clearing Cocoa Coffee
Clearance Fee per Contract
Originally
50~ 25~
SOt 20t
25~
50~
5~
lOt
20t 25~ 25~
SOt 40t
25~
20~
$1.87! per million million per bushels bushels
in a a day, each contract he clears he pays pays If he clears 1,000 clears. If contracts in contract he clears. each 1,000 contracts day, he the clearing house house $50 the service. service. Other clearing clearing members are paying for the are paying the clearing $50 for trades. the same day on other trades. The surplus various other other other amounts the various day surplus fund it stands as a financial guaranty, but it has never been necessary the but has never been in the stands as a financial guaranty, necessary in it. The funds are of any clearing house house to to draw upon usually history are usually upon it. any clearing history of
invested in in United United States interest received received from States government invested bonds, and interest government bonds, of these is usually applied to the operating expenses of the clearing the house. to the these is usually applied clearing house. operating expenses from the the surplus sufficient to to meet The income income from may even become sufficient surplus fund may factor which in in itself itself operates the major part part of the operating of the the major expenses, a factor operates operating expenses, a at nominal fee at a figure. to keep the clearance to keep the clearance fee figure. preCareful Provision against against Loss. Loss. Clearing Clearing house by-laws rules preby-laws and rules Careful Provision to the scribe procedure in case recourse recourse to the guaranty fund and the in case the the procedure scribe the guaranty in If surplus should ever necessary. If any deposit in the guaranty fund be the ever any deposit necessary. guaranty surplus should of a should be lost lost by by failure failure of a depository by defalcation, the should be defalcation, the depository bank or by transfer of of the guaranty fund be restored by transfer of enough of the surplus be must restored to fund enough by surplus to guaranty a of default make up up the the deficiency. In the event of a default by a member on his In event the his by deficiency. all the the close contracts, house close must member's out all contracts house the clearing contracts contracts, the clearing with the house in in six six trading trading hours by purchase or the or sale sale on the the clearing with by purchase clearing house must exchange floor, the closed account debited or credited with account be and the closed or credited with exchange floor,
The Clearing Clearing House
181
losses or the resulting or profits. profits. If, the contracts of a a failed contracts of failed member If, when the resulting losses is owed to are deficit is to the the clearing house, then, then, in in order to are closed closed out, order to out, a deficit clearing house, first to make good good the deficit, recourse is is had first to the member's margin margin account the member's account deficit, recourse after that that to to his his contribution to the the guaranty and after contribution to fund. guaranty fund. If these If prove insufficient insufficient to to make good the deficit, deficit, these measures should prove good the be fund would the surplus applied to such extent as the board of directors to extent as the board of directors surplus applied If the loss should may determine. If the loss should be be so the surplus so great as to to exhaust exhaust the may great as surplus a second reserve. fund, the the general guaranty fund stands stands as guaras a If the reserve. If the guarfund, general guaranty drawn fund be to anty should upon to good losses caused by a make a losses caused memanty upon good by it would be immediately ber's ber's default, immediately restored restored by by assessment upon all all assessment upon default, it clearing assessment, according usual by-laws, the usual to the clearing members. This assessment, according to by-laws, would to levied according to the equitable principle that those who have benebenebe levied the that those have according equitable principle house must fited fited most from the the clearing contribute most, should the failure contribute failure the most, clearing of of a co-member draw heavily heavily upon upon its total clearings resources. The total its resources. for clearings for number a specified of be calculated; the total clearings of of months would the total calculated; specified clearings of each for this each member for this same period period would be determined. determined. Each member's in the share of the assessment would be in the same ratio share of ratio that that his his cleared conthe assessment cleared conbear to to the the total total clearings. Thus, a firm clearances tracts would bear a firm tracts whose clearances Thus, clearings. cent of all clearings for the period period were equal per cent for the of all bear .to one per equal .to clearings would bear per cent of the the entire entire assessment. assessment. On the one per cent of in case the the other other hand, case the hand, in clearing house suffers a loss through the failure of a depository bank or a loss house suffers the of a failure or through clearing depository a defalcation defalcation and an assessment assessment of of members should be considered necesa considered necesto replenish the guaranty fund, such assessment would fall sary to the such assessment fall equally fund, guaranty sary replenish equally on each each clearing clearing house member. Security of House. These elaborate indicate the Clearing elaborate safeguards of the Clearing House. safeguards indicate Security sufficiently impregnable financial financial strength of the the clearing house of of the impregnable strength of clearing house sufficiently the the commodity commodity exchange. exchange. The financial financial resources resources in the guaranty guaranty fund in the the in themselves, and the are strong the right right of of the surplus themselves, and the strong bulwarks in surplus fund are also fully assessment is also all members is enforceable and effective; of all assessment of effective; but fully enforceable the right to call for original daily or hourly variation variation margin margin deposits deposits or hourly call for the original and daily right to is the greatest possible and effective insurance against both most effective insurance minor is the greatest possible against these elements of and heavy losses. With all all these strength, it it is is not not remarkable of strength, heavy losses. the guaranty that no loss loss has ever occurred occurred where recourse guaranty fund fund or recourse to to the has ever that no in surplus has been necessary. clearing house in the commodity No modern the commodity clearing surplus has been necessary. markets has has ever ever defaulted its legal legal commitments. defaulted on its markets of clearing house members have occurred from time time to to time, Failure!> Failures of time, clearing house but the margins on deposit deposit have have always always been sufficient to absorb market sufficient to the margins but loss. Nor is differences protect the the clearing houses against the financial is the financial differences and protect clearing houses against loss. as house institution. solidity of benefit merely to the clearing as an institution. to the With of benefit clearing merely solidity for the is it the safeguards it provides, provides, not not only only is the clearing house it impossible the impossible for clearing house safeguards it member suffer loss default to but no clearing can suffer loss through default on the the to lose, lose, but through clearing part of allY other member, except through assessment. part of any other member, except through
182
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
It be noted noted here here that that this this function function of of the the clearing is a a It should be house is clearing house
credit insurance by which every is aa function by insurance function credit every commodity commodity operator operator who is member of the clearing clearing house may may insure sale will be paid that every of the insure that sale will be every paid for at contract contract price price and that that every purchase will will be be delivered at contract delivered at contract for at every purchase price. This This credit is performed only by commodity credit insurance function is performed only by commodity price. which in exchange clearing houses, is in sharp the situation is contrast to to the situation on houses, exchange clearing sharp contrast in the physical markets, in case bankruptcy of either the buyer case of the or seller either seller on the physical markets, bankruptcy buyer or a contract contract may may take take place place between the the date the contract the date date of of the contract and the date a of delivery. delivery. of Efficient Medium of Delivery. Having An Efficient described the the organizaof Delivery. Having now described organizaof contracts, tion, contracts, the the credit credit insurance insurance function, the the clearing tion, the function, and the clearing of financial strength of the clearing house affiliated with each exchange, the house of affiliated with each financial strength clearing exchange, we shall turn to to its its service in facilitating facilitating deliveries payments. service in deliveries and payments. shall turn In the the course trading day in, say, November, aa broker a trading In of a course of broker on the the say, November, day in, a five of exchange sells five contracts of a commodity for delivery the following sells contracts for the commodity exchange following delivery May. During During the the months that that follow, follow, the does the seller, shall assume, seller, we shall assume, does May. not offset his contract by aa purchase, purchase, and May May arrives with the contract by not arrives with offset his the seller seller the amount sold has deliver the sold under this this contract. contract. The seller seller has bound to to deliver elected to to make delivery rather than close by close out the the sales sales contracts elected contracts by delivery rather offsetting purchases. has the option of making delivery on any trading He has the of offsetting purchases. making delivery option any trading day during the the month of May. On May May 55 he elects to deliver, deliver, and he of May. elects to he day during issues five transferable notices, notices, one for for each contract Let us five transferable issues contract sold. sold. Let us assume assume in is that the commodity in question is rubber and that the transferable that the that the transferable commodity question notice is issued to to Commodity Commodity Exchange Exchange Rubber Clearing is issued notice Association, Clearing Association, Inc. transferable notices notices are reproduced on the page. are reproduced the opposite Inc. These transferable opposite page. Five notices are required, for transferable notice can be notices are Five separate for no transferable notice can be required, separate issued to cover than one contract. house is the recipicontract. The clearing issued to cover more than house is the clearing recipient of each transferable transferable notice. notice. The delivery ent of is filled filled in, in, delivery day, day, which is but will be be aa subsequent, definitely fixed business day; that is, if the fixed business that if will the is, definitely day; subsequent, notice were were issued the delivery to be be made a Monday, issued on a notice Monday, the delivery would have to Thursday, unless unless aa holiday holiday intervenes. intervenes. If issued on Friday, Friday, If it it were issued on Thursday, the be deliverable on the following Tuesday. be deliverable would the the commodity commodity following Tuesday. The transferable transferable notice notice price price is the settlement the is the settlement price established by price established by the clearing house at the end of of each business business day. price established at the established for for day. The price clearing house the the last business day preceding the issuance of the notice would be the the issuance of last business notice the be the day preceding one inserted in the the notice. notice. inserted in to the When transferable transferable notices notices are are delivered the clearing house, it delivered to it ascerascerclearing house, tains from its its books books the the names of those clearing are long of those members who are tains clearing long of May contracts distributes the notices among them. A clearing and distributes the contracts notices them. of May among clearing as soon as member who does not wish wish to to take take delivery the transtransdoes not as the will, as delivery will, contract on the floor of ferable notice notice is is received, received, sell May contract the floor the exchange sell a May of the ferable exchange and will will immediately deliver the the transferable transferable notice notice to buyer. Each to his his buyer. immediately deliver
Dell....,. M-"_________ll1..-
EXCHANGE, INC. INC. COMMODITY EXCHANGE, TRANSFERABLE NonCE TRANSFERABLE NOTICE RUBBER CONTRACT STANDARD RUBBER
-
•,M M o'clock o'clock To ..____._. __..___. ___._. _•.•""
To,.
19_
New York. yOtk. RY., N, Y., • New
... _...
_,--_._----_._.- ....
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Take notice that that on _ .__ •. we aha1l dcIt..:r 10 Take notice on._ _ _ _ ...•••.. -. . to you - _.,19_._.,. 19 shall deliver about 22,400 we 22,400 """"'" you about pouodi .
01 Ribbed Smoked He..,. Plantation Plantation Rubber Rubber of 01 of Ribbed Smoked Hevea (Exchange Rubber Rubber Type) packed in in (Exchange Type) packed
w gn& of ____.. _._._
the grade of .
••. _. _ ••.__ ... .....^
-
known n. __._ ... "' _. _._.._. ________ ...._....__,___._....._ lJl·warehouse wwarehousc known a*... on dock I"",ted al- _,_ ....._____,__ •• ______ •_._ .. _. __.• _.. _ ••• __,__........_, _______ .. on dock located at .-. .
of in accordance .t the Tranalerable Notice price pnce 01.. ....... cents cent> per adjustments) in accordance with with Transferable Notice at the (with adjustments) per Cd pound (with Inc and the By-Laws the terms krm. 01 Standard Rubber Rubber Contract of Commodity Ex< ange. Ine, and the and Rut .. wiIh Contract of Rule* with the of the Standard Commodity Exchange, By-Laws and ICSpett thereto. thereto. respect The Ccrtdicate of crade upires ... _ _ . __ .•• ___ • ____ ... ___ ..... _. ___ 19 _. ..,^^...._._ .... _ _ ..__.......__._. _. 19 ~~ . The Certificate of Grade expires
w
,
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The Certificate Ccrt.6cateoIWeight'"datcd of Weight is dated ....._ ......... _ The
." al ".
.._ _ _ _ _ _ _ _.___ 19 19 •. _.
We pledge pledge ourselves ounel ... to to dehllU on the the day d.y specified .pec.6ed for lor deUvtry, lut acceptor acceptor hereof, hereof, documcnto to the the last deliver on documents delivery, 10 r
..
'. ='
. •• I "*,'! n, .... (the Exchange, upon upon written wntten notice notice of thIS notIce gtven to to UI of the the Exchange, the holding of this notice given i us P i holding of I ' k ' * . ' ; .' 'Ion is issued. I . ' " ., :. thu Notice Notl~ lS except that aa transferee transferee who becomes the on the day this issued, except t ,,.",, last acceptor of a Transferable Notice after 4 P M. on the last notice day for delivery in the current month must nottfy us before before 9 on the the next next business buslnw day. day, notify "
'
'
'
l, the day that who becomes the last acceptor of • Transferable Nolle< at!'" 4 P M, on the I"" nOl1ce day for deJllIUY ID the currellt month mull w 9AM M with our is to This Notice Noti" i. to be be delivered dcltvtrcd 10 our dehllUY of the the documents, documents, "lured to ... us aimultaneowly referred 10 to abcm:. This above, simultaneously WIth delivery of 10 the Ilast ... acceptor acceptor hereof hereol Co the '
.
Slgncd._._. _. Signed
--
_M_. ___ _
_.
_ _ 'M
• __• _ _ _ _
.._
CONDITIONS
£I".
P.M.
before 4 the da, Elch of of the the acceptor. hereof asrcu the latt la. acceptor acceptor hereof hereof WIlt. 4 P.M. on the noCI« it iuucd. Of U that the is tinted, Each will, before or as day thu noOcc agree* dw acceptors hereof to the issuer htrtof. and will reqwred, give live written wnlUn notice nobce of the holding boldine of of thu thll notice DOU(:C to the issuer Wlll on the da, apcafitd for for delivery debvtry of the on the otherwise required, hereof, and day specified Lawi ftCU'ft from the said ~d issuer utuer the the documcntl provided in ID the tht By B,-La ... and and Rule*, Rules. and payment against I.a;,uost them. all In ICCOtd.trla documents at as provided and make make payment in accordance from the receive them, all
ethUWllt
WIth the the provuions prO\'UlOI'I1 of the By By·La .... and and Rules Rule. of of Commodity Colnlllodrty Exchange. Elchange. Inc:. of the Laws Inc. with all tu. tus (or It further asrted that each uch acceptor acuptor hereof hereof shall mal) continue continue .11 (or th.ttr) lIabiLty to to tuh other for for the the fulftllmeol u funher each other It 11 fulfillment their) liability agreed that the Exchange all rcqulftd by by the the By-Laws BJ·Laws and Rules Ruin of of the Exchange for for the delivery of o( rubber Standard all dOC\ltntnb the delivery documents required rubber ~Wdt against Standard
of the thlt contract contract until until of
from the Rubber Contract h"w been bet'n received fUtlVCd by by the the last last acceptor ac«ptOl hereof, hereof. from dw: NoaciC ~ have MYC been beta. returned rtturacd to &0 the 1ISS\If:I, shall have and thu Notice shall Rubber Contract ah.1I issuer, ,Dd ;1.1 wh),h time time all ~ responsibilities fcspoRllbUltIeJ of of the the intermedia* mtulQcd&ate parties partlU hereto bucto shall ah.aU c:cuc. at which cease.
,he lNucr. the issuer,
SIgned Signed TIME RECEIVED
.'
TH_ ,,!tOVI: WITM ALL .,.. CONDITIONS AND OBLIGATION • •
a
HE"E8V ACCEPTED
--
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--.-~-
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- - _. - --- .. _--
TRANSfF"ERRED TO
184
Commodity and Futures Futures Trading Commodity Exchanges Exchanges and Trading
to whom whom the the notice notice is is passed by such person sale has half an has half an hour in hour in person to passed by such aa sale which to to sell sell it. it. The The commodity in is which is in the warehouse, certified as to grade the certified to as warehouse, commodity grade and ready for delivery, and the the time time limitation and limitation is is designed to the ready for delivery, and designed to bring bring the contract as as soon soon as as possible into the the hands contract hands of of aa buyer who wants wants actual actual possible into buyer who delivery. delivery. On the the notice, it will will be observed, On there is is space for notice, it and endorsements and observed, there space for endorsements a for column the time a column for noting the notice notice was received. received. Each Each seller seller noting the time when the endorses the notice notice as as he passes it it on. If it remains in the hands of any endorses If on. it remains in the hands of passes any for party for longer than half an hour, he automatically becomes the final becomes the hour, final longer party automatically buyer notice may circulate for for not not buyer and must accept accept the delivery. delivery. The notice may circulate It more than one business day. It reaches finally a buyer who desires delivreaches a desires delivday. finally buyer is said to to "stop All the ery. notice." All the intervening been have been ery. He is "stop the notice." intervening buyers buyers have eliminated their sales sales on the the receipt of the eliminated by the transferable transferable notices. notices. Until Until by their receipt of final payment the final of the warehouse receipt, both buyer both and payment and delivery delivery receipt, buyer and seller must maintain their their margin in seller deposits in the clearing house. the house. margin deposits clearing if necessary, are made between the Adjustments, the buyer the delivdelivAdjustments, if necessary, buyer and the seller in accordance with the the certified and weights of the ering certified grade of the ering seller grade weights 66 When payment has is the commodity which is delivered under the contract. contract. has commodity payment been received by seller and he has has delivered delivered the the warehouse warehouse receipt by the seller receipt is closed. closed. The necessity buyer, the the contract is to the buyer, for all all washes washes and necessity for rings eliminated. rings has been eliminated. Contrast the the simplicity simplicity of of this this procedure procedure with with the the former roundabout former roundabout method. Before Before development development and organization organization of the clearing clearing association, of the association, let that A, A, an importer importer of of coffee, coffee, sold sold five five contracts contracts against against an an let us us say say that importation already already arranged arranged for. for. He contemplated contemplated actual actual delivery. delivery. B, B, importation the the buyer, buyer, in in turn turn sold sold to to C and so so on, on, with with fifteen fifteen or or more more in-between in-between until R, R, aa firm firm which desired desired delivery, delivery, was was reached. reached. The ininparties, until parties, between parties' parties' differences, differences, debits debits or or credits, credits, would not not be be settled settled until the the month of of delivery delivery arrived arrived and aa transferable transferable notice notice was was endorsed endorsed until the purchase purchase and sale. sale. In In other other words, words, the the only only means means of of liquiliquiagainst the against dating the the contracts contracts involved involved was by by receipt receipt of of transferable transferable notice notice in in dating the delivery delivery month month and and subsequent subsequent billing billing by by in-between in-between parties parties based based the on on the the transferable transferable notice notice price. price. The old old cumbersome cumbersome method method of of settlement settlement between between parties parties (before (before the modern modern clearing clearing association association developed) developed), when when delivery delivery was was made, made, isis the illustrated illustrated as as follows: follows: A, A, an an importer importer of of coffee, coffee, sells sells five five contracts contracts to to B B at aa price price of of 15 15 cents; cents; B, B, the the in-between in-between party, party, sells sells five five contracts contracts to to C C at at at 12 12 cents, cents, C C intending intending to to take take delivery. delivery. When When A A issues issues his his transferable transferable ,
o6 Contracts Contracts are are in in terms terms of of aa basis basis grade grade of of the the commodity; commodity; but but delivery delivery of of other other tenderable tenderable and and certified certified grades grades isis usually usually permitted, permitted. with with differences differences in in price price allowed allowed to to compensate compensate for for the the variation variation in in the the quality quality of of the the goods goods from from the the standard standard grade. grade.
See Chapter VII. VII. See Chapter
The Clearing Clearing House
185
established by notices, the the settlement price established the exchange 14 cents. cents. settlement price is, say, notices, by the exchange is, say, 14 notice. The exchange rules provide provide that the "stopper" C stops that the the notice. exchange rules "stopper" stops the
C
at the the transferable transferable notice notice price-in this case, shall pay the 14 "issuer" at the "issuer" shall pay case, 14 pricein this cents. The exchange exchange rules rules further provided that that any difference between further provided difference cents. any the price and the the transferable transferable notice notice price settled on the the contract price the contract price be settled A 14 14 cents a pound day following delivery. Accordingly, collects from C collects cents pound day following delivery. Accordingly, day of of delivery delivery and from B 11 cent the day followcent a a pound on the the day day followpound on the in turn, cents per collects ing delivery. delivery. C in turn, having having paid paid A 14 cents per pound, pound, collects ing 22 cents per pound pound from B on the the day following delivery. B, by his his cents per B, by day following delivery. in payment of 1 cent to 2 cents to, C, has paid his losses in the trans1 cent his transA and cents has losses the to of 2 to,C, paid payment action-33 cents cents per per pound. pound. action The rules rules of of the the modern clearing regarding aa delivery strict. are strict. clearing house regarding delivery are in the 1£ the transferable notice is is not not issued in the before the the last last notice issued before notice day If the transferable notice day in default, month, not not only only will will the the seller seller be be in but he he will liable will also also be be liable default, but month, in addition addition to for all all damages damages suffered by the the purchaser, purchaser, in to a monetary monetary penpensuffered by for be alty; if his default should be willful, may be suspended or expelled if default he his be or willful, alty; may suspended expelled both the the exchange the clearing clearing house. from both house. from exchange and the It should be be recalled, recalled, however, however, that that on most exchanges general It the general exchanges the rule is is that that deliveries deliveries are are not not made on the the exchange, but usually most but rule exchange, usually most exchange contracts contracts are are consummated by by offsetting purchases and sales, sales, exchange offsetting purchases the differences between purchase purchase and sale being settled by cash sale prices differences between settled the by cash prices being 7 7 payments. payments. Limitation of Interest. A rule rule usually usually found in in every Limitation associaof Interest. every clearing clearing associaof each tion limits limits the net long long or short interest interest of member, his or short each clearing the net his tion member, clearing month, and his straddle or spread interest. Thus, the interest his straddle in anyone or interest in one interest. the month, Thus, spread any net interest interest of of aa member of of the the New York Cotton Exchange net Exchange Clearing Clearing limited to 4,000 contracts (100 bales of Association is is currently limited to Association contracts bales of 500 500 4,000 currently (100 pounds each), and his interest in any month may not exceed 5,000 conin his interest not exceed con5,000 any pounds each) may tracts. This This affords to prevent prevent undue speculation. affords an effective tracts. effective method to speculation. 8 was no limitation of interest interest on the the grain There was limitation of to 1936. 1936. 8 grain exchanges exchanges prior prior to the following following page page shows the the limitation in The table of interest table on the limitation of interest in in January various various clearing 1948. associations in clearing associations January 1948. Since with the the passage passage of the federal Act,88 of the federal Commodity Since 1936, 1936, with Commodity Exchange Exchange Act, the trading commitments or or market positions positions of of all all operators the trading such operators on such to the the Act are by a federal exchanges as are are subject are determined by federal agency, subject to exchanges as agency, in effort to to prevent prevent undue speculation. speculation. Although the federal act in an effort the federal act Although trading limits authorizes imposition of of maximum trading authorizes the the imposition limits on all all speculative speculative exchange operations, operations, whether or or not not they by members are conducted by exchange they are of the exchange, exchange, it does not not grant to regulate regulate the of the it does the margin grant authority authority to margin either of members their either of exchange or of their non-member cusrequirements or of cusexchange requirements ,
7 See T
8s See See
Chapter III. Ill. Chapter Chapter XIII. XIII. Chapter
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
186 i86
LIMITS OF INTEREST PERMITTED MEMBERS BY CLEARING ASSOCIATIONS
Number of Contracts Number of Contracts Straddle Straddle Any One Any Interest Interest Month Interest Interest
Commoditv Commoditv
Clearing Association Clearing Association
Net Net
Cocoa Coffee Copper Cotton Cottonseed Oil Hide Rubber Sugar
New York Cocoa Exchange New York Coffee and Sugar Exchange Commodity Exchange New York Cotton Exchange
1,500 2,500 600 4,000
1,500 2,500 400 5,000
2,500 4,000 1,000 4,000
New York Produce Exchange Commodity Exchange Commodity Exchange New York Coffee and Sugar Exchange
None 1,000 1,000 4,000
None 750 500 1,500
None 1,500 1,000 4,000.
those operating tomers; nor nor does does the the Act apply apply to to any tomers; any exchange exchange except operating except those in domestic agricultural agricultural products. products. Confidential Relationship of of the Its Members. the Clearing Confidential Relationship Clearing House and Its confidence is is maintained between the the clearing strictest confidence The strictest clearing house and its house manager alone knows the individual individual the its members. The clearing house alone clearing manager long or short or straddle positions of each In referring to the the of or short or straddle each member. positions referring to long responsibilities of of the the secretary-treasurer the assistant treasurer of of assistant treasurer secretary- treasurer and the responsibilities the Cotton Exchange Clearing Association, it has said: been said: it has the New York Cotton Association, Exchange Clearing
Into the the possession possession of these of these Into
each member of of officers there comes comes daily officers ·there daily from each to a comYork Cotton Cotton Exchange, belonging to the Clearing Association, a the comNew York Association, Clearing Exchange, belonging plete report of his his position position in in futures. futures. The responsibility responsibility for for strict regard for strict regard for report of plete the confidence imposed rests rests jointly jointly with with these these two Though concontwo officers. officers. Though thus imposed confidence thus the to changes changes trol of the the policies policies of of the the clearing clearing association association and the the decisions decisions as as to trol of in the amount of of original original margin margin deposits deposits required required are affairs of the are entirely affairs of the in the entirely board of of directors of the the Clearing Association, neither the president nor the neither board directors of nor the the Association, Clearing president directors have any any authority authority to require or receive from the the Secretary-Treasurer to require or receive directors have Secretary-Treasurer or Assistant Treasurer infomation concerning the market market standing Treasurer any of the Assistant or the concerning the any infomation standing of 9 9 the any clearing through the association. association. member clearing through any
the the
Summary. The advantages advantages of houses may may of modern exchange exchange clearing clearing houses Summary. be summarized from the the standpoint standpoint of their convenience to to their of their their membe bers. By By the the process process of of daily reports, clearance, each settlement each bers. clearance, and settlement daily reports, of contracts reduces the the number of contracts on which he must mainmember (1) (1) reduces tain margins; (2) clears his contracts in each day month, thus thus of every his contracts clears tain margins; day of every month, (2) leaving himself only only buyer buyer or net amount not offset; offset; (3) seller of or seller of the the net leaving himself (3) keeps his contracts contracts fully fully margined margined up to the the market daily; all his daily; and (4) up to (4) keeps all a 9
The Cotton Cotton Trade, No. 100, 68th Congress, Senate Document No. 1st Session, Part 1, 100, 68th Trade, Senate Session, Part 1, Congress, 1st
page page
119. 119.
The Clearing Clearing House
187
substitutes the clearing house as as aa buyer buyer on every he has has substitutes the contract which he every contract clearing house as a seller seller of of every every contract he has sold sold and as contract he has bought. bought. clearing house house effects saving in labor, aa simplification in clerical The clearing effects a saving clerical labor, simplification of contract contract relations, relations, and aa vital vital service service in in the of credit of the form of credit insurance. insurance. only are the members' contracts are the contracts cleared, are also Not only also guaranteed cleared, but they they are guaranteed as to to delivery delivery and payment, payment, and the the guaranty is fortified so strongly is fortified as so that guaranty strongly that the daily margin deposits have proved sufficient to absorb every loss to the sufficient to have to loss daily margin deposits proved every the clearing house arising In fact, fact, in the contract. In of any defaulted contract. in more clearing house arising out of any defaulted than one case case the the clearing house has turned over a surplus to the trustees a turned house has over to the trustees clearing surplus of aa failed failed member's member's bankrupt bankrupt estate. estate. of machinery of trading on the the floor the exchange the clearof trading of the The machinery floor of clearexchange and the ing of exchange contracts have been described. In the following In contracts described. of have now the exchange ing following of a a typical chapter the course typical transaction transaction from the the time time follow the shall follow course of chapter we shall the order order is is placed placed with with the the broker broker until until the the contract contract is is finally the closed finally closed in in the the clearing house. house. clearing
[
CHAPTER
CHAPTER
X X
) J
Transaction on the the Exchange Exchange A Typical Typical Transaction
It will be helpful helpful now to to trace trace aa few typical typical exchange transactions It will exchange transactions to the from the time the the buying buying or selling selling orders orders are to the time-perthe time are first first given given timeperare haps days, perhaps months later-when the transactions are closed by transactions closed by later when the haps days, perhaps delivery and payment payment or by by offsetting offsetting purchases purchases or by cash cash or sales, sales, followed by delivery settlements. It however, to take as typical the progress of settlements. It is is impossible, however, to take as the impossible, typical progress of one anyone single order, for the disposition of individual transactions will for of will the individual transactions any single order, disposition vary the purposes purposes which dictated the original dictated the sale. vary with the original purchase purchase or sale. The transaction transaction may may be be initiated initiated by neither owns by a speculator speculator who neither the commodity commodity nor has has any any intention intention of of it; it the of ever ever taking it; it taking delivery delivery of be or a may a purchase or a sale by a merchant or a miller who really sale miller made may purchase by really wants delivery delivery or or to to make delivery, delivery, or, is hedging by other hand, the other or, on the hand, is hedging by buying or or selling protection against risks of price as a a protection of price buying selling as against already already existing existing risks fluctuation involved in his his inventories inventories or his commitments on the physical fluctuation involved in or his the physical market; or, or, again, may be aa transaction transaction initiated initiated by by aa trader trader on the it may the market; again, it floor of of the the exchange exchange and closed before the the end of the day; day; and, floor closed out before of the and, finally, it it may may be aa hedge hedge sale sale of producer. A clearer of a producer. clearer understanding finally, understanding of the functioning functioning of will perhaps if we follow follow of the of an exchange possible, if perhaps be possible, exchange will in detail detail different types of of orders orders which proceed buyers or sellers from in different types or sellers buyers proceed motives in in trading trading are are of a widely widely different different character. character. of a whose motives is a business The Course of a Speculative Speculative Transaction. business man Transaction. Brown is of a been in has for occasionally in commodities. He has following who speculates following for speculates occasionally some time time the of the the market in has made some in crude rubber. course of rubber. He has the course investigation of of the the demand and supply kept in touch with has kept situation, has investigation supply situation, price fluctuations, and has formed opinion on the general trend trend of of has an the fluctuations, price general opinion the rubber market. market. He believes believes that that crude rubber will will sell sell lower. the If his lower. If his crude rubber at its judgment is a profit profit by future at its is sound, distant future sound, he can make a selling a distant judgment by selling at a prevailing price price and later buying back this a lower lower price. price. later buying this same future at prevailing The first first part part of this transaction transaction is is known as Although he of this a short short sale. sale. Although as a is not a is a member of of any any exchange, may be a customer of of L. L. & & Co" Co., one exchange, he may of the of the many houses which are are members of of the the New York many large large commission houses 188 188
Typical Exchange Transaction on the the Exchange Typical Transaction
18 9 189
Stock Exchange, the the Commodity Exchange, Inc., the New York and New Stock Exchange, Inc., the Commodity Exchange, Orleans Cotton Exchanges, Exchanges, the the Chicago the New Mercantile Exchange, Orleans Cotton Chicago Mercantile Exchange, the Exchange, the Cocoa Exchange, the York Coffee Coffee and Sugar the New York York Sugar Exchange, Exchange, the other Chicago Board of Trade, and other leading commodity exchanges. of Trade, leading commodity exchanges. Chicago & Co. On January January 22 Brown telephones telephones L. L. & Co. One of the customers' customers' men of the receives call, and Brown gives gives him an oral oral order to sell order to 10 contracts sell 10 the call, contracts receives the rubber for of May for his account "at the market." (units) his "at the market." Brown knows (units) of May will be executed immediately. immediately. He has this has previously considered this order order will previously considered the use use of a limited limited price, price, but but has has decided decided that that the may decline of a the market may decline the or is not active enough to make this procedure desirable. His order, to as not active this or is order, as enough procedure desirable. to sell at the the best possible price. he used aa given, is sell at best possible is practically one to given, practically price. Had he limited order, order, he he would have have named aa definite price at at or limited definite price or above which the sale must be made. the sale is entered & Co.; order is entered on aa selling in the Brown's order the office office of L. & Brown's ticket in of L. Co.; a selling ticket the time time of its receipt receipt are upon it. The use of of its number and the are stamped it. use of stamped upon in in of names saves saves time, aids in preventing instead of time, aids mistakes in numbers instead preventing mistakes the of orders to the the exchange, and protects the identity of of orders to the transmission of the transmission exchange, identity protects L. & the the main office, direct wires wires connect & Co. Co. with customer. From the connect L. the customer. office, direct all the they are are members. The customers' teleof which they customers' man teleall the exchanges exchanges of of the to members. the floor of the exchange booths are leased to phones to leased where are floor booths to the exchange phones of L. & Co., booth, takes the L. & at that that firm's takes down the An attendant attendant of firm's booth, Co., standing standing at order to rubber. Brown's Brown's name is not mentioned mentioned-he has he has order to sell sell 10 10 May is not May rubber. a number. number. L. floor broker, broker, who receives receives the the selling order. L. & Co.'s Co.'s floor become a order, selling not know for for what customer's customer's account it to be executed. does not it is is to does executed. ring, brokers brokers are are shouting shouting their bids and offers rubber for their bids At the the ring, offers of of rubber for various delivery months. broker of L. & Co. listens for a bid for The broker L. months. of Co. various listens for bid a for delivery the activity for the time being is centered in other May rubber. Since the for the rubber. Since is in centered other activity being May he hears hears no bids bids for for May, May, he glances up at the blackboard at the months and he blackboard glances up which extends wall of of the the exchange floor. This blackboard is across one wall extends across floor. blackboard is exchange all the into fifteen prices of transactions divided in which prices fifteen columns in of all the day's divided into transactions day's the head of each column is one of are recorded. recorded. At the of each the name of is the of one are of the the is made at at the calendar months. months. As each each transaction transaction is the ring, ring, the the price price calendar the number of the board board under under the of contracts sold are are indicated indicated on the contracts sold and the the in. Attendants, Attendants, with telephone telephone headpieces headpieces and earphones traded in. month traded earphones that their their wearers wearers can walk back and forth bridge in in so attached that forth on a a bridge so attached front of board, receive receive the the price price and number of trades of lots of the the board, lots as as fast fast as as trades front reported from the the ring. ring. The broker broker looks the May to find are at the looks at are reported find May column to in order the price price at at which the the last last May May sale sale was made in order to to ascertain ascertain at at the what price price to to make his his own offer to sell Brown's account. He then offer to sell for for account. then His offer is countered offers at 20.20. His offer is by a bid of 20.10 10 May at countered bid of 20.20. from 20.10 offers 10 by May the ring, ring, but he continues to call his offer, across the call out continues to out his to make across offer, hoping hoping to thus obtain the highest highest possible possible price price for his cuseushis sale at 20.20 obtain the sale at 20.20 and thus for his his
0 19 igo
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
at the tom er. Having Having instructions instructions to to sell receiving the market, sell at tomer. however, and receiving market, however, at 20.10. 20.10. no bid bid at 20.20, he he finally sells the the ten ten lots lots at at 20.20, no finally sells to buy sell must be rules provide provide that that every buy or offer to or sell The exchange exchange rules every offer it. all of offers closed with the broker first accepts all or any part of it. No offers or first who closed with the broker any part accepts of or none" none" are permitted. If the broker's broker's offer offer had been accepted If the are permitted. "all or of "all accepted simultaneously by several brokers, the question of priority probthe of would several brokers, priority probsimultaneously by question ably have been settled immediately among the brokers themselves. The themselves. the brokers been settled immediately among ably Hoor is always present and is rule on the quesis empowered to committee is floor committee quesalways present empowered to rule tion of precedence in in case case the the brokers brokers are to reach reach an amicable are unable to tion of precedence agreement. agreement. L. broker made the the sale sale to broker representing a broker L. & Co's Go's broker to a Co., representing H. & Co., in another exchange firm. firm. Each broker broker carries printed and ruled in carries cards cards printed another exchange is noted red one side black on the the other. other. Each sale sale on the the floor Hoor is noted in black side and in red on one on the the side ruled in red, and each purchase is the side is recorded on the side in red, side ruled each purchase in are printed and ruled in black. sides are printed exactly the same black. The two sides the ruled printed exactly printed date line, except the top top of of the the red red side side of the date line, of the before the at the the card, that at card, before except that for the word "sold" the for recording the name of the column the of the and the "sold" appears the recording appears the other broker broker is headed "to," whereas on the black side the words are black are the side whereas other is headed "to," "bought" "from." "bought" and "from." Co.'s broker side printed printed in in red, red, L. & Coo's broker notes 20.10." L. & On the the side notes "H., 10, May "H., 10, May 20.10." Across the ring the the broker broker of & Co. noted on the has noted the side of his his card card of H. & Co. has side of Across the ring printed in black, "L, May 20.10." Later in the day the two brokers brokers in the in black, 20.10." Later "L, 10, 10, May day the printed will compare their their cards cards to to make sure sure that that their to quantity, their notations as to notations as will compare quantity, are in in accord. accord. L. the attend. price, and month are L. & & Co's Go's broker broker now instructs instructs the attendprice, ant at the telephone telephone booth booth to to report report to to his his office price at at which the office the ant the at the the price sale was was made. made. L. & Co. Co. immediately immediately notify Brown by telephone that that L. & sale by telephone notify they have for his his account lots of May at 20.10. All All this 10 lots at 20.10. of May this activity sold for account 10 have sold activity they required much less less time time than than is may have is necessary to it norhave required describe it-nornecessary to describe may of the mally 30 to 40 seconds the Hoor of the exchange. 40 the floor 30 to seconds on mally exchange. What Brown Sold. Sold. When Brown receives receives notification notification that that his his sale sale he knows that that he he is is now under contract to deliver to aa has been made, made, he has been contract to deliver to he does not probably never will know, 224,000 purchaser, not and know never whom he does will know, 224,000 probably purchaser, at his pounds (100 long tons) tons) some time time at his option in the the month of of May option in pounds (100 long May its own standard at 20.10 20.10 cents cents per per pound. pound. Every Every exchange at standard contract contract exchange has its unit in of which all all transactions transactions are made. Each rubber rubber contract contract unit in terms are made. terms of calls for the the delivery delivery of pounds (10 tons) , and Brown has sold 10 calls for of 22,400 has 10 sold 22,400 pounds (10 tons) contracts. contracts. Confirming the Sale. Sale. Trading exchange at the the ring continues at of the the exchange ring of Trading continues Confirming the until the closing gong sounds at three o'clock. Then tables are brought at until o'clock. the closing gong sounds three tables are brought floor broker L. & Co. out on the the floor Hoor and the the Hoor broker for for L. joins other Co. joins out other brokers, brokers, who sit to exchange exchange contract contract slips slips confirming all trades of the day. all sit down to trades of the confirming day. of these these slips is filled filled in in with with the the particulars particulars of One of of Brown's Brown's sale as follows: sale as follows: slips is ,
Typical Exchange Transaction on the the Exchange Typical Transaction
191
York, January 2 New York, January 2
SELLER ...................................... L. Co. . .................................................. . L. & &: Co. Co..................................................... . BUYER .......•.............................. H. H. & Co
Subject to the the Rules Rules and By-Laws Subject to By-Laws of of
Commodity Exchange, Inc. Inc. Commodity Exchange, Number of of Contracts of Rubber Contracts of 10 10
Delivery in in Delivery
Price Price
May May
20.10 20.10
L. L. Se & Co. Co. By .......................... .. BY
Attorney Attorney L. Co.'s broker broker hands this this slip to H. & Co.'s broker and receives a Co.'s broker receives a L. & Co/s slip to these slips they constisimilar slip him. When these constisimilar signed, they slips have been signed, slip from him. for the L. & tute binding contract the sale sale of of rubber by a binding contract for of 224,000 of tute a 224,000 pounds by L. pounds Co. to & Co. at the the contract price to of to be delivered delivered in in the the month of contract price Co. Co. at to H. & of the May. Neither knows the the customer customer of the other. other. May. Neither L. & at the of the Clearing the Trade. X., L. & Co's broker, at the day the Go's the close close of X., broker, Clearing day H. takes his slips slips (among (among them the the one signed by & Co.'s broker) to & Co/s takes his signed by broker) to his office. L. & Co.'s report to to the clearing house house is up from L. 8c the clearing is made up his office. Co/s daily daily report these slips. report, as soon as it is completed, is sent to the clearing as it is soon as is sent to The the these completed, report, slips. clearing house. & Co. Co. meanwhile have have been engaged in making out a similar in a out house. H. & similar engaged making report. Messengers Messengers of of these these two firms firms will will take take the the reports reports to to the the clearing report. clearing house, carrying carrying with with them checks for original margin requirements checks for house, original margin requirements on their respective net net purchases purchases and sales. sales. After After their their reports their respective checks reports and checks have been delivered to the the clearing L. & Co. delivered to Co. and H. & Co. Co. no house, L. clearing house, longer have any relationship with each other on Brown's sale, although Brown's each have with sale, longer any relationship although L. & Brown still remains aa customer of has now still remains of L. & Co. Co. The clearing clearing house has been substituted for H. & Co. as purchaser purchaser of May rubber and 10 May Co. as of Brown's 10 substituted for been 10 May for L. as seller seller of Brown's 10 May rubber. rubber. In other words, L. Co. of Brown's other words, L. & Co. for Co. as L. & Co. have aa contract contract of to the the clearing house, and H. & Co. have aa of sale sale to & Co. now have have clearing house, contract of purchase purchase from the the clearing clearing house house for the account of their for the of their contract of respective customers. customers. respective Brown's Margin Margin with L. L. &Co. Brown is old customer of L. & Co. Brown's is an old of L. & Co. Co. He has, with them them-enough to take the take care care of of the has, say, $10,000, on deposit enough to deposit with say, $10,000, original margin requirement and to cover subsequent small fluctuations to cover small fluctuations subsequent original margin requirement in price. Brown has has already already been notified notified by by telephone the execution in price. of the execution telephone of of his order, order, but but aa written written confirmat,ion to him before confirmation is is mailed to before L. L. & & Co.'s of his Co/s office closes the day. The commission houses send confirmations, one for the houses office closes for confirmations, day. of purchase and the other of sale, to their respective customers, as follows: of the other of purchase sale, to their respective customers, as follows:
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading CONFIRMATION OF PURCHASE Sir: Dear Sir:As indicated below, we have this this day day BOUGHT for risk, for your indicated below, your account and risk, and Customs, as existing or subject to the By-Laws, Rules, Regulations, as now to the Customs, existing or By-Laws, Rules, Regulations, subject of the hereafter amended or or adopted, adopted, of the Exchange Exchange where the was made the purchase hereafter purchase and its House, and subject to all all applicable State laws laws and its Clearing Federal and State Clearing House, subject to applicable Federal Government to the regulations of any agency having authority with respect of with to the regulations agency having authority any respect
thereto: thereto: Date, Date,
Account Account
A. A. B. B. Customer
Quantity Quantity Ten (10) (10)
Commodity Commodity Rubber
Price Price
January 2, 2, 1947 1947 January Remarks
Extension Extension
20.1O~ 20.10<
per lb. Ib. per for future of commodities for future delivery All the purchase purchase of are received received for the orders for All orders delivery are is contemplated and actual delivery and executed with the the understanding understanding that that actual executed with delivery is contemplated the party party giving the order order so understands and agrees. the right so understands reserve the to the agrees. We reserve right to giving the in our judgment are insufclose out out contract contract (s) (s) without without notice notice when margins margins in judgment are insufclose as and when authorized ficient. Contract will be be closed closed out by by us or required will us as authorized or Contract (s) ficient. (s) required if you fail by the Exchange made; or, if fail to give instructions can be be to which where instructions the made; or, give you Exchange by the contract shall close close out the contract (s) prevailing conditions, conditions, we shall or executed or executed under prevailing (s) of the take delivery delivery and dispose of the commodity by any feasible method and upon feasible take commodity by any upon dispose any terms terms which we may may see see fit. fit. Against Against aa "long" in the the near near month, month, "long" position position in any have liquidating liquidating instructions, instructions, or or we must be placed placed in in sufficient funds sufficient funds we must have first the notice of said to delivery at at least five days before the first notice day of said month, before and least five to take take delivery month, days day in default thereof we reserve reserve the the right, right, without without demand or notice, to close close in default thereof notice, to of the out the the contract (s) or to to take take delivery delivery and dispose the commodity upon any contract (s) out commodity upon dispose of any feasible. terms and by by any any method which may may be feasible. terms Yours respectfully, respectfully, Yours H. & Be Co.
By By ....................................... . CONFIRMATION OF SALE
Dear Sir:Sir: for your As indicated indicated below, below, we have have this this day risk, subject As your account and risk, day SOLD for subject as now existing to the By-Laws, By-Laws, Rules, Regulations, and Customs, hereafter to the Customs, as Rules, Regulations, existing or hereafter or adopted, of the the Exchange Exchange where the the sale was made and its its Clearing sale was amended or Clearing adopted, of to the House, and and subject subject to to all all applicable Federal and State laws and to regulaState laws the regulaHouse, applicable Federal tions of any Government agency having authority with respect respect thereto: thereto: of any tions authority with agency having
Date, Date,
Account Account Robert Brown Robert
Quantity Quantity Ten (10) (10)
Commodity Commodity Rubber
Pirce Pirce
January 1947 2, 1947 January 2, Remarks
Extension Extension
20.1O~ 20.10^
per lb. Ib. per for future delivery are received All orders orders for for the the sale sale of of commodities for received and All delivery are is contemplated and the executed with the the understanding understanding that that actual actual delivery the executed with delivery is contemplated
Typical Transaction Exchange Transaction on the the Exchange Typical
193
party giving giving the the order understands and agrees. reserve the right to to close dose so understands order so the right agrees. We reserve party out the contract (s) without notice, margins in our judgment are insufwithout in out the contract when are insufnotice, margins (s) judgment will us as as and when authorized ficient. Contract (s) will be be closed dosed out by by us or required ficient. Contract authorized or (s) required where if the fail by the Exchange made; or, if you fail to give instructions which can -to instructions which can made; or, Exchange you by give be executed executed under prevailing prevailing conditions, we shall dose out contract (s) or shall close out contract or conditions, (s) feasible method and upon delivery by by any which we may make delivery terms which any feasible any terms may upon any position in in the the current month, we must have instrucsee fit. Against Against aa "short" position see fit. current month, have instruc,tions to close close out, out, or all all necessary necessary delivery delivery documents must be in in our at tions to our hands at last trading least 55 days days before before the the last trading day of said month, and in default thereof least of said in default thereof month, day reserve the right without demand or or notice notice to to dose the contract or we reserve the right close out out the contract (s) (s) or the for actual procure the actual commodity for delivery upon any terms and by any method terms procure commodity delivery upon any by any may be be feasible_ which may feasible. Respectfully yours, yours, Respectfully
L. & Co. L. Co.
By By ....................................... .
Commissions. For executing executing Brown's Brown's order, L. & receive aa com& Co. Co. receive Commissions. For order, L. minimum for purchase mission of $200.00. prevailing commission for purchase The mission of $200.00. prevailing or sale exchange is is $20.00 $20.00 for the sale purchase of or for the sale or or purchase of one contract, sale on the the exchange contract, contracts. If If he were and Brown has has sold sold ten ten contracts. were a member of the exchange, of the exchange, the commission commission charged by L. L. & Co. Co. would be be half the above amount the half of of the charged by in all,1 -$10.00 per contract, contract, or or $100.00 all. 1 $100.00 in $10.00 per the course course of of rubber rubber prices prices in the newspapers in the follows daily Brown follows daily the newspapers and is interested reader reader of all statistical statistical matter matter and news which have have of all is an interested of course of prices bearing on rubber. rubber. Will Will the the course his anticipation? aa bearing follow his prices follow anticipation? it not. As weeks weeks go by he finds that it does not. Instead of going the he finds that Instead of down, the go by going down, price of May rubber advances. By February 1, a after he rubber advances. made of a he month after By February 1, May price his price is is up up to to 21.10. 21.10. At this this stage has an unliquidated unliquidated his sale, the price sale, the stage Brown has on his paper loss of 1 per pound his sale, and, if he were at this time 1 cent cent if loss of at this time he were sale, and, per pound paper out his his trade trade by by aa corresponding corresponding purchase, he actually to would to close close out actually purchase, 10 contracts and immediately immediately sustain this loss. loss. Since has sold sold 10 sustain this contracts (224,000 Since he has (224,000 pounds), his his paper paper loss to $2,240. loss amounts to $2,240. pounds) Variation Margins. The price price of of May May rubber rubber having having advanced 11 Variation Margins. cent a pound, L. Co., in addition to the original have paid paid & in L. addition to a the cent Co., original deposit, deposit, have pound, to the the clearing clearing house house $2,240 variation or market-difference margin. as variation or market-difference to $2,240 as margin. As it to L. & Co. pay this to the the clearing clearing house, house, which credits to the the account credits it L. & this sum to Co. pay debit the of subject to to their their draft, draft, L. L. & the & Co. Co. simultaneously of H. & fc Co., Co., subject simultaneously debit account of of Brown correspondingly. account correspondingly. Switching. price change change of Before occurs. Before of any further price any moment occurs. Switching. No further until May arrives, L. & Co. reminds that he has until May 25 (the last has that 25 Brown L. & reminds Co. May (the last May arrives, close either to of two things delivery for May rubber) to to do one of things-either to close delivery day day for May rubber) fulfill it it by to fulfill out his by aa purchase purchase of of 10 Mayor else to by the the or else 10 May out his contract contract by ,
1 For current current iFor
VIII. see Chapter commission rates rates on on commodity commodity exchanges, commission exchanges, see Chapter VIII.
194 194
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
of rubber of of a grade delivery of of 224,000 pounds of tenderable on the the 224,000 pounds grade tenderable delivery cover. Nevertheless, exchange contract. decides to to cover. Nevertheless, despite fact the fact contract. Brown decides despite the exchange
that price of of rubber rubber has has advanced advanced 11 cent per pound cent per his sale, since his that the the price sale, pound since not yet yet convinced convinced that that his his judgment judgment of the longer-term trend of is of the trend of is not longer-term therefore, to to get his unprofitable unprofitable prices was wrong. wrong. He decides, of his decides, therefore, get out of prices 10 May short sale, but still to remain short 10 contracts of rubber. Accordof but to short contracts short still remain rubber. sale, May 10 the ingly, he directs L. & Co. to buy 10 May rubber at the preva:iling L. to at & Co. rubber directs he buy May ingly, prevailing market price, but but to October simultaneously the market. His purchase purchase 10 October to sell at the sell 10 market. His price, simultaneously at of offsets the sale he in January leaves with of 10 10 May the him offsets sale which in with he and made leaves May January no obligation to a to deliver rubber the May contract, but he has a deliver has rubber now on the but he obligation May contract, of $2,240. May contract is bought bought back back on the floor liquidated loss loss of the floor contract is $2,240. The May liquidated of at the at 2 I.l 0, and a short sale is entered into by of the the exchange a into new short is entered sale 21.10, exchange by the sale of 10 October at, say, 21.90. has simply switched his short sale of 10 21.90. Brown short has simply switched his at, say, position from aa near near month to to aa more distant he now has has distant position, but he position position, but a a liquidated liquidated loss loss of of $2,240 to overcome. overcome. $2,240 to Brown's Trade Closed. Before October judgment Closed. Before Brown's October arrives, Brown's judgment arrives, Brown's 16.10 may be be vindicated. vindicated. The price price of rubber declines to, say, of October rubber declines to, say, 16.10 may per pound. pound. Brown now has has aa paper profit of 5.8 cents per pound, cents per of cents 5.8 cents paper profit per pound, amounting to $12,992 his sale sale of of October rubber. rubber. Deducting Deducting the $2,240 the $2,240 $12,992 on his amounting to which he he lost the sale sale of of May rubber, he he still a net profit of net profit of $10,752, still has has a which lost on the $10,752, May rubber, less commissions to L. & Co. for the the two two lots 10 contracts L. & Co. for lots of of 10 contracts each. less commissions to each. Brown & Co. to buy buy 10 buying order the L. & Co. to 10 October. follows the now instructs instructs L. October. The buying order follows same course that his his original original selling selling orders and, the conconorders pursued, the course that when and, pursued, is closed firmation notice of & Co. Co. reaches reaches him, him, his of L. L. & his trading firmation notice closed and he trading is L. of his receives aa statement & Co. Co. of together statement from L. & receives his profits profits and charges, charges, together wi th aa check. check. with If been bullish bullish on the the rubber rubber market market and, If Brown had been of sellsellinstead of and, instead ing short, had ordered L. & Co. to buy for his account, the operations ordered L. & Co. to buy for his account, the operations ing short, the same except that Brown would have made money money have been been the would have except that on his his first first and lost his second transaction. lost on his second transaction. Protective Sale. Sale. Differing Differing widely widely in of transaction the sale in type sale transaction is is the A Protective type of in crude rubber. rubber. Since the primary primary of Mr. Black, aa merchant merchant who deals deals in Since the of Mr. Black, rubber are abroad, Black Black is touch with with merchants markets for for rubber in constant constant touch is in are abroad, markets 1 he is in receipt of offers in Singapore, is in offers in Batavia, and Colombo. On April April 1 receipt of Singapore, Batavia, he rubber for April shipment shipment from exporters with whom deals, to sell with to sell rubber for April deals, exporters and he 50 tons tons offered offered by by aa merchant in price of in Singapore at a price of he accepts Singapore at accepts 50 18 cents aa pound, pound, c.i.f. c.i.f. New York, York, for 18 cents for April shipment. The Singapore Singapore April shipment. merchant will will prepare prepare immediately to ship the rubber, which will be the to will be which rubber, immediately ship en route by the the middle middle of of April. April. Not desiring to speculate on this transto this transroute by desiring speculate action, Black Black wishes wishes to to make certain that he will will not the if the not lose certain that lose money, action, money, if 18 price declines 18 cents. His shipment will probably arrive in below cents. in His will arrive declines shipment probably price at moment the June he has at the immediate buyer for the specific has no he and for the buyer specific June he he
Typical Exchange Transaction on the the Exchange Typical Transaction
195 195
is long of grade the physical physical market. market. He now is 50 tons the physical physical tons of of the long of 50 grade on the rubber, but to to protect protect himself himself from market risks risks he he can sell June sell 5 5 June rubber, but contracts (50 tons) tons) on the the exchange. contracts (50 exchange. to make the April I1 he he instructs instructs L. L. & Co. to the sale. his sale. They On April execute his They execute the exchange order at, at, say, per pound pound on the for June June delivery. cents per floor for 19 cents order exchange floor say, 19 delivery. 18 cents of 18 the c.i.f. c.i.f. price price of the price price of difference between the cents and the The difference the of the interest exchange future is represented by interest charges, weighing, trucking, is future represented by charges, weighing, trucking, exchange other incidental Black has has now bought bought at 18 cents at 18 and other incidental expenses. cents and expenses. Black in sold exchange for for delivery in June at 19 cents per pound. the the exchange 19 cents sold on the at delivery June per pound. By By the 1 arrives the for I arrives the price of rubber for immediate delivery has time June time of June price delivery declined, to 17 per pound. pound. cents per 17 cents declined, say, say, to If were not not for his sale the exchange, Black would be be compelled sale on the If it it were for his exchange, Black compelled at a to find find aa purchaser purchaser on the loss to the physical physical market at a loss to himself. himself. But he to sold the has no such problem. problem. When he he sold the 55 June June futures, futures, he had thereby has thereby if he decided to a procured a purchaser of his physical rubber, if to deliver of his deliver on rubber, purchaser procured physical the exchange. exchange. It only necessary necessary for to make delivery in accordfor him to the It is is now only accorddelivery in with his his contract, contract, if if it it is is more profitable Black ance ance with for him to to do so. so. Black profitable for in a a declining declining market through through his his protective protective sale. has avoided aa loss has loss in sale. He it at a reasonable has been enabled enabled to to buy buy the the rubber rubber and hedge reasonable profit profit has at a hedge it when, without such protection and unable unable to to sell sell it it immediately to such protection when, without immediately to an actual user, he he might might have have deemed it it unsafe unsafe to purchase. to purchase. actual user, the shipment inspected, arrives from Singapore, When the it is is sampled, Singapore, it sampled, inspected, shipment arrives weighed, and certified as to to quality. rubber is grade tendertendercertified as Since the the rubber is of a grade of a quality. Since weighed, L. & the exchange contract, instructs L. & Co. to issue transferable able on the instructs able he Co. to issue transferable contract, exchange has sold contracts, each representing representing 10 tons, and his his notices. He has 5 contracts, 10 long sold 5 notices. long tons, L. & Co. accordingly tons. L. & Co. issue 55 transferable purchase abroad was 50 tons. transferable accordingly issue purchase for each contract. notices to the clearing clearing house, house, one for house to the contract. The clearing notices clearing house that H. & Co. are among the many clearing members who are long notes & Co. are among the many clearing notes that are long rubber; accordingly, the transferable transferable notices notices are them. are sent sent to to them. on June accordingly, the June rubber; in which to H. & Co. have have a half half hour in to decide to do with the the transtransdecide what to 8c Co. the they wish wish the physical physical rubber for customer, they they ferable notices. notices. If for a a customer, If they ferable that is, they will retain-the notices accept delivery. Having will stop-that retain the notices and will will is, accept delivery. Having they stop their customer, customer, however, however, not to accept instructions not to instructions from their of the the delivery of accept delivery rubber, they send the the notices notices immediately the exchange, where their to the their rubber, they immediately to exchange, where floor broker broker sells in the the ring ring as contracts. Each succeeding as 5 5 June sells them in contracts. floor June succeeding or transferee into whose hands hands the notices come has has this this same time buyer or transferee into the notices time buyer limit half hour hour for for disposing them; otherwise, he must take take deliva half of them; of a delivlimit of otherwise, he disposing of ery. time of transfer and the endorsement of each buying the of endorsement The time of transfer member buying ery. for that in the are placed on the the notices notices in the space provided for that purpose. are placed space provided purpose. The notices finally the hands hands of broker acting of a a broker for a purchaser into the notices acting for purchaser finally come into him. notices are by him. The delivery take delivery. delivery. The notices to take are stopped wishes to who wishes stopped by delivery transferable notice notice is is aa fixed fixed business business day the date day on aa transferable date day succeeding succeeding the day
196
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
& Co. the buyer buyer must meantime maintain Co. and the their positions with the the clearing house; that that is, is, they they must adjust their positions clearing house; adjust margins margins to the transferable notice notice price, price, based based on the the settlement price established established settlement price the transferable to by the house at the end of of each day. will do this this until at the until the clearing day. They clearing house They will by his Black payment for the rubber has has been made. When the buyer gives his the buyer for the gives payment check in exchange for the delivery the documents, both notify the in exchange for the of the check documents, both notify the delivery of clearing house. Black's transaction then is completed. transaction is house. Black's then clearing completed. More likely, however, Black Black will will prefer prefer to to sell his physical physical rubber on sell his likely, however, arrival to a tire tire manufacturer and close close out his by an offoffarrival to a his exchange sale by exchange sale setting purchase. By doing this is likely to make an extra profit, this to extra he is likely profit, setting purchase. By doing for may obtain obtain aa small premium for for the grade on the the physical physical small premium the specific for he may specific grade market-a premium higher higher than than the the price price which he 'Would marketa premium would get delivery by delivery get by contracts. suffer the exchange contracts. In any case, by such action he will not suffer action on the will case, by exchange any any loss. loss. any Central Market Place. The Central Place. In In these these two transactions transactions the the work of of the exchange exchange as as aa great place has been briefly illustrated. The market illustrated. has been the great place briefly exchange has been likened likened to to aa telephone telephone switchboard and the the itself has exchange itself mechanism. trading ring to the board's The sale of Brown, the specuto the board's of the sale Brown, trading ring speculator, may may find find aa buyer buyer in in the the manufacturer manufacturer who wishes wishes to to make sure sure lator, of rubber at at the the price price on which he had based his a sale sale his cost cost estimates for a of rubber estimates for of manufactured goods. Black, the who sells to protect himself the merchant sells to of goods. Black, protect against the the risk risk of of price price change change while while his his rubber is is en route route from against Singapore, may have his offering taken up by a floor speculator, who, his taken have floor offering up by Singapore, may speculator, who, before the the day's trading closes, sells the contract again to a tire before the manusells contract to a tire day's trading closes, again facturer, who in in turn turn is is protecting protecting aa sale tires for sale of of tires for forward delivery. facturer, delivery. The commercial needs needs of of merchants merchants and manufacturers, manufacturers, the the judgment judgment floor all of the shrewd buying and selling of floor traders all and of traders of speculators, the speculators, buying selling contribute to make the the market liquid broad. Enough has been contribute to Enough has liquid and broad. to indicate indicate the shown to the impossibility impossibility of any single exchange transof labeling labeling any single exchange transaction as wholly wholly speculative or wholly commercial, unless one or action as unless knows commercial, speculative wholly every step through which each contract contract passes. passes. A speculator the every may be the step through speculator may maker of of the the price price which the the merchant needs for protection, whereas whereas for his his protection, it possible for the hedging hedging merchant may may in in turn turn make it the speculator the for the to speculator to possible back his his own judgment judgment of trends at risk of a loss for a mere at the of market trends risk loss for the of chance of profit. of a profit.
of the notice. Both L. L. of the notice.
[
CHAPTER
CHAPTER
XI I ) X
Hedging Hedging
trade and commerce was chiefly In days local and commodities commodities days when trade chiefly local more passed directly and quickly producer to distri,butor and from from to distributor directly quickly passed producer merchant to relatively little credit risk or hazard of substanto consumer, little credit risk or hazard of substanconsumer, relatively tial price tial price change, change, based on time, time, was involved. involved. Under modern condiconditions of tions of mass production production in agriculture, mining, and industry, as well as well agriculture, mining, industry, swift transportation as of swift transportation and large-scale large-scale warehouse and refrigeration refrigeration as of facilities, expansion in the the volume of of dealing in wheat, facilities, wheat, cotton, cotton, coffee, coffee, dealing in expansion in than and other other staple commodi~ies and, expansion, the development more the commodities and, expansion, staple development of trading in contracts for forward delivery in standard contracts for forward of standard standard grades, of trading delivery of grades, have introduced elements elements of time hazard which have already disof time have already been disdescribing the the origin growth of the futures contract. These cussed in and of the in describing futures contract. cussed growth origin in bringing hazards were were instrumental bringing about the the formation of of commodity instrumental in hazards commodity risks to exchanges. It was to minimize credit risks and to guard against hazcredit to the hazguard against the exchanges. It ards of of wide wide fluctuations in prices prices arising of transactions for future fluctuations in future transactions for ards arising out of deliveries the commodity commodity exchange exchange and the the the modern form of that the of the deliveries that to futures contract evolved to provide insurance for producers, dealevolved for were futures contract provide producers, dealers, manufacturers. The current current widespread use of the futures of the futures conconers, and manufacturers. widespread use tract for for insurance or hedging hedging represents represents the development the highest of insurance or tract highest development of all the machinery of the exchanges today. all insurance, the hedge Like of the is the the machinery insurance, exchanges today. hedge is to minimize losses used to protect against against major major casualties casualties and to losses therefrom, there from, to protect used full protection all losses but it not give give perfect perfect or or full protection from all losses arising out does not it does but arising out of such casualties. of insurance can guarantee to do that. to of insurance that. form No casualties. such of guarantee All may be be said to represent represent a hedging possessor said to insurance may All insurance hedging operation. operation. The possessor life of aa $50,000 life value, for example, goes to a life insurance company to hedge to insurance for life of value, $50,000 company to hedge example, goes that value value with with aa $50,000 $50,000 life life insurance insurance policy. After that, no matter matter what that that, policy. he has his happens, the insured is always even financially, since has his life, if lives, if he since is even the insured life, lives, financially, always happens, have the the money money value value of that that life life should he die. die. The while his his dependents while dependents have to owner of of aa $50,000 building goes to a fire insurance company to hedge the fire to a owner $50,000 building goes hedge the company is same with aa $50,000 fire insurance policy. Thereafter, he is financially secure, insurance fire same with Thereafter, secure, $50,000 financially policy. its equivalent if it if it since he has has the the building, building, if it does does not not burn, burn, or its in cash, cash, if it since he equivalent in burn. . . ~hould b'\lrn. • • • , should
197 197
Ig8 198
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
Similarly, the owner of $50,000 worth of of cotton to the the speculative exchange of $50,000 cotton goes Similarly, the goes to speculative exchange market (the (the insurance insurance institution institution which is the existence is made possible through the existence possible through of necessary factors: factors: namely, namely, aa large body of speculators, a continuous of a of four four necessary large body speculators, market, aa future future contract, short selling) selling) to to hedge against loss loss that value value against market, contract, and short hedge that through price decline, decline, with with aa short the same amount. Thereafter, a price short sale sale for for the Thereafter, he through a is financially secure, just like like the the owner of value or is financially of a a life life value of a a building, or of since secure, just building, since any in the the value value of the cotton by the the gain gain derived of the cotton is is offset offset by derived from the the shrinkage in any shrinkage 1 short serves the the same purpose purpose as as an insurance short sale, insurance policy.1 sale, which serves policy.
Risks of of Dealer and Manufacturer. Manufacturer. It necessary to take, at It is to take, Risks is only at only necessary random, familiar experiences in any commodity to find in in familiar market find in to them random, any commodity experiences aa wealth of of illustrations illustrations of of risks risks of of price price changes hazards which credit hazards changes and credit are inherent in these these transactions. transactions. inherent in are A cotton in aa southern southern port April receives cotton merchant in receives an order order port during during April a specified from aa spinner bales of for one thousand bales of a of cotton cotton of spinner abroad for specified grade for December shipment. The order specifies for grade and staple shipment. staple specifies I1 inch the staple; the grade, strict middling. The cotton exchange grade is cotton strict basis grade is exchange basis grade, middling. staple; is middling tit inch; strict middling is one grade higher than middling and strict than middling middling |f inch; grade higher middling at premium of middling. sells premium over over the the prevailing prevailing price price of middling. From the the sells at for on price prevailing the exchange for middling H-inch cotton, the merthe the mercotton, exchange middling ^-inch price prevailing 1-inch cotton chant estimates estimates the the price price of strict middling middling I-inch per of strict cotton at at 2! cents cents per and pound higher, adding freight carrying charges and including his carrying charges pound higher, adding freight including his profit of, of, say, per cent. cent. The merchant then then sells to the 3 per sells to the spinner the say, 3 spinner the profit cotton of of the the grade staple for shipment in December at the in and for at wanted the cotton grade shipment staple price so determined. contract of sale is a time the is made at at a The contract of time so determined. sale when the price at a time when it crop yet been harvested or possibly possibly at not it may may not crop has not yet even have been been planted. planted. The risk risk to this merchant has has exposed himself, by thus entering to which this by thus exposed himself, entering unqualified contract contract at at a definite for delivery of aa quantity definite price for of on an unqualified price delivery quantity of grade of of cotton cotton which he does does not not own, a is sufficient a specific sufficient on a of a own, is specific grade him a rising to cause a heavy loss. He expects to earn a profit of cause loss. to a market to earn of heavy expects rising profit sale. Such small profits only, per cent cent on this this sale. profits on many many deals his 3 per deals are are his only, say, say, 3 livelihood. primary concern concern in in business business is the earning of these profits. is the of livelihood. His primary these earning profits. Yet, if the price price of cotton were to to advance, advance, say, between if the of cotton 5 cents cents per Yet, say, 5 per pound pound between the time of the time time when he must enter the to buy of sale the market to sale and the the the buy the his cotton not only his anticipated profit wiped out, not would for shipment, be cotton for anticipated profit only wiped out, shipment, but he would suffer ruinous losses well. as well. losses as suffer ruinous but country grain grain elevator buys from a farmer 5,000 bushels A country elevator operator 5,000 bushels operator buys at of No. 11 Northern spot at $2.00 per bushel. The purchase price bushel. wheat of No. $2.00 per purchase price spot the is based on the prevailing exchange price in the terminal market. week market. A the is prevailing exchange price to or or arrive or more may may pass pass before before the the grain the arrive at at the or grain can be shipped shipped to the price terminal market market for sale. In that that short time the price may may have declined short time for sale. terminal declined 2ijr
s. s.
of Pennsylvania, 1i S. S. Huebner, Huebner. Professor University of Annals of of the of Insurance, in Annals Professor of the Insurance, University Pennsylvania, in American Academy Academy of of Political Political and Social Social Sciences, Sciences, May, 1931. American May, 1931.
Hedging Hedging
199 199
substantially that paid paid to to the the farmer. is primarily primarily farmer. The elevator elevator also also is substantially below that interested in in making making aa small merchandising profit many transactions; small merchandising interested transactions; profit on many him yet the possibility of sharp price fluctuations subjects to heavy of fluctuations to the yet heavy specusharp price subjects possibility speculative risks. risks. lative flour miller miller contracts in April April to barrels of in A flour to deliver contracts in deliver 5,000 of flour flour in 5,000 barrels to aa bakery bakery or to the the United States at a price based or to at a December to States Army based on Army price current prices for price quoted the current exchange for December wheat. wheat. The price for the exchange prices quoted for flour is to cover cover costs costs and insure milling profit, but flour a normal milling is sufficient sufficient to insure a profit, but it does does not not include margin sufficient sufficient to to justify justify aa speculative risk. The it a margin include a risk. speculative arrives and the the miller, miller, by reason of of December arrives in month of of an advance advance in by reason the price price of of wheat, wheat, may may be compelled compelled to pay, say, per bushel bushel more the to pay, cents per 20 cents say, 20 than the the price price on which he he based based his his estimate he contracted to mill mill estimate when he contracted to flour at at the the flour fixed price. the the fixed price. He will will require require approximately 25,000 bushels approximately 25,000 bushels to make 5,000 of wheat to of 5,000 barrels barrels of of flour. flour. An advance in in the price of the price of wheat would cost cost him $250.00 for each cent per bushel. for each cent bushel. $250.00 per Eliminating the the Risk. Risk. If producers, merchants, merchants, millers, millers, spinners, If producers, Eliminating spinners, and manufacturers were were compelled compelled to to face face such market hazards hazards without means manufacturers such market in the left in of protection, protection, many many fields fields of of enterprise of the hands of of enterprise would be left speculators nerve ,and tremendous financial resources. More imimof iron iron nerve financial resources. .and tremendous speculators of portant, prices be higher to consumers or much lower to be would much or to lower to higher portant, prices producers and also be erratic. The profits of merchants be would also much erratic. of more merchants profits producers and converters necessarily have to to be higher to compensate converters would necessarily for higher to compensate for these speculative hazards. hazards. these speculative the examples in particular, Although examples mentioned differ transactions differ in the transactions Although the particular, the a business alike in is a in kind. kind. Each is business transaction by aa mermerare alike transaction entered entered into are into by in the chant or manufacturer manufacturer in the ordinary ordinary course his business business with the course of chant or of his with the of making his normal merchandising, milling, or manufacturing object of his or making merchandising, milling, object manufacturing for assumption profit, without without allowance assumption of based on of speculative allowance for risks based speculative risks profit, time. He wants wants to to operate without such risks. such without risks. time. operate in which the There are, are, of of course, various ways ways in risk of the risk a price of a course, various price change change might or eliminated. eliminated. Taking the case case of of the the southern southern Taking the might be minimized or there are are three cotton merchant, merchant, it it is is apparent that there three ways in which he cotton apparent that ways in risk: could escape his price risk: (1) as soon as he his contract his as as made his could escape contract of of sale, sale, (1) price of the he buy and store the grade he could buy store spot could buy could he could sold; (2) grade sold; spot cotton of (2) buy for forward delivery in in the the appropriate appropriate market the grade he the particular for forward delivery particular grade he not if he needs; or, (3) if could immediately obtain the necessary specific the needs; or, (3) immediately necessary specific of grade, he could buy cotton of various grades, store it, and in cotton various store in the he could the course course it, buy grades, grade, of strict 1 of his specific grade of strict middling I inch cotton by later obtain his inch time obtain cotton of time middling specific grade by later cotton for the exchange his stored stored cotton for the grade desires. of his grade he desires. exchange of to a a business these methods would appeal appeal to business man. To buy buy of these None of such deals for would cotton for many such deals be highly undesirable, be cotton immediately many immediately highly undesirable, tie up because such transactions would soon tie up his his entire such transactions entire capital because from capital from
200 goo
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
spring until the the time time for the frozen in December. Interest for shipment Interest on the frozen shipment in spring until the stored capital, of the the cotton, stored cotton cotton cotton, and carrying carrying charges charges on the shrinkage of capital, shrinkage away his his profits. profits. It It would also unsatisfactory would soon also be equally eat away soon eat equally unsatisfactory to attempt attempt to to buy buy from aa farmer farmer the the specific specific grade he requires, requires, for him to for grade he in finding might have have difficulty difficulty in finding cotton for cotton of of the the grade, for he he might grade, staple, staple, and desired, and the the time time consumed in in prosecuting prosecuting the for the search search for amount desired, eat into his small merchandising profit. The second method it would also his it eat small also second into merchandising profit. it is (buying the specific grade for forward delivery), it true, is the for forward is is open to true, delivery), (buying specific grade open to these objections so far as the is but it merchant is concerned, it does far as but does none of of these so the concerned, objections not eliminate the risk of price fluctuation from the transaction; the risk not eliminate the risk of price fluctuation the transaction; the risk is merely merely passed passed on to to the the party party who contracts to make the the forward delivdelivis contracts to and he be faced with the same problem confronted ery, he would which be faced with the ery, problem the cotton cotton merchant. merchant. the The cotton cotton merchant or the flour flour miller to minimize his his or the miller who seeks seeks to price changes by purchasing at once for forward delivery the risks of risks of price for the at once forward delivery changes by purchasing specific grade of he has has sold) the specific specific grade of wheat of cotton or the cotton (which grade of specific grade sold) or (which he (which he has contracted to mill into flour) from a cotton or mill a or wheat he has to cotton contracted into (which flour) farmer a credit or merchant dealer dealer is to another risk-a credit farmer or himself to risk is subjecting himself subjecting the specific risk. The farmer or the cotton farmer or the merchant from whom the risk. of cotton grade of specific grade at or wheat wheat is is bought bought for forward delivery delivery may may fail fail to or to make delivery for forward delivery at the date is due. due. A rising rising market between April and may the it is December date it may April at higher tempt resell their their cotton or wheat at the to resell cotton or higher prices (despite the tempt them to prices (despite certainty of a lawsuit for damages for non-delivery) . Furthermore, they a of for lawsuit for Furthermore, certainty they non-delivery) damages may be be forced forced into into bankruptcy bankruptcy before before delivery the date. In either either case case the delivery date. may cotton flour miller miller would be compelled to meet such or flour such defaults defaults cotton merchant or compelled to entering into the rebuying the defaulted contracts, by again market and the into defaulted the contracts, rebuying by again entering at much higher higher prices. prices. The legal right to to sue sue aa defaulter a possibly at defaulter on a legal right possibly contract to file file aa claim bankrupt estate is not not or to for damages estate is contract or claim for damages against against a bankrupt risks. such adequate protection against such risks. adequate protection against The merchant merchant and the the miller, miller, because because of of the the exchange, of the the facilities facilities of exchange, not compelled to resort resort to to any are these methods. They of these obtain are not any of They can obtain compelled to of protection against both the hazards of default and the risks of price hazards default the risks both the of protection against price in result that it fluctuation, a protection so eminently satisfactory in a so result that it more fluctuation, eminently satisfactory protection credit insurance. appropriately be termed termed price price and credit insurance. The merchant appropriately should be sell by protect their their contracts to sell purchases or and miller contracts to miller can protect or by offsetting offsetting purchases hedges on the exchange. the exchange. hedges in face miller could could operate operate in price and credit face of No merchant or or miller of such such price credit working on margins margins of of profits larger than normal. risks without working much risks than normal. profits larger This, in turn, turn, would raise raise prices prices to to consumers or those paid paid to lower those or lower to This, in producers. In In any the merchant and miller miller want to to operate operate on case, the any case, producers. their normal merchandising merchandising or milling margins-a percentage on or milling their small percentage margins a small large volume-without assuming speculative risks. For these reasons they volumewithout these reasons assuming speculative risks. large they .
Hedging Hedging will insure insure against against such such risks risks will tions-on the exchange. exchange. tions on the
201
by hedgesoff-setting hedges-off-setting insurance insurance transac transae by
After After all, a futures futures market serves the same purpose purpose in in the marketing serves much the the marketing all, a in the field as does does Lloyd's in the shipping field. It takes, for example, the risk incident field. It for risk the incident takes, Lloyd's shipping example, a fall to fall in price on aa warehouse warehouse full full of of butter, risk too to a in price or cotton-a cotton a risk too large wheat, or butter, wheat, large for any anyone person or firm to to carry without courting bankruptcy-and it for one person or firm and breaks breaks it carry without courting bankruptcy up into many small parts and passes these small parts on to others. These may into these small to others. These many up passes parts parts may be be hedgers hedgers who want to to balance balance and offset offset other be other kinds kinds of of risks risks or or they may be they may speculators feel that there is better than an even chance that the market that who feel there is better chance that the market speculators in the will direction and give a profit-there will move in the opposite is normally normally aa give them a opposite direction profit there is seasonal rise, seasonal rise, for for example, in the open futures contracts of grain, as grain in the futures contracts of as open grain, grain moves example, into into commercial channels. a seasonal toward the of the the crop crop channels. There is is a the end of seasonal decline decline toward as year, as supplies diminish, short and short hedgers and long speculative traders reduce traders reduce hedgers year, long speculative supplies diminish, their futures futures contracts. This is the insurance insurance or risk.dispersing their is an indication contracts. This indication of of the or risk-dispersing character of of the the futures markets. 22 character futures markets. field as
Operation of the the Hedge. Hedge. A hedge hedge is purchase of is a "sale or purchase a contract "sale or of a contract Operation of for future delivery against a previous previous purchase purchase or quanor sale sale of of an equal for future delivery against a equal quan3 that tity of another commodity that has a parallel price movement."3 a of has another movement/' The commodity tity parallel price the use the futures contract a hedge, then, entails the -use of the futures contract on a commodity entails of hedge, then, commodity risks incident the risks to aa trade exchange a means of of offsetting as a incident to trade transaction transaction exchange as offsetting the or a market market position position in in the the physical physical trade. trade. or a It may may be be helpful helpful to to trace trace aa typical typical hedging hedging transaction. miller It transaction. A flour flour miller makes aa contract in July to deliver 5,000 barrels of a specific grade of in to deliver a contract 5,000 barrels of specific grade of July in December at at aa fixed fixed price. price. He will flour in flour will need a of a specific specific quantity quantity of for milling a specific specific quality quality of milling into flour in the in November. At the a of wheat for into flour time the the miller miller makes the the contract contract for the flour, he can simul· for sale sale of time of the simulflour, he taneously buy December futures futures contracts contracts for for the the necessary necessary quantity taneously buy quantity of of wheat on the the Chicago of Trade, or the Minneapolis or Board or the of Trade, Minneapolis or Chicago Kansas City City grain exchange. In the interval between the time the In the interval when the the Kansas grain exchange. contract for the the sale the flour November, when the is made and November, the of the flour is sale of contract for miller will need need the the specific specific grades grades of to mill mill the the flour, the of wheat to miller will flour, the price of of wheat rises, rises, say, cents per per bushel. bushel. When November arrives arrives he 2 cents say, 2 price purchases in the spot spot market wheat of of the quality he desires. desires. the quantity in the quantity and quality purchases loses 22 cents per bushel bushel by by reason reason of the advance in the the price price of of of the cents per He loses but wheat on the physical during the intervening four months, four market the the physical wheat months, intervening during at the the time time he he obtains obtains the the spot spot wheat he he simultaneously his closes out his at simultaneously closes He contracts. hedge transaction by selling the exchange contracts. makes December the transaction exchange by selling hedge his exchange thereby aa corresponding profit of of 22 cents cents per exchange per bushel on his thereby corresponding profit 22 Address Address
by by
J.
J.
M. chief of the Commodity Commodity Exchange before of the M, Mehl, Administration, before Mehl, chief Exchange Administration,
the Chicago Mercantile Exchange, Exchange, September September 10, 1941, the 10, 1941. Chicago Mercantile U.S. 1444 (Washington: 8sAlonzo Alonzo B. B. Cox, Cox, Cotton Prices and an" Markets, Marketsl Bulletin Bulletin No. No. 1444 Cotton Prices (Washington: V.S. Dep't of Agriculture) ,, p. p. 27, 27. of Agriculture) Dep't
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Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
transaction. transaction.
his loss balances his This profit profit on the the exchange loss on This exchange operations operations biilances his normal milling the purchase purchase of the spot wheat and insures insures him his profit of the the milling profit spot wheat at a cost in commison the manufacture and sale the flour a small small cost of the flour at sale of the manufacture price and credit were eliminated by by the the sions. risks were credit risks sions. The speculative speculative price
hedge. hedge. hedge is is employed employed in by those those who buy in like The hedge like manner by already buy or already fall in in order order to to protect protect themselves themselves against a fall in commodities in actual commodities own actual against a price. grain elevator which buys 5,000 bushels of from a farmer price. The grain elevator which buys 5,000 bushels of wheat contracts can protect itself by selling simultaneously futures or exchange futures or can protect itself by exchange contracts selling simultaneously will there amount; then, then, if the price price of of wheat wheat declines, although there will for a like like amount; for a if the declines, although be aa loss loss on the the sale of the the actual wheat which goes to the terminal the terminal be sale of actual wheat goes to transaction when the hedged transaction the market, there there will will be be aa corresponding corresponding profit market, hedged profit these hedging is closed on the by an offsetting offsetting purchase. hedging is closed the exchange purchase. In both these exchange by or insurance operations operations the the hedger has protected protected himself himself not not only or insurance against only against hedger has losses. price fluctuations or risks, but also against credit losses. or but credit fluctuations also risks, against price In the the words words of Dr. Emery: hedger has has made two equal of Dr. equal and oppooppoEmery: "The hedger site transactions, and, if the the price price moves moves either way, he loses loses on one and either way, site transactions, and, if himself largely gains the other. In this this way way he he makes himself independent of of other. In gains on the largely independent 4 speculative fluctuations." 4 fluctuations." speculative Mr. William L. formerly Under Secretary presiL. Clayton, of State State and presiClayton, formerly Secretary of dent of Anderson, Clayton & Company, the largest and active cotton dent of Anderson, most cotton the active & Clayton largest Company, merchants in in the the world, world, has has given given the the term term hedging hedging aa broad and at the at the merchants same time exact exact meaning. meaning. In In 1936, speaking before before the the Senate Senate Committee 1936, speaking Agriculture, he said, definition of hedging is the offsetting a on Agriculture, of the of a definition is said, "My offsetting of "My hedging a market risk risk in transaction by by [assuming] a market risk of the opporisk in one transaction of the oppo[assuming] a like site nature in in another transaction involving the same like amount of of the another transaction site nature involving a commodity." commodity." of hedging Object the Hedge. Hedge. The following hedging from the the New of the following analysis analysis of Object of Journal of the argument York Journal answers the 1940, answers 10, 1940, Commerce, July of Commerce, argument against against July 10, do not understand its proper hedging frequently used by those those not used who its understand hedging frequently by proper function: function: the title title "An Opportunity Opportunity for Journal Of for Commodity Under the a Journal of Commodity Exchanges" Exchanges" a Commerce editorial ago stated: futures exchanges several weeks ago stated: "The commodity editorial several futures exchanges commodity offer business men an opportunity to hedge hedge inventories offer business inventories and future future commitments, commitments, opportunity to losses so as to to avoid the risk risk of losses unpredictable price of larger from so as avoid the larger unpredictable price swings." swings." in response Among various letters received in to this this editorial following letters received the various the following editorial the Among -the response to attention since a in merits special attention since it raises a very pertinent point in in our opinion, merits raises it in very pertinent point special opinion, for the connection with with the the value value of of hedging hedging for the protection of raw material connection of material protection inventories. inventories. letter: "The writer's We quote quote from this this letter: writer's experience the indicate that that the experience would indicate * the Stock "Henry Emery, Speculation Speculation on the Stock and Produce Produce Exchanges Exchanges of the Henry Crosby Crosby Emery, of the United States (New York: Columbia University University Press, Press, 1896) p. 160. United States 160. (New York: 1896) , p. ,
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cocoa cocoa market does does provide provide aa source source of material supply a manuof raw material that a supply and that facturer can protect facturer protect his his raw material material against price increases simply by being increases against price simply by being of the but long of the market, but this is nothing than speculation, whether the market is more the this market, long nothing speculation, if cocoa is bought and simultaneously hedged out, goes up or down. However, cocoa is However, if goes up bought simultaneously hedged out, the the hedges hedges to to be repurchased repurchased from time time to to time time as are used, used, the the as materials materials are
facturer has has not not the the price price protection protection facturer conditions." conditions."
manu-
competitive which is is necessary to necessary to meet competitive
doubt this this point point is well taken. taken. Take an example: manufacturers or or No doubt is well example: Two manufacturers buy cocoa cocoa at 5~ per per pound. pound. One of his commitments in in the at 5^ of them hedges the buy hedges his futures market; the other takes a chance on an advancing market. assume takes a futures the other chance market. Now market; advancing that the the price price rises rises to to 6^ 6~ per per pound. pound. The buyer placed hedges hedges in in the futures that the futures buyer who placed dealers dealers
market against his actuals actuals must sell 6~ because because he has has to loss sell at at 6^ to take take a a lOO-point against his 100-point loss when buying in the buying back his his hedges hedges in the futures market. On the the other hand, the futures market. the other hand, buyer who took took aa chance on the the market market can well well afford to sell the cocoa 20 afford to sell the at 20 cocoa at buyer small part points or so so below his his competitor, thus giving giving up up merely merely aa small part of of his his specupoints competitor, thus specuin this the buyer lative profit. Clearly then in this case case the buyer who did not not hedge hedge had the the lative profit. Clearly then did. advantage over the the one who did. advantage However, die the case have been been entirely if the the price price of cocoa had case would have of cocoa However, different, if entirely different, gone not not up up but but down. Then, Then, of course, the the buyer buyer who placed hedges against his of course, his gone against placed hedges actuals would have have been been able able to to sell at the the lower price without loss, since his sell at actuals without since his loss, price in the sale in the futures futures market would show a corresponding hedge sale hedge corresponding profit. profit. n'garding- the the value value of hedging one frequently encounters the discussions rc^ardinjj;In discussions of hedging the frequently encounters argument that hedging is fine prices go down, but a nuisance the that is when a fine when nuisance the down, argument hedging prices go market goes goes up. up. True enough; but this argument only proves that those using it but this that those enough; argument only proves using it is have not not yet yet fully understood the functions of hedging. Hedging is of value only have understood the of of value functions hedging. Hedging fully only at all if it is adopted adopted as matter of of policy policy to be used used at all times. times. The whole idea of as a to be if it is a matter idea of the hedging consists in trying to eliminate speculative risks from the merchandising in to risks consists eliminate merchandising trying speculative hedging or processing processing of materials. Those using using this this method of protection must of price or of raw materials. price protection however, that that in in doing doing so so they they give the chance to to make specube aware, aware, however, give up up the specuin the lative profits. It has been proved proved time time and again that, in the long run, this this is is the the lative profits. It has again that, long run, profitable method of of doing business in commodities. business in more profitable commodities. doing
whole purpose purpose of of hedging hedging is is to to remove credit price risks risks or credit and price or to to The whole minimize them. Hedging not used used to to make aa profit, is not either speculative minimize them. profit, either Hedging is speculative a or but to to insure insure one already already existing or to limit a loss already or to limit loss or otherwise, otherwise, but existing already It is this purpose purpose which has the hedge hedge to to be termed termed threatened. It caused the has caused is this threatened. Business men can, through established insurprice and credit insurance. Business established insurcredit insurance. can, through price as major casualties as fire, employers' ance insure against such casualties insure ance companies, fire, against major employers' companies, other contingencies which, though liability, explosion, and other conremote, concontingencies which, though remote, liability, explosion, suffers the tain the possibility possibility of of great loss to to anyone anyone who suffers the casualty. tain the casualty. The great loss offer organized insurance companies not, however, offer insurance against do insurance however, not, against companies organized contracts in price and credit risks inherent in commodity contracts and commodity credit risks commodity commodity price in such contracts contracts or positions. Yet the risks inherent inherent in or market positions are risks are Yet the positions positions. than less remote remote and sometimes are are more devastating those defined those defined much less devastating casualties. as insurable casualties. as strictly strictly insurable
Commodity Exchanges and Futures Trading and Futures Trading Commodity Exchanges
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The unhedged unhedged profits profits of producers, dealers, of producers, dealers, and manufacturers are credit risks. radically by price price changes risks. affected by changes and credit radically affected trader is is primarily primarily concerned concerned with with getting getting aa profit of differences of The trader profit from differences price in different markets . . . . In a sense, the same is true of the manufacturer. a is true ... the the in different markets. of sense, price He buys buys material material and labor his product product for labor and attempts for something sell his to sell something more attempts to than cost of of production. production. This difference between markets is is constant difference between constant and than the the cost constitutes the the reward reward for for the the services normal and constitutes services of of the the middleman and manufacturer. To insure insure such profits, their to escape the risks of risks of desire is is to such normal profits, their desire facturer. escape the 5 5 fluctuation within the same market. the market. fluctuation insure the the producer, or manuhedge, therefore, used to to insure is used The hedge, dealer, or therefore, is producer, dealer, credit risks to price price changes changes or credit in commodifacturer against loss due to risks in facturer against loss ties. Its purpose is is to to insure his profit profit or minimize his or minimize of which Its purpose insure his his loss, ties. loss, one of of the in which it is always an integral integral part part of the business business transaction transaction in it is is is always for the employed. Its object is is not not to to return return a speculative profit, for the reason reason Its object speculative profit, employed. that any profit derived on the futures merely equalizes or offsets aa loss loss that derived futures or offsets the any profit merely equalizes in which has has been incurred the incurred on a transaction transaction or market position in the or position vice versa. physical market or vice versa. The physical physical market transaction transaction and the the physical exchange transaction are complementary. The hedger, however, by insurtransaction insurare however, exchange by hedger, complementary. ing against risks, must forego forego the profits. chance of of speculative the chance against speculative ing speculative risks, speculative profits.
Gross margins margins [of profits] in in the the flour flour milling industry are compared to Gross to are small small compared milling industry [of profits] the in most other the gross gross margins margins in processing industries. published by by the the other processing industries. Figures Figures published National City that 1,017 manufacturing conNational for 1944-45 con1944-45 show that 1,017 leading leading manufacturing City Bank for cerns, covering covering aa very very wide field, field, reported reported aa percentage percentage of net income on of 3.9 of net 3.9 of cerns, sales taxes. The Millers National Federation Federation reports reports figures-covering sales after after taxes. Millers National figures covering sixty sixty flour milling milling concerns, representative cross cross section industry, for the years, of the flour for the a representative section of the industry, concerns, a years, 1939-43 of 2.33 per cent after taxes. taxes. cent after 1939-43 of 2.33 per There are are various various reasons rea'sons for for this this showing, showing, one of the principal principal ones ones being being of the that utilize the the services services offered offered by by the the commodity exchange. a result millers utilize that millers As a result commodity exchange. of the the use use of the grain market, my my company, practically every of the futures market, of as well well as as practically grain futures every company, as other milling company, has able to keep itself "hedged market"' has been able other flour flour milling to itself the market" "hedged on the keep company, in wheat. miller to and avoid wheat. Were the the miller to accumulate avoid speculation accumulate wheat without speculation in a hedging facilities, obliged to exact a greater margin of be exact in order he would to of profit order obliged greater margin hedging facilities, profit in to cover his risks, risks, or go out of of business. business. 66 or go to cover his in the An interesting interesting use use of of the the hedge hedge is is indicated the following indicated in following quotation quotation from the the testimony testimony of J. M. Mehl, Mehl, then then assistant the Grain of J. assistant chief chief of of the Futures Administration, Administration, Department Department of before the the Comof Agriculture, Futures Agriculture, before mittee of Agriculture Agriculture of of the the United States 21, 1936: States Senate, 1936: mittee of Senate, April 21, April
They Quaker Oats Oats Company] I believe, are oats futures futures are claim, I believe, that, that, when oats They [the Company] claim, [the Quaker selling on the Chicago Board of at a price which will assure a fair of at the Trade will assure them a fair Chicago selling price B 11
H. C. Emery, op. p. 159. 159. H. C. Emery, cit., p. op. cit., H. Mirick, vice-president of of Pillsbury Pillsbury H. Mirick, vice-president
6 E. E.
Agriculture, April 23, 28, 1946. 1946. Agriculture, April
Mills, Inc., before Senate Committee Committee on on
Mills, Inc., before Senate
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205
retail for oatmeal, 10 cents retail price price for oatmeal, say cents say 10
per package, package, they they know rather rather definitely per definitely from past past experiences oats in the form of package goods can be be sold, in how much oats the of form sold, experiences package goods can and in in such such aa situation they plan plan their their advertising campaign. purchase situation they their advertising campaign, purchase their labels boxes, let let their their advertising in what what they they labels and boxes, the futures futures in contracts, and buy advertising contracts, buy the their investment. is a hedge against would say is their investment. hedge against say
Classes Hedges. There are producers, manuare two broad divisions Classes of of producers, divisions of of Hedges. and dealers employ the the hedge hedge for those for protection: dealers who employ first, those protection: first, who are producers, buyers, buyers, or or owners of second, those of some commodity; are producers, those commodity; second, who have entered entered into into contracts contracts for for the the forward sale sale of of some commodity commodity or aa product product manufactured therefrom, there from, but at at the the time time of the or of making making the contracts not own the the commodity sold or necessary for the maufaccontracts do not sold or for the maufacnecessary commodity ture of the goods which have been sold. hedge is the goods is employed by ture of sold. The hedge employed by both classes for protective purpose; purpose; the the procedure for the classes the same protective is merely reversed merely reversed procedure is fit the a commodity to fit or producer producer of is long long of of the the case. case. The owner or to of a the commodity is in in contract or or in his physical grain grain or or cotton cotton in warehouse, warehouse, under contract his growing physical growing a short of obtains his his insurance protection by a short sale of an equivalent fields. insurance protection sale fields. He obtains by equivalent futures or or exchange exchange market. market. The dealer, miller in the the futures or miller amount in dealer, spinner, spinner, or contracts ahead for sale of the sale of a commodity or its products prior who contracts for the or its to commodity products prior to is short in the the physical physical market. market. He protects his position by the the ownership short in protects his ownership is position by a purchase of a futures contract an exchange for an equivalent amount. of contract on futures for exchange equivalent purchase In the the first first class class-the longs-are the various various producers, producers, the the elevators in the longs are the elevators in the grain grain trades trades which buy buy wheat from the to the the farmer farmer and forward forward it it to the the terminal market market for the merchants buy for sale, converters who buy merchants and converters terminal sale, and the cotton from the the growers merchandising or or accumulate stocks for merchandising stocks for or cotton growers or manufacturing purposes. In the second class-the shorts-are the flour the second class shorts are the the flour manufacturing purposes. millers, spinners, and local cotton spinners, local shippers sell commillers, exporters, exporters, cotton shippers who sell not not own. classes in the different modities which they do These in classes the different trades trades modities they in more detail dealt with in in the the following who use use the the hedge hedge will will be dealt detail in following chapter. chapter. T he Degree Degree of Protection. Although Although the hedge is is an efficient the hedge The efficient form of of of Protection. insurance, it it is is not not complete insurance. Perfect insurance require insurance. Perfect insurance would insurance, complete require that profit or or loss loss on each transaction transaction on the physical market be be balanced the physical that profit balanced or gain exactly by a corresponding gain on the the futures market. loss or futures or or exchange corresponding loss exactly by exchange market. measure of complete insurance protection to of complete a full full measure insurance protection afford a To afford to those those for futures the futures contract for hedging, there must be maintained contract there the who employ maintained hedging, employ during the the life life of of each each hedging hedging transaction: transaction: during
facturers, facturers,
(1) stable price relationship or or price between the the basis basis (or price spread spread between (1) A stable price relationship (or and the specific grade of the commodity standard) exchange grade the of the specific grade standard) exchange grade commodity bought or in the the physical physical market; market; or sold sold in bought of (2) A constant instead of a narrowing instead or widening widening (price) constant narrowing or (price) spread spread (2) of deliveries the price price of deliveries in the the spot or current month and between the or between current spot in various prices for for deliveries various future months; and in future months; deliveries in in certain certain (:ases cases prices
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Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
(3) A stable price spread spread between prices materials and prices prices of raw materials stable price prices of of produced from such materials. materials. of finished finished goods goods produced
(3)
The futures be employed employed to to hedge the purchase purchase or insure insure the contract can be futures contract hedge or in the the physical or of the the physical physical commodity physical or sale sale of only because prices prices in commodity only fall market and prices prices on the the exchange generally tend to rise or fall together or tend to rise market together exchange generally at the the same rate. rate. Advances or or declines prices of grades on one in prices all grades declines in of all at tend to to be paralleled paralleled by by corresponding corresponding advances or declines in in or declines market tend prices of the same grades the other market. Likewise, the prices the of the on the other market. of Likewise, grades prices of prices all of spot or near-by deliveries tend to rise and fall with prices fall of to with all grades or deliveries tend rise grades near-by prices spot of more distant distant future of the price spreads or differendifferenfuture deliveries. deliveries. Similarly, Similarly, the price spreads tials between various various grades grades of of the the same commodity to remain the the tials tend to commodity tend same rather rather than to to widen or or narrow. narrow. Finally, the premiums of normal the Finally, premiums of future deliveries deliveries over over prices prices of of current current or future or spot deliveries, based on carrycarryspot deliveries, to ing charges from spot to distant future months, tend to remain constant to distant tend constant future months, ing charges spot not widen, widen, narrow, narrow, or collapse collapse into and not discounts. into discounts. A material material dislocation dislocation of the normal relationship relationship between spot prices of the spot prices and the the price price of futures, or or between physical physical market prices prices and exchange of futures, exchange prices, will will temporarily temporarily make the the hedge hedge an imperfect protection. market prices, imperfect protection. a temporary of the Likewise, widening or narrowing of price differentials differentials or narrowing the price Likewise, a temporary widening price of contracts and prices of various grades of the price between the of exchange of various contracts of grades exchange prices the commodity may may give imperfect protection or entail actual loss to the same commodity or entail actual to loss give imperfect protection the hedger. Similar temporary widening widening or narrowing of spread Similar temporary or narrowing of the the hedger. the price price spread materials and finished goods produced may reduce reduce finished goods between raw materials produced from them may if the the insurance protection protection or or even entail Finally, if loss. Finally, entail actual actual loss. the normal the insurance price spreads current deliveries deliveries and distant distant futures or current futures (that spot or (that spreads between spot price is, the the normal premiums premiums of near-by delivfuture deliveries of future deliveries over spot delivis, spot or near-by eries) narrow, narrow, widen, widen, or, worse still, go into into reverse discounts, reverse and become discounts, still, go or, worse eries) the hedger not only may fail to get insurance protection, may fail to but not insurance suffer the only may get protection, may suffer hedger in substantial losses besides. It is these temporary shifts inherent in price is It these shifts inherent substantial losses besides. temporary price movements, basis risks, risks, which make hedging as basis far from movements, known as hedging operations operations far the matter they appear. It recalled, however, that insurIt that must be insurmatter the simple recalled, however, they appear. simple ance of all kinds is primarily to protect against major casualties. The kinds all is casualties. ance of primarily to protect against major at times, are usually hedge may may result result in losses at times, but such losses usually small small comin losses losses are hedge of pared to the major risks of sharp fluctuations and resulting heavy market fluctuations the risks to sharp resulting heavy major pared losses, if hedge is employed. subject will be treated in greater This will in if be no is treated losses, employed. greater hedge subject detail in in the the next next chapter. chapter. detail Correlation Prices of of Raw Material Material and Manufactured Manufactured Goods. between Prices Goods. Correlation between in The manufacturer may may employ the hedge in two ways. acquires the When he hedge ways. employ acquires supplies his raw material material from the the physical market, he may of his sell futures futures physical market, may sell supplies of rid (short) himself the exchange in the endeavor to rid himself of the risk of of in to of the the endeavor risk on the exchange (short) price fluctuation in his material inventory before sale of his finmaterial before in sale of his his raw finfluctuation inventory price ished goods. sales for for forward delivery of his his finished ished finished delivery of goods. When he makes sales
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207
products, he products,
to guard may buy buy futures the exchange the endeavor to futures on the in the may guard exchange in against paying higher higher prices prices for his raw materials, to process process for his needed, to materials, when needed, against paying
into finished finished goods. goods. When the the former type type of hedge is is employed, into it is is of hedge employed, it vital to the that the the price price of the finished and that vital to of the finished product that the manufacturer that product of the the futures uniformly together. together. If they do not not-specifically, if of If they futures move uniformly specifically, if the price of the exchange) futures (of is short the price of the the futures short on the to rises to (of which he is exchange) rises a greater greater extent the price price of the finished the hedge will of the finished product, extent than the be the will product, hedge imperfect, for the the reason reason that that the the manufacturer will will lose his lose more on his imperfect, for short hedging transaction than he gains the advance in in the of the the hedging transaction gains because of finished price of his finished goods. of his goods. price From the the manufacturer's manufacturer's standpoint, standpoint, the the effectiveness as effectiveness of of the the hedge hedge as protection may may be influenced by the the varying proportion which the cost influenced by the cost protection varying proportion of of the the particular particular raw material material bears bears to to the the total total cost the particular particular cost of of the manufactured article. article. In A Study Study of of Cotton Hedging Hedging for for a Grey Grey Goods of Harvard University Mill, the Bureau of of Business Business Research of Mill, 1921-1926, 1921-1926, the University thus thus summarizes the the difference difference between the problem faced faced by the cotton the problem cotton by the the flour miller: manufacturer and the flour miller: cost of of wheat represents (1) In the the flour industry the the net net cost flour industry about four-fifths four-fifths of of (1) represents about of the the total cost case of the particular the total of the the flour, flour, whereas whereas in in the the case particular construction construction of of cost of net cost cost of the cotton grey goods goods considered considered in in this this study study the the net cotton represented of the grey only represented only
about two-thirds of the the total total cost cost of the sheeting_ about two-thirds of of the sheeting. Flour is a a so-called (2) Flour is a strictly staple product, necessity of not in in comso-called necessity of life, comlife, not strictly staple product, a (2) in petition with other products in the same way that cotton goods are in competiwith the same other products way that cotton goods are in competipetition tion with with other other fabrics. fabrics. Also, Also, there there is is no parallel the case in the tion to the case of of flour flour to the parallel in 7 1 the changing style preferences which which affect affect the sale sale of of finished finished cotton cotton goods. changing style preferences goods. The argument is made that that the the greater greater effectiveness of the in effectiveness of the hedge argument is hedge in flour milling may may be attributed attributed to to this this difference the ratio ratio of difference in in the of raw flour milling materials cost to the the finished finished product. product. But, color materials cost to the study lends color But, though though the study lends it is to argument, it it does does not follow follow that that it study to the is conclusive. conclusive. As the the argument, the study points out: out: points attaches to it is is a a fair Some weight weight attaches to these these arguments; arguments; but but also whether also it fair question question whether the price price of cloth might might not not tend tend to to follow price of of cotton the price the cotton cloth follow the of cotton cotton more closely, closely, in fact if cotton cotton mills mills on the the whole whole did did in hedge their purchases. If policy fact hedge their cotton cotton purchases. if a policy If a
of protective hedging hedging were were followed by the the cotton then fewer of protective followed by cotton industry fewer industry generally, generally, then mills would be be in in aa position position to to adjust their prices downward, when for one their mills for one downward, adjust prices able to reason or they had been able to purchase cotton at prices lower than the reason or another another they cotton at lower than the purchase prices current replacement cost. cost. current replacement In other other words, words, the the condition in in the revealed by by the cotton cotton industry, as revealed industry, as the study, may be be the the result result of of the the specific specific causes causes named, or the the the failure failure named, or study, may * 7 A Study Study of of Cotton Hedging Hedging for for a Grey Mill, 1921-1926, Bulletin No. No. 70, 70, 1921-1926, Bulletin Grey Goods Mill, Research (Cambridge: University Press, Press, 1928), p. 19. of Business Business Research Bureau of 19. (Cambridge: Harvard University 1928) p. ,
2o8
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
of mills to to hedge hedge (whereas (whereas others others do hedge) hedge) may be responsible for of some mills may be responsible for the imperfect correlation correlation between between raw material material prices prices and the the prices prices the imperfect its of the the finished goods. The mill mill which by by speculation acquires its materials materials finished goods. of speculation acquires cut its its prices those of at a lower does not not hedge hedge can cut prices under those of cost and does at a lower cost the mill mill which which acquires acquires its materials at price, whether the the at a a higher its raw materials the higher price, failure the of latter mill mill hedges hedges or not. Thus, that the failure of many that it is or not. is possible latter Thus, it many possible of irregumills to hedge hedge may may be be found to to be be aa major irregucause of mills to contributing cause major contributing It must lar correlation correlation between between finished-goods prices. It raw-material prices. lar finished-goods and raw-material be recalled recalled that hedging is is for for the the purpose of eliminating speculative of that hedging be eliminating speculative purpose of permanent permanent risks and, to to be be successful, be employed as a a matter of risks and, successful, must be employed as policy. and consistent consistent policy. Shifting the Hedge. When aa purchase purchase on the the physical for the physical market for Hedge. Shifting the sale (raw material) inventory purposes has hedged by the sale been of of aa has hedged by (raw material) inventory purposes futures contract future, it it may may be be that that the the arrival arrival of of the the futures contract the month when the future, the purchased find the must be be closed closed by by offset by delivery delivery will will find commodity or by offset or must purchased commodity it hedged, still necessity of however, still still in inventory. of keeping still in hedged, however, inventory. The necessity keeping it remains. sales contract futures sales contract must be closed closed out out during remains. The original original futures during its maturity. the of its maturity. It will be be closed an offsetting purchase It will the month of closed by by offsetting purchase on in future At another distant month the exchange. the same time, another future in aa more distant the the exchange. time, will be be sold the exchange. It is the same hedging hedging operation, will sold on the is one and the exchange. It operation, although of necessity it has involved a shifting of the protective sale a of of it has involved the sale shifting although necessity protective to another. matter of the alert alert from one one delivery a matter of fact, from another. As a fact, the delivery month to distant before the hedger usually shifts his hedge to a distant month shifts his to a before the month hedge hedger usually if he has for delivery the futures contract arrives, arrives, if has any reason to to anticifutures contract anticifor of the any reason delivery of in order to escape pate that will be be necessary. necessary. He will a shift shift will will do so so in order to that such a pate escape the uncertainties of market fluctuations fluctuations frequently frequently accompanying of market the uncertainties the accompanying the approaching maturity of a futures delivery. of a futures delivery. approaching maturity Hedging Applies Applies Only Balances. It is not not only possible, but but aa It is to Balances. only possible, Only to Hedging matter of frequent frequent occurrence that aa firm in a commodity in firm dealing a matter of occurrence that may dealing commodity may have its its purchases purchases and sales sales in in exact there exact balance. balance. When this this occurs occurs there is naturally is naturally no necessity necessity for for hedging. hedging. Being long and short short equivalent Being long equivalent amounts, the the firm's firm's trading trading position position is perfect hedge. hedge. It It in itself itself a a perfect is in amounts, is is only only the the excess excess of of sales purchases or purchases over sales over over sales sales over purchases of purchases or of which requires requires hedging. hedging. Thus, a merchant merchant who owns or has contracted or has contracted Thus, a to buy buy 75,000 bales of cotton on the the physical physical market market and has has contracts to of cotton contracts 75,000 bales for forward delivery on the physical market amounting to 65,000 for the to bales 65,000 bales delivery amounting physical has a net net long long interest of only only 10,000 bales. It this net net long long interest interest interest of is this It is 10,000 bales. the dealer dealer may protect by the sale on the exchange of futures which the the of the sale futures may protect by exchange contracts contracts of of an equivalent equivalent amount. As As the the net interest increases by net long interest increases long by purchases on the the physical physical market, market, further further hedges hedges by by offsetting on sales on purchases offsetting sales the exchange the will be made; and, since the interest may be reduced by will be the interest since reduced made; and, exchange may by sales on the the physical physical market, market, the the hedges hedges will out by purchase.s sales will be closed closed out by purchaser
Hedging Hedging
209 209
on the to an amount sufficient sufficient to to bring bring in balance the the exchange in balance smaller the smaller exchange to net long the dealer. dealer. net interest of of the long interest Selecting the Market. Hedging not not only Market. the the careful careful selection selection involves the Hedging Selecting only involves of the in which to to buy buy or or sell, but may also involve the careful of the month in also the careful involve sell, may a market for selection the sale sale or purchase of Normally, prices prices or purchase for the selection of of a of futures. futures. Normally, in different markets markets for the same commodity together. Differences in different for the move Differences commodity together. for one commodity in price between two markets markets for distance in price the distance commodity equalize equalize the and the the two points. the price price of the cost of shipping cost of of cotton cotton Thus, the shipping between the points. Thus, in in Liverpool is normally always higher than the price in York by is normally the in New always higher Liverpool price by the difference difference in in the the costs shipping cotton across Atlantic and incithe costs of of shipping across the the Atlantic incidental charges charges and expenses. prices based in wheat prices dental difference in based Similarly, a difference expenses. Similarly, costs exists Chicago and Minneapolis. market A on shipping costs between exists market Chicago shipping Minneapolis. where prices prices rule rule lower lower may may temporarily temporarily advance to to aa point the point where the spread it and another market is materially less the normal is materially less than the spread between it difference to the the cost cost of from one to another. Since the difference due to of shipping to another. Since the shipping for the market which has has thus thus bulged bulged is is for the time time being abnormally high, being abnormally high, a futures it be aa natural natural market to to select it would be futures contract select for for selling contract as as a a selling a a of the hedge. Conversely, a widening of the difference indicate normal difference would indicate hedge. Conversely, widening in the the desirability of placing aa purchase purchase hedge the market where prices prices the desirability of placing hedge in 8 8 are abnormally are abnormally low. of the the arbitrageur will, as quickly low. The work of as a rule, rule, quickly arbitrageur will, restore normal parity parity between the the markets. markets. restore Choice of of the the Month. Selection the delivery in which to Selection of of the to delivery month in place the hedge will often be governed by considerations relating to the will be the often considerations to the by hedge governed relating place purchase or is being being hedged. hedged. For instance, if aa miller or sale sale which is miller makes instance, if purchase contract during the summer for the sale of flour to be delivered aa contract the for the sale of flour to in delivered in during December, he he will will require require delivery delivery of of the the wheat sometime during NovemDecember, during ber or early December. Accordingly, Accordingly, when he makes the the contract ber or early for contract for he will the sale of the flour, will purchase a December future as a hedge. The the sale of the flour, future as a hedge. purchase month in in which to to hedge hedge is dictated in in this this case by the time when the the is dictated case by the time miller will will go into the for the physical wheat. Since it is a fundainto the for market the miller wheat. Since it a fundais go physical mental principle principle of of hedging hedging that that the the futures the exchange is closed futures sale sale on the closed exchange is as soon as as the the purchase purchase on the the physical physical market is is made or or simultaneously as simultaneously with it, or vice vice versa, versa, the the practice practice of of buying the with or selling a contract for the contract for it, or buying or selling a future month which most nearly nearly coincides with the time of of the the operopercoincides with the time future ator's requirements requirements in the the physical physical market is the general rule that is is the ator's rule that is general followed. followed. It may be that that sales sales are are being being hedged hedged which require require deliveries over an It may deliveries over futures contracts extended period. period. Here the the futures contracts which are bought as are bought extended as hedges hedges may manufacturer over consecutive consecutive delivery Thus, a manufacturer delivery months. Thus, may be spread spread over finished cotton deliveries of of finished of forward deliveries (contracting for the sale sale of goods) cotton goods) for the (contracting will need his his raw materials materials in in October, November, and December who will October, November, s 8
See Chapter XII. XII. See Chapter
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
:uo 2io
buys hedges in October and December, December, closing closing out these these separate hedge separate hedge hedges in buys as he buys his necessary the exchange exchange as buys his grades in contracts by sales sales on the in contracts by necessary grades of the in which his the cash physical market. market. The selection the month in his selection of or physical cash or the is largely the judgment judgment of the hedges are are placed, placed, however, however, is of the largely determined by by the hedges hedger. hedger. Apart from synchronizing spot and futures transactions, certain futures transactions, certain other other synchronizing spot Apart considerations may enter enter into into the the selection selection of placing the the of the the month for for placing considerations may certain months that inactive. hedge. On some exchanges there are that are are certain are inactive. exchanges there hedge. The merchant merchant or or manufacturer, manufacturer, in placing a hedge, naturally would naturally hedge, placing are likely avoid placing placing it it in these inactive months, where prices in one of of these avoid inactive months, likely prices are to be be more irregular the market less less broad and liquid. to irregular and the liquid. Another consideration becomes of of great the delivery as the Another consideration becomes delivery great importance, importance, as 9 9 may occur in for the the futures futures contract contract approaches. Squeezes in the the month for approaches. Squeezes may in the current month. Consequently, those who have selling hedges in the current selling hedges Consequently, those of the current month must observe observe the the stocks stocks of the commodity available for available for current commodity in as it in the current month, as it approaches, and keep in touch with delivery in current the month, approaches, keep delivery in stocks supplies are headed for the market. market. Their interest for the interest in stocks and supplies which are If such a deliveries is is to anticipate the the possibility possibility of squeezes. If such a possibility to anticipate deliveries squeezes. possibility shifted then be to a more distant the hedge should then shifted to a distant delivery appears, the hedge delivery appears, month. The reason reason for this is is that that the the hedge hedge operates as for this month. operates most effectively effectively as insurance when the the prices prices of the exchange and physical markets maintain maintain of the markets insurance exchange physical as nearly as possible the the spread spread existing the hedge placed. A as possible as nearly existing when the hedge was placed. squeeze this relationship. relationship. When the the hedging transaction is a disturbs this is a hedging transaction squeeze disturbs of sale, may operate to destroy a large part of the protection sought to the a a squeeze sale, a destroy large part protection sought squeeze may operate in buying by the the hedger hedger and may may even even cause buying back back the the cause serious losses in serious losses by at an abnormal price. hedge price. sale at hedge sale Practice Regarding Regarding Delivery Delivery on Hedges. Hedges. Futures which are are bought Practice bought or sold hedges are in the the vast vast majority majority of of cases closed out by cases closed as hedges are in or sold as by offsetting offsetting 10 On the sales purchases on the the exchange. exchange. Delivery is exceptionaJ.1O or purchases the sales or Delivery is exceptional. cent all Chicago Board of Trade, 88 per cent of all exchange trading of in of where Trade, exchange trading in Chicago per grain in the States is conducted, than 99 per cent of all is more than in United States cent all the of conducted, grain per contracts are are closed by offset not delivery. is aa normal normal conconoffset and not closed out out by contracts delivery. This is dition in line with the the purpose purpose of the hedge. In fact, the of the line with the dition and in more fact, hedge. perfectly the the market operates as an insurance the smaller the insurance vehicle, smaller the vehicle, the operates as perfectly deliveries. perfect exchange insurance market would deliveries. Theoretically, exchange or insurance Theoretically, a perfect have no deliveries. deliveries. have It has been explained explained previously previously that that aa variety variety of grades of It has of grades of a a comwhich there there is trading are tenderable on the modity in which is future future trading are made tenderable the modity in exchange contract, and the grade to be delivered is at the seller's option. be at the to delivered is the seller's contract, exchange grade option. basis grade, Thus, although the contract contract has has aa basis the purchaser may receive receive Thus, although the grade, the purchaser may & 9
See XIII. See Chapter Chapter XIII. Chapter III. Ill. Chapter
10 See 10 See
Hedging Hedging
211
a number of anyone of aa number of tenderable grades grades. of various various grades. of tenderable or a one of grades or any as to He, as buyer, has has no choice to quality, for the the manufacturer or choice as or as buyer, He, quality, and for dealer quality is likely to to be of prime importance. of prime is likely dealer quality importance.
spinner . . . purchases purchases from the the merchant cotton cotton of of a certain certain specified The spinner specified .
.
.
grade, since he can can use use only only fairly fairly even-running bought cotton the lots. If If he bought since he cotton on the even-running lots. grade, Exchange with with the the expectation expectation of using it in his mill, he would find find of using it in his mill, New York Exchange upon receiving receiving it it that that only a part part was adapted needs. To be sure, payhis needs. the paysure, the only a adapted to his upon to the grade of cotton delivered, according to a scale of "ons" to a ment is is adjusted to scale of the of cotton delivered, according grade adjusted with reference reference to to the the price middling cotton. that does of middling "offs" arranged cotton. But that and "offs" arranged with price of not help help the the spinner spinner to to obtain obtain immediately immediately just just what he wants and to to dispose not dispose of the portion portion that that he does does not not desire. Moreover, the the spinner is uncertain uncertain not desire. Moreover, of the spinner is only as as to to what grade grade of will receive, to when it it will of cotton cotton he will also as as to will be receive, but also only 11 delivered. 11 delivered.
Accordingly, the the hedged hedged merchant or manufacturer, or manufacturer, Accordingly,
who has purchased purchased
of the desires a a specific the exchange, commodity, will will purpurthe commodity, on the grade of specific grade exchange, but desires
chase it in in the the spot spot market, market, thus thus obtaining obtaining the the grade meets chase it grade which exactly exactly meets his requirements, while simultaneously simultaneously selling his hedge hedge contract. contract. This his selling his requirements, while is aa major consideration militates against taking delivery militates of any consideration which is against taking delivery of any major on contracts. large amount exchange ,contracts. exchange large centers may In the cotton textile textile industry, industry, the the manufacturing manufacturing centers may be be far far In the cotton the exchange delivery points. Apart altogether the from the removed from the exchange delivery points. Apart altogether matter of obtaining the exact exact grade grade desired is the that it not fact that it would not matter of desired is the fact obtaining the be an economical economical procedure procedure to to accept the distant at the distant center be center and delivery at accept delivery then to transport the cotton to the mill, when actual requirements to for then to cotton the actual the mill, transport requirements for spot deliveries of specific grades may be filled at points near by. When of be filled at deliveries by. spot specific grades may points delivery is tendered exchange contract hedge, it it is is for a tendered on an exchange sold as a hedge, for a contract sold as a delivery is good business reason. For instance: business reason. instance: good An exporter exporter may may buy buy cotton for delivery delivery at hedge it it in in New cotton for at Memphis Memphis and hedge York. If meets with with aa demand from some European that particular particular If he meets York. for that European spinner spinner for his New York grade, he may may sell sell to to him at a good while perhaps at a covering his grade, good figure, figure, while perhaps covering contract at aa low price price for middling. If his grade at If there is no good contract at for middling. there is for his good market for grade at
the southern ports or may find to .... . . deliver deliver on what find it the it better better to southern ports or abroad, abroad, he may for hedging hedging contracts. Particularly is true when this true is this were originally contracts. Particularly originally intended for his cotton cotton proves proves to to be of of inferior In the same way, elevator his inferior quality. the when elevator quality. way, companies sold against their in the it is they sold their have wheat in it is stored, the market where stored, against they companies will either either deliver their sales or cover cover and sell cash, according sales or will deliver on their sell later later for for cash, to according to the conditions spot conditions of of spot the
12 and future prices at at the the moment. 12 future prices
in Other Commodities. Hedging by by Transactions Transactions in Commodities. Not only only may Hedging may aa transaction hedged by by an offsetting purchase or sale of a future transaction be hedged or of sale in future in offsetting purchase 11 11
M. T. T. Copeland, Manufacturing Industry Industry of States (CamCotton Manufacturing United States the United of the Copeland, The Cotton (Cam, p. p. 186. 186.
bridge: Harvard University University Press, Press, 1912) 1912) bridge: 12 12 H. C. Emery, op. cit. cit.,f p. p. 164. C. Emery, 164.
op.
,
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
211 21*
in another commodity the same but an exchange exchange future future in the same commodity, commodity commodity, but is bought or sold, if there is a normal, corresponding, and usually may be if there a or be normal, sold, usually corresponding, bought may of Illustrations dependable price relationship. Illustrations have already given been already given of dependable price relationship.
the sale finished product, the purchase purchase of of an exchange exchange future future to to hedge hedge the product, sale of a finished the sale of as the case case of the purchase purchase of of wheat futures the forward sale of futures against in the of the as in against the of be normal relationflour. Again, Again, unless unless prices prices are are likely to out of relationto thrown flour. likely
ship by unusual unusual differences in the the normal size of or for the the size of or demand for differences in ship by as hedges respective futures for for one grain may be employed hedges against against grain may employed as respective crops, crops, futures of wheat and rye the sale or purchase purchase of of another. another. Prices Prices of rye usually the sale or usually move of together with a fair degree of unison; hence a purchase of rye could be be fair of with a unison; rye purchase degree together futures or hedged hedged by by the the sale sale of of aa wheat future vice versa) before futures offset future (or offset or (or vice versa) before trading in rye was established. Similarly, the sale of barley for forward in of for established. sale was the barley rye Similarly, trading future. delivery was occasionally occasionally hedged hedged by by the the purchase purchase of of a a corn or or oats oats future. delivery was in the Hedging as an Aid in Financing. It the commodity in Financing. It is is true as an true in trades, commodity trades, Hedging of that the financial in business business life life at that the character and financial soundness of as in at large, character as large, the borrower are are of of prime prime importance; importance; but, but, granted these essentials are the borrower essentials are these granted satisfactorily met, the the borrower borrower of of good credit rating is able to obtain obtain able to satisfactorily met, good credit rating is loans to to aa much higher higher proportion proportion of of the the value of his his commodity (which loans commodity (which if it as collateral it has collateral security for the the loan), has been hedged hedged than he offers offers as security for loan) if if it if not been hedged. hedged. In England the Second World War the it has has not before the the England before required any commodity which represented the security banks customarily the customarily required any commodity represented security for aa loan loan to be hedged hedged if possible. Credit readily proprofor if possible. to be Credit everywhere is more readily everywhere is curable on hedged hedged than than on unhedged unhedged commodities, curable all unhedged commodities, and all unhedged inventory may be considered speculative. On hedged loans aa higher higher be considered loans inventory may speculative. hedged of percentage of the pledged commodity can be borrowed-up to 90 per to 90 the cent be borrowed up percentage pledged commodity per cent and at at lower lower rates rates of of interestthan interest-than on unhedged unhedged loans, the hedge for the loans, for hedge limits risk and removes removes to to aa large large extent uncertainties limits the the risk extent the the speculative uncertainties speculative of of price price fluctuations. fluctuations. The hedge, hedge, therefore, therefore, is by is strongly advocated by strongly advocated banks for for their their own protection. protection. Its employment is the borrower borrower Its employment is an aid aid to to the and reducing the amount of his by increasing his borrowing capacity his of his the by increasing borrowing capacity reducing own capital capital which is is tied tied up up in in each each lot he purchases. lot which he purchases. ,
. . . . the the fluctuations fluctuations in in the the supply supply and in the average American in the of American average price price of cotton from from year year to to year year result result in in fluctuations fluctuations in the aggregate values involved, cotton in the values involved, aggregate often amounting to to many many hundreds hundreds of of millions millions of year to to the the often amounting of dollars dollars from one year .
.
next, or or several times the the total total several times next,
of all all the the cotton combined capital cotton merchants merchants and capital of in firms firms engaged in the distribution of the country's production .••• In other the distribution of the other engaged country's production. ... In not words, were it not for the consistent use of the practice of "hedging," the cotton were it for the the the consistent use of of cotton words, practice "hedging," merchants merchants as as aa body body would be be continually continually exposed exposed to to losses representing more losses representing
than entire combined capital, than their capital, by by reason reason of the changes the price price and their entire of the in the changes in in in the the aggregate aggregate value value of of the the commodity commodity they distribute changes which no they distribute-changes has so so far far been able able to to predict predict with with even even an approach human mind has to accuaccuapproach to . . . racy..•• racy.
Hedging Hedging
213
Thus, months from November, November, 1926, to March, March, 1927, bumper in the the months the bumper 1927, when the 1926, to Thus, in had forced prices some 50 per cent below the averAmerican crop crop of of 1926-1927 forced prices cent below the averAmerican 1926-1927 had per five age for the preceding five years, European, Japanese, and to some extent for to the extent years, European, Japanese, age preceding American manufacturers contracted with merchants the delivery delivery of great contracted with merchants for for the of great American manufacturers by the trade at a minimum of 1,:iOO,OOO bales and quantities of cotton-estimated estimated the trade at a of of bales cotton 1,300,000 by quantities 2,000,000 bales-in future years from 1928 to 1931. These forward probably over bales in future from forward over to 1931. 1928 These 2,000,000 years probably in this were of of incalculable incalculable assistance assistance to to the producers in this country, since contracts were contracts the producers country, since by ,the merchants, relieved the market of the burden of the "hedges," purchased the the relieved the market burden of of the merchants, "hedges," purchased by the superabundant a corresponding corresponding quantity quantity of cotton from the of cotton a superabundant present present supply. supply. make the forward forward Evidently, however, the merchants would have been unable to would the merchants have been unable to the make Evidently, however, contracts any terms, terms, if if they they had been been compelled to assume the risks flucrisks of of fluccontracts on any assume the compelled to
tuating production production and prices prices over the period years in over the of years in which which the deliveries the deliveries tuating period of were were
13 to be made. made. 1a to be
influence of Onc phase of of the the influence the hedge requires of the further phase One further hedge on financing financing requires fact that credit risks mention. The fact that speculative speculative price price and credit may be largely risks may largely manufacturer and dealer to work on aa much narrower enables manufacturer dealer to removed enables if they of profit margin profit than than would be be possible, possible, if were compelled compelled to to absorb absorb they were margin of all such highly risks. As it all highly speculative risks. it is axiomatic that profit sought is is axiomatic that speculative profit sought is with risk risk assumed, it is the lower commensurate with true that that the costs are so it is true lower costs are assumed, so reduced, the narrower narrower will, will. be be the the necessary necessary profit margin of miller of miller reduced, the profit margin or or spinner. spinner. Relation of of Spot Spot and Futures Futures Prices. Prices. The normal relation relation between Relation disprices for spot or current deliveries and prices of near-by current of or deliveries for near-by and more disprices prices spot tant futures is based the cost of storing and carrying spot merchandise on based the cost of futures merchandise tant is storing carrying spot If spot to the future months. If spot cotton at, say, 20 cents per pound pound cotton is is selling cents per future months. to the at, say, 20 selling in and of in in September the cost of carrying cotton for each month in storage the cotton for cost carrying storage September (including insurance, loss weight, loss incidental all incidental loss of of weight, loss of of interest, interest, and all (including insurance, expenses) is, is, say, say, 1/10 of a cent cent per per pound, pound, then then March cotton cotton of of the the 1/10 of expenses) following year cannot sell for any appreciable time on the exchange or for cannot sell time the following year any appreciable exchange or a the physical physical market in in excess excess of of if of per pound the of a cent cent per September pound above September of the the previous previous year. year. The spread spread or or premium premium of prices of of of future deliveries of prices future deliveries over the the price price of deliveries cannot normally for any length of time be for over of spot deliveries cannot of time be normally any length spot actual costs costs of carrying the the spot any more than the of carrying the actual commodity from any spot commodity given time to the future of delivery. For, if the spread rises if month rises to of the the time future For, delivery. spread given above such carrying carrying charges, charges, there there are with above are many many experienced operators with experienced operators ample resources ready ready to to buy buy unlimited quantities of financial or or credit credit resources ample financial quantities of any commodity, subject to exchange trading, so long as they can buy spot to as so buy spot any commodity, subject long exchange trading, they and simultaneously hedge or for delivery or sell sell for to twelve twelve months simultaneously hedge delivery from one to or the future at prices prices which cover the spot price and all all or more into into the future at cover the spot price carrying charges, including interest. (Bank loans are easily without made interest. are loans carrying charges, including easily (Bank is Brief 18 Brief
on Behalf Behalf of of Taxpayer Taxpayer in the Matter Matter of of Gosho Kabushiki and Memorandum on in the Kabushiki
Kaisha, before before the the General General Counsel, Counsel, Bureau Bureau of Internal Revenue, Washington, D. C., D. C., of Internal Kaisha, Revenue, Washington, by Charles E. Hughes, pp. 68-71. 68-71. Charles E. of Counsel, Counsel, pp. by Hughes, of
SU4 214
Commodity Exchanges and Futures Trading and Futures Trading Commodity Exchanges
limit for for such risks of for risks of default are eliminated default are eliminated limit such operations, operations, for
by the by the hedging of the the certified the certified and warehoused commodities which become the hedging of security for such loans.) Such opportunities arise from time to time, such for arise time to time, opportunities security loans.) heavy seasonal seasonal crops crops are are being being marketed. "It need hardly marketed. "It said when heavy hardly be said that result is is entirely entirely unaffected unaffected by the price price of cash and that this this result of cash by whether the futures rises, rises, remains remains constant, constant, or or falls the while the months futures the falls during the during operation is being carried on. hedge not only permits the operator on. The not the carried is only permits hedge being operation operator to carrying charges, charges, but also also protects protects him, like any to earn the the carrying him, like any other hedge, hedge, 14 from a decline in price." price."14 decline in Credit Insurance Credit Insurance through Hedging. Whereas credit insurance through through credit insurance through Hedging. the regular casualty companies companies is is more or the in certain or less less common in certain retail retail regular casualty trades~here, as as in the department store field, the average sale is relain the the sale relais store trades-where, field, average department in is tively small in dollar value, but the of sales is extremely largesmall but of sales dollar number the value, tively extremely largesuch insurance not practical practical in in the the staple trades for various insurance is is not for various commodity trades staple commodity Although the the number of in various reasons. Although reasons. of sales sales of of commodities in various trades trades is large, the in is the dollar value of the average sale in the commodity trades is dollar of the sale trades is value the average large, commodity so much larger and the number of sales so much smaller than in the so the in the of sales so smaller larger retail trades insurance, at present, is that credit at least at present, retail trades that credit insurance, least at is not practical. As practical. a the commodity the only insurance a consequence, consequence, the credit insurance are the commodity exchanges exchanges are only credit agencies available available to to commodity operators, and they they can be be used used by by agencies commodity operators, in producers, dealers, converters so that, in effect, they substantially converters and so effect, that, dealers, they substantially producers, not insure against, several types of reduce, if not of credit credit risks. risks. insure against, several types reduce, if The producer, producer, when he sells sells on the the physical physical market for for delivery, delivery, say, say, six or nine nine months later later-even though the terms of be cash on six or even though the terms of sale be cash sale may may delivery-still subjects himself to a credit risk: the risk that his buyer will a credit risk: the risk himself to that his will still buyer delivery subjects not be able able to to pay pay for for the the delivery buyer may may become not tender. The buyer delivery on tender. at a insolvent the seller seller may may be be forced resell the the parcel forced to substantial a substantial insolvent and the to resell parcel at loss a falling falling market. market. This risk risk of date of between date of bankruptcy of sale loss on a sale bankruptcy and time time of delivery can be greatly minimized, if not entirely eliminated, if not of delivery be greatly minimized, entirely eliminated, by selling futures contracts the exchange. ready to deliver, deliver, at the When on to at futures contracts ready exchange. by selling for his his specific harvest time, time, the the producer producer finds finds aa buyer buyer for grades, now on harvest specific grades, spot, to him for for cash delivery (or to aa financially cash on delivery sells to financially strong strong buyer buyer (or to spot, and sells his credit), while while simultaneously unhedging his exchange on short-term short-term credit) simultaneously unhedging exchange sold. contracts by by purchases purchases of of contracts contracts he had previously contracts previously sold. Likewise, when aa miller miller or or manufacturer desires to buy delivery in desires to for delivery in Likewise, buy for he can risk the distant distant months of of delivery, eliminate the risk of default of aa eliminate of the default the of delivery, producer or a dealer on a contract for forward delivery. This risk is a a for risk a dealer contract is a or delivery. producer substantial one on a sharply rising market. The producer or dealer may market. a sharply rising substantial one producer or dealer may have overspeculated overspeculated and be forced into bankruptcy bankruptcy before before he delivers delivers on forced into the forward forward sales. sales. This risk risk can can be avoided by by the the miller miller or or converter converter the ,
i* G. 14 G. S. S. Shepherd. Shepherd,
1946) 1946)..
Marketing Farm Products Products (Ames. (Ames, Marketing
la.: la.: Iowa State State College Press, College Press.
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2 15 215
through purchases purchases of futures on the the exchange. of futures is due on exchange. When delivery through delivery is such contracts, contracts, the the miller miller who does not want to to take take delivery misdoes not of a misdelivery of of tenderable tenderable grades, grades, resells resells his his exchange cellaneous assortment assortment of cellaneous contracts exchange contracts and simultaneously buys on spot, the specific grades he desires. the which desires. simultaneously buys spot, specific grades all credit in potential practice eliminates eliminates all risks involved defaults by credit risks This practice involved in potential defaults by sellers of forward contracts the physical physical market. sellers of contracts on the dealer, likewise, likewise, whether whether he he is The dealer, is buying or later delivfor later delivbuying or selling selling for credit risks eries, can protect protect himself himself from all all such such credit risks by eries, can by such exchange exchange operoperproducer and the the manufacturer manufacturer use that purpose. purpose. ations as as the the producer use for ations for that of credit credit insurance, course, does not and cannot cover the This type of course, cover the insurance, of type of type of risk risk involved involved in in selling selling merchandise merchandise on open account, say, 30-, type of open account, say, on 30., 60-, or 90-day gO-day credit credit terms; terms; but but operators operators who constantly deal in large deal in 60-, or constantly large in the of staple for deliveries quantities of commodities for the distant deliveries in distant future future are are staple commodities quantities a vehicle fortunate to to have a fortunate vehicle through through which they they can insure credit insure against credit against losses based on contract contract defaults, defaults, which, which, when they they occur, losses based into occur, may may run into a on many thousands of dollars a single contract. dollars contract. of many single The Work of of the the Arbitrageur. Arbitrageur. The Arbitrageur Arbitrageur (frequently (frequently desigdesiga market is nated as as aa spreader) is a operator takes advantage who nated takes of an an spreader) operator advantage of abnormal price price relationship relationship between markets or or between futures for futures for different delivery delivery months (or (or even between different different different commodities) commodities) by by in making sales of specific quantities in the or delivery of the market sales or or making specific quantities delivery month or or abnormally commodity has become relatively relatively or high and by by commodity which has abnormally high buying simultaneously the quantities in the market, month, or the in same the or market, month, buying simultaneously quantities commodity which has relatively or abnormally low. makes has become or which low. He makes commodity relatively abnormally the prices prices return return to to their their his profit by by merely merely reversing reversing the the process process when the his profit if each parities. The operation operation will will be be clearer, transaction is is normal parities. each transaction clearer, if considered separately. considered separately. difference which should should prevail prevail in in the the prices prices of the same The normal difference of the same different exchanges is sometimes stated to be the cost of commodity different is on stated to be the cost of commodity exchanges transporting handling the commodity from one market to the other. and the to the other. handling commodity transporting This is if normal marketing marketing involves from the is true, a shipment involves a the first first true, if shipment from to the vice versa; versa; otherwise, market to the second, the normal difference second, or vice difference may otherwise, the may to differences futures contract contract delivery the difbe due to differences in futures be terms or or to to the difdelivery terms in quality, quality, and in in costs costs of of handling handling and delivery to some ference in ference some delivery to point where shipments the two markets come into into competition. shipments from the point competition. In the case of of wheat, wheat, both Canada and the the United United States the case States are are exportexporting countries. Grain shipped Port or Port William, Winnipeg, shipped from Fort William, ing countries. Winnipeg, or Arthur comes into competition with with grain moving from Chicago into competition or grain moving Chicago or us assume that Minneapolis to Europe. Let us that the spread between to the normal Europe. Minneapolis spread between the Winnipeg Winnipeg and Minneapolis markets is per bushel. bushel. Now, Now, is 9i 9 cents cents per the Minneapolis markets at of the the May future at Winnipeg, let us say, is quoted in Janthe price price of let us is the in May Winnipeg, say, quoted Janthan 10 bushel uary at lOi cents per bushel higher the May future in Minnecents the higher per May future in Minneuary at
216 216 apolis. apolis.
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
The arbitrageur notes this this abnormality of 11 cent bushel. cent per abnormality of per bushel. arbitrageur notes sells May Mayor distant future the relatively in the or some more distant future in He sells relatively higher higher futures market-that is, in simultaneously buys the same futures the and in Winnipeg-and market that is, simultaneously buys Winnipeg in the the relatively relatively cheaper market, Minneapolis. Minneapolis. He for aa like like amount in for cheaper market, mayor may not not assume assume aa definite definite risk, risk, but but in performs aa in any case he performs any case may or may at normal parities. keeping world world markets markets at parities. definite service aids in in keeping service which aids definite normal He is reasonably certain to be compensated by a profit the when the is reasonably certain to compensated by profit of parity is resumed. When prices prices again return to to the the normal spread is resumed. again return spread of parity 91 cents between between the the two two markets, markets, the the arbitrageur can simultaneously close close 9 cents simultaneously arbitrageur out his his purchase purchase in Minneapolis, making making aa in Minneapolis, at Winnipeg sale at his short short sale out Winnipeg and his of 11 cent cent per per bushel, bushel, inclusive inclusive of profit of of commission and other other charges. charges. profit so as is immaterial of the is immaterial so long as prices before maturity of market before The c.,ourse the course long maturity prices at the of the the contracts together again the normal spread. contracts come together of instance, again at spread. For instance, sale in markets rise. his short in both markets might rise. He would lose on his short sale in prices lose in both might prices with to the the the 'Vinnipeg, but the ,Minneapolis price, with the return to the normal but return Minneapolis price, Winnipeg, 1 cent of 1 cent per parity, would rise rise further, further, and, he would make a profit per and, he profit of parity, in Minneapolis bushel more on sale of his his purchase purchase in Minneapolis than he he would lose lose sale of bushel in Winnipeg. Similarly, prices in both markets markets decline, will if prices in both in Winnipeg. decline, though Similarly, if though he will 1 in a will clear of cent on the purchase in Minneapolis, he will clear a profit of 1 cent per lose lose the purchase profit Minneapolis, per bushel net, net, for the Winnipeg Winnipeg future future will will decline bushel more for the decline I1 cent cent per bushel per bushel than the Minneapolis Minneapolis future, as the parity returns. In normal normal returns. as the than the future, parity times, before the Second World War, arbitraging between the the wheat War, arbitraging times, before the of Chicago Chicago and Liverpool Liverpool and other world markets markets was was quite markets markets of other world quite from time time to to time. time. common from The same opportunity futures for difexists between futures for diffor arbitraging arbitraging exists opportunity for ferent delivery delivery months on the the same exchange. or spreader, ferent exchange. The operator, operator, or spreader, or sees that the September cotton future is abnormally cheap cotton future is that the or straddler, sees straddler, September abnormally cheap in comparison with November, or vice versa. He will straddle the market in comparison will straddle the November, or vice versa. by buying the under-priced simultaneously the overoverand month the simultaneously selling selling the by buying under-priced priced future, making his profit the normal price parity returns his the when returns profit price parity priced future, making by selling out his his long long position position and simultaneously his selling out simultaneously buying by buying back his short short sale. sale. In these these operations, so long long as the arbitrageur buys and sells the as the sells the arbitrageur buys operations, so same quantities in the the dislocated markets and, dislocated markets the and, when the simultaneously in quantities simultaneously between the markets has returned, reverses the process the two markets has normal spread between reverses the returned, spread process he generally generally assumes by simultaneous simultaneous counter-sale counter-sale and counter-purchase, assumes counter-purchase, he by market risk, risk, provided provided his his operations operations have been been made in of in months of no market deliver}' sufficiently far in the future to permit the abnormal spread far in to the future the to delivery sufficiently permit spread to give way to the one. to normal one. the give way If, however, the the operator operator fails fails to to buy buy and sell to sell simultaneously or to If, however, simultaneously or resell simultaneously, or if he closes out one end of the repurchase and if he resell or closes out of the simultaneously, repurchase arbitrage before before the the other, other, he "lifts parlance) and at a leg'; "lifts a trade parlance) at arbitrage leg" (in (in trade
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once has has taken taken either either aa long or aa short short speculative than rather than long or speculative position, position, rather aa balanced balanced one, so subjects subjects himself himself to to risks risks of of a a loss loss or or a chance chance of of one, and so profit-which is not the principle on which the arbitrage a speculative a is not which the the speculative profit principle arbitrage is based. based. is is properly properly balanced balanced-long in the Even when he is the lower-priced long in lower-priced market in the higher-priced market market-if market is market, if one market and short short in the higher-priced is a a foreign foreign market, he runs runs the the risk risk of of losing his arbitrage profit he attempts to convert his when he to convert losing arbitrage profit attempts in a that profit a foreign that profit-in currency-into the currency if the into dollars, of the the dollars, if foreign currency currency of a foreign country is not a gold currency or otherwise firmly stabilized in not is or in otherwise stabilized foreign country gold currency firmly terms of terms of the the dollar. dollar. In the spring of of 1930, spreading relationships upset by by the the spring the 1930, normal spreading badly upset relationships were badly Stabilization Corporation entry of of the the Grain Stabilization Corporation into markets. At first into the the futures futures markets. first its its entry in the the Chicago May wheat contract, the result result was operations centered in contract, and the Chicago May operations centered unusual strength in ,that .that delivery delivery compared compared with other For example, other positions. strength in positions. For example, in the the Chicago May ten cents cents under Winnipeg Winnipeg May earlier in Chicago May wheat had been ten May earlier in Canada and a season, to -aa very very small of superior superior quality liberal crop crop small crop a liberal season, due to crop of quality in in the in the United States. the Stabilization functioning with States. When the Stabilization Corporation, with functioning Corporation, in March, government money, money, started started to to buy buy Chicago May wheat in March, 1930, there was 1930, there government Chicago May the part aa scramble part of of speculative speculative shorts shorts and spreaders to cover scramble on the their Chicago cover their Chicago spreaders to As a result, Chicago May wheat to a premium of seven May contracts. contracts. a went a cents to of seven cents result, Chicago May May premium in bushel the per bushel over Winnipeg May wheat, in spite of the fact that this country over of fact this that wheat, per spite country held Winnipeg May an enormous surplus of for of for export and actually carried over more wheat wheat carried over actually surplus export in ·the than in in July than ever before in its history. It is natural to -the following ever its It before is natural to inquire following July history. inquire and why this happened, the only logical reply is that fear of governmental this is the fear of interthat why only logical reply governmental interhappened, ference in in the the market market outweighed all normal factors of commercial value and it all normal it ference factors of commercial value outweighed psychology of spreading differences. this psywas the of fear fear that that governed this the psychology differences. When governed spreading psychology changed changed in in May these fears fears had subsided, Winnipeg May subsided, Winnipeg chology May and these May wheat line premium of five cents 'over Chicago, nearly in in line regained aa premium of five cents \over a difference difference more nearly regained Chicago, a 15 ,with ordinary relationships relationships and merchandising merchandising values. values. 15 .with ordinary
A less less familiar familiar operation operation is is that that of of arbitraging between different different comarbitraging between normal correlation exist between the prices A definite correlation may exist definite and normal the may prices of wheat and corn, corn, wheat and rye, rye, or barley. The arbitrageur or oats oats and barley. of wheat arbitrageur in relation unduly high high in relation to the price price of of wheat. wheat. may believe rye rye is to the is selling selling unduly may believe rye futures futures and simultaneously buys wheat futures, profiting or wheat He sells sells rye futures, profiting or simultaneously buys losing in with whether whether or or not not his his judgment judgment is is vindicated. in accordance accordance with vindicated. losing The arbitrageur, in the course of his operations for his own profit, profit. in the of for his his course arbitrageur, operations a in economic service in maintaining a normal price relationship performs an economic service maintaining price relationship performs in the the high-priced high-priced market market contributes to the the between markets. markets. His selling in contributes to between His selling in his buying in the depressed market is an lowering of prices there, and his the is of there, buying depressed lowering prices aid in lifting prices in that market, thereby expediting the return of the aid in lifting prices in that market, thereby expediting the return of the normal parity parity between between the the two markets. markets. normal modities. modities.
15 S. Harris, "Arbitraging," "Arbitraging," C. Harris, S. C.
Social Science, Science, Social
1931. May, 1931. May,
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of the Summary. primary purposes purposes of the hedge have been shown to to hedge have Summary. The primary risks of fluctuations credit and credit be insurance the risks of wide price fluctuations the insurance against be price against a purchase is obtained insurance is obtained by by offsetting purchase or or defaults. or sale sale or defaults. The insurance offsetting a market by a a sale position in in one one marketthe market-the cash cash or puror physical or pursale or physical market-by position
in the exchange market. market. The protection protection may may approxichase or exchange futures or the futures chase in approxiif prices of mate complete complete price price insurance, future deliveries, mate insurance, if deliveries, spot and future prices of spot prices of the physical physical and the price spread between various various grades, grades, and prices of the the price spread between maintain their and close relationship exchange markets normal their close relationship from exchange markets the time time the the hedge hedge is it is be imperfect, imperfect, is closed; or it it may is placed until the closed; or may be placed until it if there is is aa temporary temporary dislocation of these The temporary these relationships. dislocation of if there relationships. temporary at times times may may last considerable periods, but experienced dislocation last for for considerable dislocation at periods, experienced avoid the the consequences operators can usually usually anticipate anticipate and avoid of such such consequences of operators can or imperfect abnormal conditions. perfect or the particular particular hedge abnormal conditions. However perfect hedge imperfect the with discretion it is originally undertaken with discretion and judgment, the may be, if if it is undertaken be, may originally judgment, the is minimized. minimized. speculative risk is speculative risk further value value of the hedge hedge to to the the merchant or manufacturer lies lies in or manufacturer in A further of the it gives the increased increased borrowing borrowing power power which it gives him against his inventory his the against inventory in in materials and in the consequent lower holdings or long positions in materials raw the or long positions holdings consequent lower he can work. Viewed the margin of profit which he can work. from the standpoint of of on which margin standpoint of profit a hedged the bank, security the loan hedged commodity is increased, increased, for for loan on a of the the bank, commodity is security of the hedger hedger has has made the the transaction transaction largely independent of speculative of the largely independent speculative risks. risks.
CHAPTER XII t{ CHAPTER XII) Hedging in Practice Practice Hedging in
In practice to the the selection practice the the hedger hedger must give give careful of careful attention attention to selection of the market and the the month in in which to his hedge. These, howboth the to place his These, hedge. place are only only preliminary preliminary considerations. considerations. There are risks, known ever, are certain certain risks, ever, are as basis as risks, which cannot be be eliminated by the the hedge. The success of basis risks, eliminated by success of hedge. the hedge the hedge as as insurance against price risks risks may may depend the mainteagainst price depend on the
nance-throughout the the life life of the hedge hedge-of the same spread between of the of the nancethroughout spread between of the contract on the the exchange the price price of the basis basis contract and the price of aa the the exchange price of on market the at specific grade the physi~al existing at the time the hedge the is time the physical specific grade existing hedge is It placed. It may depend on the of the relationship between of the maintenance the may depend placed. relationship the price price of of the the current near-by position price of of some or some near-by current or the price the position and the distant position position existing the hedge is placed. hedger distant The when is the existing hedger must hedge placed. be alert alert to avoid being being caught caught in in an abnormal movement which may may to avoid be temporarily change these these price price spreads relationships between two or relationships temporarily change spreads or grades positions either to his his material times or two positions material disadvantage either to grades or disadvantage (at (at times involving a serious unanticipated loss) or to his material advantage a and or his material serious to advantage involving unanticipated loss) (at times times giving unexpected and possibly possibly considerable of windfall of considerable windfall giving him an unexpected (at speculative profit) . speculative profit) If the price price of all particular particular grades grades of the physical physical If the of all of a commodity commodity on the always moved in in unison unison with with one another, particularly if if market always another, and particularly at their prices always fluctuated upward or downward at the same rate fluctuated or the rate their prices always upward and in in unison unison with with the the price price of of the the basis the exchange basis grade of the contract exchange contract grade of (on the price price of tenderable grade by various various of each tenderable is determined by grade is (on which the as premiums premiums for superior to the basis differentials, for grades to the basis differentials, known as grades superior grade as discounts for inferior grades), hedging would be an operainferior as for be and discounts operagrades) hedging grade tion the utmost utmost simplicity. Also, if various grades grades of of raw of various if prices tion of of the simplicity. Also, prices of materials and prices prices of of finished goods produced rose finished goods materials always rose produced from them always and fell fell at at the the same rate, rate, and if the spread spread between the prices of if the the prices of contracts contracts in the for deliveries deliveries in in the the current or near-by near-by months and deliveries the varideliveries in varicurrent or for ous more distant future months always remained constant during the life distant future ous always during the life of aa particular particular hedge, hedge, the the insurance protection affords of protection which hedging hedging affords would be practically practically perfect. perfect. .
,
219 219
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Commodity Exchanges and Futures Trading and Futures Trading Commodity Exchanges
usual and familiar familiar type type of of hedging hedging transactions transactions is is not not difficult difficult The usual to understand. We refer refer to to the the hedge hedge where the the loss transor gain loss or to understand. gain on a transaction or position position in the physical physical market is is more or less balanced in the less evenly balanced action or evenly gain or the offsetting offsetting exchange by aa gain in or loss as explained loss on the transaction, as exchange transaction, explained in by the preceding chapter. chapter. Hedging is not not always so simple, however. Though the preceding always so Though Hedging is simple, however. as an of widely and effectively used as efficient form of price insurance, it is is used efficient it insurance, effectively price widely that by as innocuous as the hypothesis that prices of various grades as the of various as no means hypothesis prices grades by in markets and for various delivery lines exactly in lines for various in various various markets delivery months move in exactly parallel to to one another another would seem to to indicate. indicate. parallel The normal relationship relationship or or spread spread between the the price price of the current of the current (or the price price of may, contrary of more distant distant futures futures may, spot) month and the contrary (or spot) to tendency, or during the life of the hedge. hedge. widen narrow or of the the life to the the general during general tendency, of raw of materials and the prices Likewise, the spread between prices materials the prices Likewise, the spread prices of produced from them may may alter alter temporarily of manufactured goods goods produced temporarily during the life of the hedge. Furthermore, the price or the differential or life of the the Furthermore, hedge. price differential during on spread between a particular grade the physical and the basis a the market basis between the particular grade physical spread grade of the the exchange exchange contract contract may may undergo undergo an abnormal, but temtemabnormal, but grade of is porary change between the time the hedge is placed and the when the the between the time hedge placed porary change of in risks relationit is closed out. risks of changes in the price relationtime is out. These the it closed when time changes price ship between different different grades grades and among various months of of delivery, delivery, among various ship between or changes of of basis, basis, cannot cannot be hedged or shifted to the speculator. known as shifted the to as changes hedged speculator. They inherent in in changing market conditions to conditions due to are inherent changing economic and market They are in the the supply-demand to particular particular temporary shifts shifts in factors relating relating to supply-demand factors temporary in grades deliveries in particular futures months. There is and is no escape deliveries futures months. particular escape grades unremitting alertness on the part of the user of from them except by user of the the the the from alertness of part except by unremitting at all times be be constantly constantly prepared to shift his hedge hedge. shift his all times hedge hedge. He must at prepared to at the first sign of change from the actual relationship position the actual first which at of the sign change relationship position rapid than than price price existed when the the hedge hedge was placed. placed. Such changes are less less rapid existed changes are usually can can be be foreseen foreseen before before they they threaten threaten serious changes serious losses. losses. changes and usually situations will In this this chapter the causes of some of these abnormal situations will be be of of these In the causes chapter outlined the problems they present will be pointed out. shall We and will out. the problems they present shall outlined pointed then be be in in aa better better position position to to consider extent to hedging can to which hedging the extent consider the then at present successfully be practiced, practiced, the the various various interests interests which at present employ successfully be employ :1. I! .. ;;a .. as as price price insurance, the way in which they InT.,ip., insurance, and the way in they operate. operate. Discounts on Distant Distant Months. Months. The normal relationship relationship between between Discounts in the prices of commodities ready for immediate delivery in the current for of current month ready delivery prices and prices prices of of contracts contracts for for distant future deliveries that the is that distant future deliveries is the more disdistant premiums above above the the current the current month or or the tant months should should command premiums at least the amount of far above the the near near month by by at least the of the far month above the actual actual costs the other. of carrying carrying the the commodity commodity from one month to to the Handling other. Handling costs of charges, storage, shrinkage, insurance, interest on capital, and the like interest the like insurance, capital, charges, storage, shrinkage, are necessarily expended in the purchase of the spot commodity and in of the spot commodity are necessarily expended in the purchase in
Hedging Hedging carrying carrying
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it forward forward in in warehouse warehouse to to particular particular distant months. This This prinprindistant months. is theoretically theoretically sound and generally practice for ciple is in actual actual practice for generally operates ciple operates in futures in any given commodity under normal conditions. in futures trading under normal conditions. trading any given commodity to time, time, however, however, because because of From time time to of extraordinary for extraordinary demand for near-by deliveries-as in 1946-1948, the Second Second World War, War, deliveriesas in 1946-1948, following near-by following the when world requirements requirements for for grains, grains, cotton, basic raw other basic cotton, and most other materials exceeded world supply supply-prices of spot and near-by materials exceeded of deliveries spot near-by deliveries prices rule substantially prices for During will rule will for more distant distant deliveries. deliveries. During substantially above prices the the Second World War many many millions millions of acres were overrun of productive acres were overrun productive and necessarily necessarily withdrawn from production, production, and many millions of proof promany millions ductive workers workers were were drafted drafted for for military military service ductive service from agricultural areas agricultural areas in Europe and Asia. Asia. Large Large agricultural areas were also devastated by the in Europe areas were devastated also agricultural by the war and depleted man depleted of of power, seeds, seeds, fertilizers, productive machinmachinfertilizers, and productive power, planting and reaping crops. areas afflicted with blighted ery for for Other were afflicted areas blighted ery reaping crops. planting or frozen crops for for several years in in succession. succession. Large frozen crops or several years sections agricultural sections Large agricultural Iron of eastern Europe were sealed off the so-called Iron Curtain of of eastern sealed off behind so-called the of were Europe in large Soviet conditions prevailed prevailed for years in large areas Similar conditions for years of Soviet Russia. areas of Russia. Similar distribution of the Far East. East. Rail and water water transportation transportation for of basic basic for distribution the Far of destruction destruction or or capture of rolling raw materials broke down, down,' because because of rolling materials broke capture of stock and river river shipping. shipping facilities, by substock subfacilities, decimated by shipping. Marine shipping marines and bombers during the war, not been replaced. Finally, had the marines war, during replaced. Finally, major contributing contributing factor to the the world shortages basic materials materials a major factor to a of basic shortages of was the exhaustion during during the the war of the normal surpluses of the the exhaustion of grains, was grains, surpluses of cotton, wool, wool, and other staples, usually usually carried year to year other staples, carried over over from year to year cotton, in normal times as buffers against unexpected crop failures or other in times as buffers against unexpected crop failures or other casualties. casualties. Such situations not normal, normal, although they are not uncommon. are also also not situations are are not although they in crop In years years of of peace peace they they are are more frequently frequently found in commodities crop commodities rather than than in as rubber, rubber, ferrous metals, in such such staples ferrous and non-ferrous non-ferrous metals, rather staples as the like, like, which which are are not not seasonal seasonal products. They occur usually and the usually when products. They in it is expected that a very short crop in one year will be followed by aa will short be followed it is expected that a very crop year by crop in in the the next next year. year. much larger larger crop of the in clear and succinct reasons why distant months in the reasons succinct summary A clear summary of why distant more normal times times sell sell below near months is given by a distinguished is given by distinguished agricultural economist: economist: agricultural it
in explanation the frequent Several reasons are advanced in of of the occurrence of are advanced Several reasons frequent occurrence explanation of is most often current short short crop distant months: months: (1) (1) A current is often stressed. the distant on the stressed, crop sold for for forward because it a scramble scramble for for cotton by those those who have have sold cotton by forward it causes causes a because so together shipment. Each is ignorant of others sell. so together they may of how much others oversell is ignorant Each sell, they may oversell shipment. the raises on the Covering of these short sales raises the price abnormally short near these sales near of the supply. price abnormally supply. Covering lower. The months positions, thus leaving distant relatively lower. (2) of manner distant of thus (2) relatively leaving positions, are influence. placing the hedge has an important influence. The spinners are inclined to inclined to has spinners important placing the hedge
discounts discounts
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
222
operate a hand-to-mouth hand-to-mouth policy policy in in fixing fixing the price on on raw cotton, the price cotton, especially especially operate on a if the advance in the the price price has has been been strong. strong. On the they may may buy buy if the the other advance in other hand, hand, they heavily of call cotton basis, to be sure to get the cotton they wish. of of call on cotton wish. of cotton sure to the Much to be basis, get they heavily the cotton bought bought on call call is is hedged hedged in in aa distant while there is a while is distant month. month. Thus, there a the cotton Thus, strong demand for spot cotton by merchants in anticipation of future needs, for in future cotton merchants of needs, strong by spot anticipation the weight weight of of the the crop in hedges hedges may may be be placed the forward forward months rather rather in the the placed in crop in than against against the the immediate immediate demand. demand. (3) (3) These the distant months in the These discounts distant months than discounts in may be due partly to uncertain business conditions. (4) declining price level due to business A be uncertain conditions. declining price level may (4) partly may cause such discounts. (5) In the spring months, following a high-price crop, a In cause the such discounts. (5) high-price crop, may spring months, following the prospects prospects of of the the new crop may have have an important influence in disin causing the causing discrop may important influence 1 1 counts in the later months of the year. in months of counts the year. the later Discounts in the distant distant months usually usually develop a strong in the is a there is Discounts strong develop when there when are sellers' market; premiums usually prevail supply and demand are sellers market; premiums usually prevail supply or less in balance balance or or there there is is a continuing or less in more or continuing normal carry-over carry-over or of surplus from season to season to take care of emergencies-a condition to care season take condition season to emergenciesa surplus are in generally prevails prevails when world world supply in approxiwhich generally approxisupply and demand are balance. mate balance. in the factor in important factor the relationship relationship between prices phySical An important prices on the physical market and those those on the the exchange exchange or market is the supply or futures is futures the supply of of A the commodity available for delivery on the futures exchange. low the for futures available the commodity exchange. delivery supply suitable for for delivery the exchange, tends of the the commodity, delivery on the exchange, tends commodity, suitable supply of to advance the price of the futures contract over prices on the physical the physical the price of the futures contract to prices market, for for both both immediate and forward deliveries. deliveries. Thus an abnormal market, relationship is brought brought about by by aa normal economic cause cause and effect. effect. relationship is The same authority, authority, summarizing summarizing the the relationship of stocks of relationship between stocks certificated cotton, future prices, prices, and spot prices for fifteen consecutive for fifteen consecutive certificated cotton, future spot prices in 1923-24 that "during the four months ... when the the months in 1923-24 shows that "during the in New York were more than 100,000 stocks of certificated certificated cotton cotton in stocks of 100,000 bales, bales, 16 points the price of of New York futures futures averaged averaged 16 the price of midbelow the of the price points price dling spot cotton in the ten designated (cash) markets. On the other hand, markets. in the ten the other cotton hand, designated (cash) dling spot the price of of New York futures futures was 36 points points above the price in in the price the average average price months when the of the ten markets during the eleven the stocks of certificated eleven stocks certificated the ten markets the during cotton in in New York were were less less than than 100,000 bales."22 cotton 100,000 bales." During 1947-48, with aa short short cotton crop prices, the the 1947-48, with very high high prices, crop and very During deliveries prices of current near-by futures deliveries held consistently and futures and current of consistently near-by prices distant futures-particularly substantially the price price of of the the more distant futures particularly substantially above the those during which the the new crop crop (expected to be larger) larger) would those months during (expected to In other short be coming to market. other words, following a short crop high market. to be words, following crop and high coming sell below current and prices, distant future deliveries will sell current near-by deliveries will delivnear-by delivprices, distant future 9
.
.
.
1444 (Washington: 1* Alonzo Alonzo B. B. Cox, Prices and Markets, Markets, Bulletin Bulletin No. No. 1444 Cotton Prices U.S. Cox, Cotton (Washington: U.S. 71. Dep't of Agriculture) , p. 71. of p. Agriculture) Dep't ,
Ibid., p. 71.
2 2 Ibid., p. 71.
Hedging in in Practice Practice Hedging
223
eries eries
on both both markets markets because because merchants merchants and speculators are discounting speculators are discounting in the the high prices prices in the light light of of anticipated higher crop the current current high with anticipated higher crop yields, yields, with lower prices prices almost almost aa certainty. lower certainty. situation that is, is, when there the there are The normal situation-that are premiums premiums on the or near-by distant future positions positions over current or near-by months-is months is clearly distant future eviclearly evivarious New York comcomdenced by by reports reports of of actual actual prices prices prevailing prevailing on various modity exchanges to the the Second World 1938, prior 10, 1938, February 10, exchanges on February prior to modity War; the there are premiums of the situation that is, are premiums of the the abnormal situation-that is, when there War; current and near-by near-by futures futures over over the the more distant distant futures-is futures is clearly current clearly indicated by the the reports reports of of actual actual prices prices on the the same exchanges ten years years indicated by exchanges ten to the February 10, subsequent to the Second World War. Prices Prices later, on February 10, 1948, 1948, subsequent later, in the New York Times of both these these years years were were published published in for of February for both February as follows: 11, February 11, respectively, as follows: 1948, respectively, 11, 1948, 1938, and February 11, 1938, Prices Prices
Prices Prices
1938
1948 1948
RUBBER
RUBBER Prev. Prw.
High High
Mar. 14.54 14.54 14.71 May 14.71 July 14.84 14.84 July Sept. 14.96 Sept. 14.96 Dec. 15.10 15.10 Dec. 1939 1939 Jan. 15.15 15.15 Jan.
Mar. June June Sept. Sept. Dec. Dec.
Low 14.37 14.37 14.61 14.61 14.68 14.68 14.88 14.88 15.00 15.00
Close Close
[email protected] [email protected] 14.70t 14.70t 14.83t 14.83t
[email protected] [email protected] 15.06t 15.06t
IS.lln 15.15 15.11n 15.15
High High
Close Close 14:43t 14:43t 14.60t 14.60t 14.72t 14.72t
[email protected] [email protected] 15.00t 15.00t
Mar. 20.70 20.70
20.41 20.41
19.98 19.60 19.60 May 19.98
19.54 19.54 Sept. 18.95 18.95 Sept.
July July
19.16 19.16 18.70 18.70
Close Close 20.70t 20.70t 19.95-19.98t 19.95-19.98t 19.54t 19.54t 18.95 18.95 @ 19.10 19.10
Prev. Prev. Close Close 20.25 20.25 19.52 19.52 19.05 19.05 18.54 18.54
15.05n 15.05n
HIDES STANDARD CONTRACTS 8.27 @ .30 .30 8.20 8.20 8.27 8.26 8.26 8.63t 8.51 8.63t 8.51 8.71 8.71 8.95t 8.95t 8.86 8.86 9.06 9.06 9.26n 9.26n 9.26 9.26 9.26 9.26
HIDES 8,41b 8.41b 8.72t 8.72t 9.08t 9.08t 9.39n 9.39n
Mar June June Sept. Sept. Dec.
27.50 27.50
27.22 27.22
25.50 25.50
24.85 24.85
24.15 24.15 23.15 23.15
24.00 24.00 23.15 23.15
27.50t 27.50t 25.30 @ 25.50t 25.30 @25.50t 24.40n 24.40n 23.55n 23.55n
27.15 27.15 24.85 24.85 23.90 23.90 23.10 23.10
COTTON
COTTON
Mar. May July Oct. Dec. 1939 Jan.
Low
Open 8.70 8.81 8.86 8.90 8.94
High 8.71 8.81 8.88 8.92 8.96
Low 8.63 8.74 8.77 8.55 8.88
Close 8.69 8.80 8.83 8.90 8.92
....
8.97
8.89
8.94
Prev. Close
8.77 8.87 8.94 8.99 9.02 9.06
OPen Mar. 33.83 May 33.92 July 34.42 Oct. 31.10 Dec. 30.80 1949 Mar. 30.70 May 30.35 July 29.90
Prev. Clou 33.88 33.94 33.40 31.20 30.93
High 34.13 34.23 33.62 31.19 30.89
Low 33.75 33.85 33.33 31.03 30.72
Close 33.98 34.07 33.45 31.07 30.80
30.70 30.41 30.00
30.48 30.28 29.90
30.52 30.76 30.32n 30.55 29.90n 30.13
Commodity Exchanges Exchanges and Futures Futures Trading Trading Commodity
224
When prices prices of of distant distant future future deliveries deliveries are are higher higher than for for near-bys, near-bys, in trade trade parlance parlance there there are are "premiums "premiums on the the distants" distants" or or "discounts "discounts in on the the nears," nears," and, and, when they they are are lower lower than than the the near-by near-by future future delivdelivon and "discounts on nears" eries, it is said that there are "premiums the nears" "discounts on the that there are said it is eries, "premiums the distants/' distants." the clearer the the effect effect.of a change change in in the the normal relationship relationship bebcof a To make clearer hedge, the the following following quoquotween prices prices for for various various delivery delivery months on aa hedge, tween tation will will be be helpful: helpful: tation Significance of of Cash-Future Cash-Future Spread. Spread. The significance significance and the the importance importance of of Significance the spread spread [between [between near-by near-by and more distant distant future future deliveries] deliveries] lie lie in in the the fact fact the that the the relationship relationship of of cash cash and future future prices prices primarily primarily determines determines the the effectiveeffectivethat ness of of hedging hedging by by way way of of futures futures as as aa protection protection to to merchants and manufacness
turers. So So long long as as this this spread spread remains remains constant, constant, the the merchant or or manufacturer turers. has nothing nothing whatever whatever to to fear fear from price price changes, changes, irrespective irrespective of of how great great they they has in may be. Changes in the spread, however, may easily involve the hedger in large involve the in the be. however, hedger large may easily Changes spread, may favor gains or or serious serious losses, losses, depending depending upon upon whether the the change change is is in in his his favor gains or against against him. him. :From this it it follows follows that that the the more stable or uniform the the stable or or From this
cash-future spread, spread, the the cash-future
for hedging, satisfactory are hedging, and vice vice more satisfactory are conditions conditions for
versa. versa. in the cash-future spread What aa hedger hedger can expect expect with with reference reference to to changes the cash-future changes in spread of in no small the cash and futures futures is determined determined in small degree by the existing relationship of cash degree by existing relationship at time the the hedge hedge is reason is of cash is that that the the movement of cash and is placed. The reason the time at ,the placed. futures is is not not actually actually parallel, parallel, as as is is frequently frequently assumed, assumed, but but is is more nearly a futures nearly a (011\ tl'gillg one, so that there is a constant tendency for the cash-future spread for is a the cash-future so that there constant
,
in Practice Hedging in Practice Hedging
225
and the the cash-future cash· future spread widens, the the selling hedger loses loses and the the buying selling hedger spread widens, buying hedger gains. hedger gains. (3) hedges are placed with with the the future cash at a are placed future at a discount discount under the the cash (3) When hedges and the the cash-future cash· future spread spread narrows, narrows, the the selling hedger loses and the buying loses the selling hedger buying hedger gains. gains. hedger at a a discount (4) hedges are are placed placed with with the the future cash future at discount under the the cash (4) When hedges and the the cash-future the cash·future spread widens, the selling hedger gains and the buying the selling hedger gains buying spread widens, hedger loses. loses. hedger the narrowing this summary summary it it appears appears that, that, because of narrowing tendency From this of the of tendency of futures the spread, premiums of futures over cash are generally favorable to the hedge hedge of are the spread, premiums cash generally favorable to the seller, unfavorable, and that that the the reverse reverse is is true discounts unfavorable, of the the hedge true of seller, and discounts hedge buyer. buyer. initial hedging Now, the the majority majority of of initial hedging transactions, transactions, at in agricultural agricultural at least least in Now, staples, are normally normally on the the selling rather than than the the futures side of of the the buying futures selling rather buying side staples, are of merchants who sell This is is primarily primarily due to to the the operations operations of market. market. This sell futures futures against their purchases purchases of of the the actual commodity from producers. large number actual commodity against their producers. A large in their of hedges are placed by by manufacturers, manufacturers, though though in their operations operations of selling also placed are also selling hedges initial hedge hedge purchases purchases are are perhaps perhaps somewhat more common than than initial initial initial sales. hedge sales. hedge favor of Since the converging tendency of of cash cash and futures in favor of selling Since the futures works in selling converging tendency futures at bulk of initial hedges, futures are at a premium, and the bulk of initial hedging trans· when are a the hedging transhedges, premium, is reasonable to to are on the the selling side; it reasonable to conclude that, to be of maxi· actions it is of maxiactions are that, side, selling hedging operations, futures should normally premiums for hedging mum service service for normally show premiums operations, futures over rather than than discounts the cash discounts under the cash.. . . . over rather Small crops tend to to produce produce urgent urgent buying the part of manufacturers manufacturers buying on the part of crops tend wish to to be be assured a supply supply of of the the particular particular grades and qualities who wish assured of of a grades qualities which is for example, supply is exhausted. Certain cotton mills, they require, before the cotton before the supply mills, for they require, example, emphasize the fact that better cotton is obtainable as soon as the crop is the obtainable better cotton as as the fact that emphasize crop comes on the the market. the crop crop is is short, therefore, the buy heavily If the the manufacturers buy market. If short, therefore, heavily and this demand is reflected to the merchants from whom they commonly pur· the merchants this is reflected to they commonly purchase. These same conditions tend to to cause relatively slower marketings by by the the cause relatively slower marketings chase. conditions tend producer, who is is likely likely to to figure figure that, that, in the short prices in view of short crop, of the higher prices crop, higher producer, will probably probably be be obtainable result is spot prices prices to to is a a tendency later. The result for spot will obtainable later. tendency for advance sharply. sharply. If, the other other hand, hand, the the crop is large, manufacturers are the demands of of manufacturers are If, on the large, the crop is less urgent because because they they anticipate anticipate no difficulty their requirements. requirements. in obtaining less urgent difficulty in obtaining their less freely. Frequently anticipate lower lower prices prices and so so buy Producers, fearing freely. Producers, fearing buy less they anticipate Frequently they them later declines prices, hasten hasten to to market their their crops, and purchases from in prices, later declines in crops, purchases is the absolute tend the dealers' dealers' sales to manufacturers. manufacturers. Not only is the absolute sales to to exceed tend to exceed the only the size size of of the volume of of selling hedges larger larger because because of the neither the c~p, crop, but neither selling hedges for manufacturers merchants feel feel any any necessity necessity for futures for protecfor buying futures manufacturers nor merchants buying protecside tion. Practically Practically all hedging, therefore, therefore, is the selling side of the market. is on the the market. of all hedging, tion. selling the early depress spot prices in the part of of the Large crops, crops, therefore, therefore, tend to to depress the early part Large spot prices futures marketing season, which also tends to depress the near futures as compared with to the near as with also tends which depress compared marketing season, the distant. the heavy and early marketing of the farmer, with the of the distant. The heavy the farmer, combined with early marketing in results of slowness of the manufacturers in purchasing, results in an accumulation of the the the manufacturers of slowness purchasing, of in in results spot commodity in the hands of dealers. This in turn results in heavy hedging in dealers. the heavy hedging spot commodity .
.
.
226
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
to depress sales, mostly placed placed in in the the nearer nearer options, options, which tends tends to depress those those below sales, mostly ones. 33 distant ones. more distant
the the
the spread It be clear, clear, therefore, therefore, that that a subsequent in the spread should be It should change in subsequent change will seriously affect the existing time the the hedge hedge is is made will the hedger at the the time seriously affect hedger existing at and under certain certain conditions cause him unexpected unexpected losses losses against conditions cause and under against which he insure or hedge. Under other circumstances, will benefit benefit or hedge. he cannot cannot insure circumstances, he will with from an unexpected windfall. However, proper expert advice from windfall. from an unexpected However, proper expert in time of coming in his commission agent, agent, he can be be warned in time of his commission coming changes changes in the and, if they are favorable, action is necessary other than no action if they are is necessary other than the spread, favorable, and, spread, to stand by and accept accept the the unexpected unexpected profit. profit. If, hand, the the the other other hand, stand by to If, on the change is likely to affect affect him adversely, adversely, the the hedger hedger can close his close out his likely to change is if that it to is not hedge and, if desired, transfer it to a new month; or, if that is not advistransfer a advisif desired, month; or, and, hedge loss resulting able, he must decide decide whether the the loss the possible possible change change able, resulting from the loss an in spread is likely to exceed the possible loss from open or unhedged the possible in spread is likely to open or unhedged In the is more interested speculative position. any case, the hedger is interested in in proprocase, hedger any speculative position. major market fluctuations, which as a rule are tecting himself as a are himself from market rule more fluctuations, major tecting those involved in likely to result in in heavier heavier financial financial losses losses than those in the basis the basis to result likely futures. Judgment distant futures. change of the spread near-bys and distant of the Judgment change spread between near-bys shift positions foresight and willingness willingness to to shift are the only protections the are and foresight only protections positions against risks. against such risks. Changes in Basis Basis Weaken the the Hedge Hedge as Insurance Protection. Protection. The as Insurance Changes in hedger seeking protection from risks risks of of price seeking insurance protection hedger changes frequently price changes frequently finds he has has secured protection against changes in the price price trend, in the that he secured protection finds that trend, against changes in in only to involved in changes in the spread between prices of parthe to become involved of changes only spread prices particular grades grades in in the the physical physical market and the the basis contract grade grade of of or contract basis or ticular the exchange market. market. In In many many trades trades the the problem is not too serious, is not the exchange too serious, problem the trading trading is is in in the the same standard grade of the where most of is also also grade which is the the exchange exchange contract. contract. The relation relation between between the price the basis basis grade of the the price grade of in the of the of standard grade grade in the physical physical market and the the price price of the same grade grade of on the exchange usually usually remains remains constant, constant, though though it the exchange it generally sells at generally sells at aa small small premium premium in in the the physical physical market over price in the exchange over the in the the price exchange is never (because the the exchange exchange buyer buyer is never sure sure of market (because of receiving receiving anyone any one an grade exchange basis contract) . basis on exchange grade contract) In trades trades such as as cotton cotton and wool, wool, however, however, where a very substantial very substantial in part of the trading in the physical of necessity is in grades of the the market of in is other trading part physical necessity grades other than the the standard or basis basis grade of the exchange contract, the problem of the the grade exchange contract, problem of changes in the the price price spread the basis exchange grade grade and of basis exchange changes in spread between the various inferior traded in large inferior or in constantly various or superior in large grades traded superior grades constantly and in volume on the the physical physical markets becomes aa most serious serious one. one. The result result is that that hedgers hedgers in in such markets necessarily necessarily are with the the is are more concerned concerned with .
3 8
W. w. H. S. of the the American Academy Academy of Political and Social Social Science, S. Stevens, Stevens, in Annals of of Political Science,
May, 1931. 1931. May,
Hedging Hedging
in Practice in Practice
227
of the change in this than in the the general general trend of the prices. prices. They are this spread They are change in spread than protected from the the latter latter by by the the hedge, hedge, but they they cannot hedge hedge against against protected in the the former. former. In In trade trade parlance parlance they they are to be trading in the basis and are said said to basis the trading their losses or or gains gains from such such changes changes are are known as as "basis "basis losses" losses" and their losses "basis "basis gains." gains." at 32.50 If is selling selling on the the exchange per pound pound 32.50 cents cents per cotton is If March cotton exchange at as the (the price being determined the exchange floor as the price for the on floor the for the exchange price (the price being at certain basis grade, with other grades deliverable at certain premiums or disdeliverable or with other disbasis grades premiums grade, counts) a merchant buys buys aa lot lot of cotton of a grade worth! cent grade worth | cent counts) and a he less basis grade, at 32.00 cents, can hedge by selling on the at than the the the basis 32.00 less than cents, hedge by selling grade, the exchange at 32.50 cents. Later, he sells the inferior grade to a mill sells inferior mill when to a at cents. 32.50 Later, grade exchange at 33.50 cents, he may may find find that, that, while while the the physical physical market has has risen risen 11 at 33.50 cents, of the the cent per per pound pound on the the inferior inferior grade, the price of the exchange or basis or basis cent grade, price exchange he closes his contract has has risen risen 22 cents. when closes out his hedge cents. Consequently, contract hedge on Consequently, back his finds has the exchange by purchasing his hedge sale, he finds he has suffered suffered the exchange by purchasing hedge sale, loss of !^ cent rather of 1I cent cent per per pound pound an..d net loss rather than a a basis basis loss loss of a anjd a net not profit of ! cent-a loss did anticipate. On the other hand, hand, he did the loss which of centa anticipate. profit the price price on the the exchange exchange may may have increased only i cent, while the price the the only ^ cent, price In that cents. of the the grade grade held held by by him had J:1ad risen risen li that case, the hedger hedger of case, the 1^ cents. of I1 cent per to would reap reap an unexpected unexpected basis basis profit profit of pound in addition to per pound his normal merchandising merchandising profit. profit. his The changes changes in in the the price price spread spread between the the the futures futures contract contract on the exchange particular inferior the physical physical inferior or superior grades on the superior grades exchange market and particular market are frequent and more rapid rapid than changes in the the are much more frequent changes in price spread near-by deliveries and distant future delivdistant more deliveries delivbetween future near-by price spread in the but they they are are not not so so frequent general eries, but so swift swift as as changes the general eries, changes in frequent or so to price level. Moreover, these changes are also due to different causes. Essenare also different causes. these Essenlevel. Moreover, changes price in the relative they result from changes in the relative supply-demand factors tially result factors supply-demand changes tially they applicable particular grade. grade. The demand or for aa specific or supply to each each particular supply for specific applicable to grade may change change drastically, drastically, without any the supply-demand any change change in the supply-demand grade may relatives applicable applicable to to other other grades. grades. This may to the fact that the fact relatives that may be due to crop or conditions increased or decreased the supply of have increased the or weather of one supply crop or grades, without causing causing similar similar changes changes in other grades. It may or several several grades, grades. It may be due to heavily increased for a certain grade from certain grade increased demand for to a sudden heavily be mills which have found a new and popular use for for a particular grade mills popular use particular grade that previously had been in in small small demand. that previously of the several grades Not only only will will the the supply supply of the several of any any of of these these grades and qualities qualities of after the is harvested, harvested, there there will grades vary widely widely from year year to to year, year, but but after the crop will crop is grades vary be further variations during during the the year, year, depending depending upon upon the rate of the rate of consumption further variations be consumption of the particular grades and qualities in that that crop. of the particular grades and qualities in crop. for the Similarly, side, the the market market for the manufactured manufactured commodity the demand side, Similarly, on the commodity of raw material produced from any anyone particular grade grade or be or quality material may one particular quality of may be produced for goods either brisk or or sluggish, sluggish, as as compared with that that for goods produced another either brisk produced from another compared with
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
228 228
or other other grades grades or qualities. this is is true true not not only the years, years, but but as between the or only as qualities. And this also at periods within within the the same year. year. at different different periods also in the or differences the spreads various grades grades Despite these these fluctuations fluctuations in differences between various spreads or Despite
in the the cash cash market, market, all all sales sales and purchases purchases must be be hedged in a and qualities a hedged in qualities in single basis future contract upon not merely one grade or quality, but future contract which basis but grade upon merely single quality, several grades and qualities qualities are are deliverable. deliverable. The basis basis or cash-future cash-future spread, several grades spread, therefore, not one, one, but but several several bases reprein fact bases or is in or spreads, ol which reprefact not each of therefore, is spreads, each of each lot difference between the the cash cash price price of grade sents the difference lot of of specific sents the specific grade and quality and the price of a basis future contract in which all hedges of in the a basis future contract all hedges must be quality price placed is therefore to all. Because of the foregoing and which all. Because is therefore common to of the fluctuaforegoing fluctuaplaced in it in the cash market, it is apparent that the spread between the tions the cash is that tions the spread the future future market, apparent at the and one grade grade or quality the cash cash may may move favorably to the the hedger hedger at the quality of the favorably to same time that that the the spread of the the future future and some other is becoming other grade grade is becoming spread of unfavorable. 44 unfavorable. this subject, On this A. H. Garside, Garside, late late economist of the the New York subject, Mr. A. Exchange and the New York Wool Top Exchange, Cotton Exchange Top Exchange, says: says: are in given there are in existence thousands of lots of At any moment there existence of thousands lots of wool and any given products, of of many many different qualities and at many different locations, and wool products, different qualities at many different locations, at any many different different prices. prices. On the the other hand, hand, at given moment hence worth many any given the New York Exchange different future future deliveries deliveries of wool tops tops on the Exchange command different the price slightly different prices. prices. The spread spread between the price of given lot lot of of wool wool of any any given slightly different or product and the the simultaneous price of any given future delivery of or wool product future any given delivery on price
the is the that lot lot in terms of delivery. Thus, Thus, "basis" on that of that that future future delivery. the "basis" the Exchange Exchange is theoretically at least, there are thousands of bases that one could calculate are thousands of there bases that could at calculate and least, theoretically the quote at any given time. the price of a given lot of or product at of time. lot wool or wool When given any given product price quote is more than than the the price price of of the the future future delivery delivery used in in calculating basis on the basis is calculating the it is it, the basis on it is said said to to be "on"; than the is less less than the price the basis it is of the the future future "on"; when it it, price of when it same delivery, the basis it is said to "off"; it is the as the price is said to be is the as the it of basis on "off"; delivery, the price of 5 is said the future future delivery, the basis on it said to "par."5 to be the it is basis the "par." delivery, Any operator is said to to be long basis when he owns spot is said of the basis long of Any market operator spot cotton on which the the purchase purchase price price has been fixed, it he has his has on his fixed, and against against it books a sale of futures cotton, does not against it a forward shipment but not have a does books a sale of futures cotton, against it shipment sale of spot cotton. . • . (In (In other words, aa shipper of the basis, if if he he other words, is long the basis, sale of long of shipper is spot cotton. sale of of spot against which he has has not not a forward sale cotton against owns spot cotton, and spot cotton, spot cotton is the his basis position with with respect respect to to such cotton cotton is the same, of whether his basis position same, regardless regardless of or not not the the purchase purchase price price has has been fixed fixed or whether or not he has has sold sold futures futures or in both of these cotton as aa hedge against it.) it.) It It will will be be seen that cases the the that in these cases cotton as hedge against he in the shipper (operator) takes the basis risk and loses in the event of a decline in takes the risk loses of a basis in decline shipper (operator) the basis. basis. 66 the .
.
.
41bid. H. Garside, the Wool Trade (New York: Frederick A. A. Stokes Stokes ComGarside, Wool and the (New York: pany, 1939) , p. 164. 164. pany, 1939) p. e Stokes Company, 6 A. A. H. H. Garside, to Market (New Frederick A. Stokes Company, Cotton Goes to Garside, Cotton (New York: Frederick 1935) p. 249. 249. 1935) , p. 5 A. A.
,
,
Hedging Hedging
in Practice in Practice
229 229
An operator said to operator is is said to be be short short of has sold the basis basis when he has sold for for of the forward delivery the physical physical market cotton than the basis cotton of of other other than the basis delivery on the basis the grade. His basis position is the same, whether or not he has hedged the is or not has same, grade. position hedged the short by purchase purchase of In either case he will short sale sale by of a future future on the the exchange. In either he case will exchange. lose in the the event event of rise in in the the basis. lose money of a rise basis. money in basis in all this The use use of the the term basis in all this discussion is perhaps perhaps unnecessary. unnecessary. discussion is What the the term is is used used to to express may be simply stated by that stated express may simply by saying saying that the price price differentials differentials between grades grades of the same commodity are subject of the commodity are subject to to change change from time time to to time, time, as as supply-demand supply-demand factors particular factors for for particular As a grades change. a consequence, on a free market the price of one grade free the of grades change. consequence, price grade rise may rise while others constant, or may constant while while others remain or remain constant while constant, may may others decline, or may may decline decline more slowly declining others while others others are are declining decline, or slowly while and so on. at rapidly, so on. Several grades at the same time may move contrary Several time the rapidly, grades may contrary to is needlessly complicated by to the the general general market trend. trend. The problem problem is needlessly complicated by the use of of the the term basis basis to to express express these these changes in spreads. the use changes in spreads. has pointed out: As an Englishman has out: Englishman pointed The nomenclature for an outsider nomenclature·-of of the the cotton market makes it outsider it difficult difficult for above or discounts below The premiums discounts below premiums the the price price of of middling middling are are obviously obviously differences differences above or below the the basis basis price price of of shorthand thinking, of middling. middling. But, But, by by aa peculiar peculiar method of thinking, cotton traders cotton traders to use use the the word "basis" as meaning meaning not not the price of the basis have come to "basis" as basis price of middling, middling, if a cotton but the the differences above or below it. it. Thus, Thus, if that "the cotton merchant says but "the differences above says that basis is is rising" rising" he he means not not that that the the basis basis price of middling is rising, but that of basis is that middling rising, price a the difference or or "points be paid (for a superior grade) is on" which must the difference paid (for superior grade) is "points as matter of the greater than before, though as a matter of fact the price of middling may than fact before, middling may greater though price have fallen. fallen. have This peculiar peculiar use use of of the the trade trade terminology terminology is, itself, enough to confuse confuse of itself, is, of enough to has the layman very badly, but unfortunately the difficulty has been made still the but still the difficulty unfortunately layman very badly, in in word "basis" still greater by the custom of the trade in using the "basis" in still another the trade the of custom the using greater by sense of spot prices, which are are made official quotations sense.. . . . The official (physical) prices, spot (physical) quotations of the value up daily, always show a higher value for middling on the spot (physical) for a middling higher spot (physical) up daily, always of the futures contract, market than the the current current quotation the futures is that is market than contract, although although that quotation of the of the also based on middling. This premium of the spot (physical) price over the This also based spot (physical) price middling. premium is also the market as futures (exchange) (exchange) price price for in the as also known in for the the same grade futures grade is it the fact that it is "the basis," for for no apparent apparent reason reason other that the fact that is aa difference difference other than that "the basis," for two entirely expressed in points on. on. This use use of of the the same word "basis" entirely "basis" for in points expressed to the outsider outsider who tries of dire tries to different things things is dire confusion to the confusion to a source is a source of different understand the the talk talk on the the exchange exchange or or to read a market report. report. . • .J7 to read understand to to follow follow the the use use of of trade trade terms. terms. .. .. ..
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.
.
.
Effect
of Effect of
so-called basis, Change in Basis Basis upon upon the the Hedge. Hedge. The so-called basis, or Change in rather in the the basis, basis, is is a far far more important to a hedger, the change rather the hedger, important matter to change in In thereafter. trend of once he is hedged, than is the general trend of prices thereafter. fact, is the than fact, is he once prices general hedged, 7 7
John A. A. Todd, Todd, The Marketing Marketing of of Cotton (New York: Pitman Publishing Publishing Corp., Corp., (New York: John
1984) 1934) • .
230
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
if the basis on which the latter is is entirely the particular the latter immaterial, if entirely immaterial, particular spread spread or basis as when it it was placed. he is is the the same when the the hedge hedge is is closed closed as is operating placed. operating is conditions, the the profit profit or loss the offsetting exchange operloss on the Under such conditions, offsetting exchange operin ation will exactly exactly balance balance the the loss loss or gain on the the operation in the physical the or gain ation will physical operation market, thus perfect perfect insurance insurance protection protection against fluctuation market, and thus against market fluctuation in basis will be afforded. afforded. The problem problem created created by by aa change basis may may be more will change in fully illustrated by the following example: the illustrated fully by following example: Upland & Co., merchants, purchase purchase on the the physical physical market 500 cotton merchants, Co., cotton Upland bales (500 (500 pounds pounds each) of a specific grade of cotton on spot of of for immecotton bales specific grade spot for each) diate delivery on August 1. They pay 20.80 cents per pound, price 1. They a price diate 20.80 cents August pay per pound, a delivery which is is 50 points above above (or the price the October future of the future on 50 points "on") the price of (or "on") the exchange. They hedge the purchase transaction by a sale of a the of five transaction sale five the by exchange. They hedge purchase & bales of of October futures & Co. later sell futures at at 20.30 cents. Upland later hundred bales 20.30 cents. Co. sell Upland a loss the actual to a mill mill at at 19.80, per pound pound on the actual cotton to loss of of I1 cent cent per 19.80, taking taking a the operation in in the the actual cotton. At the the time sell to the mill, the the the actual cotton. time they sell to the operation mill, they October future they close close their hedge by by the the purchase purchase of of the the is 19.70 their hedge October future is 19.70 and they the hedge October contracts contracts on the the exchange. hedge or exchange exchange. The profit profit on the exchange transaction is 60 points, or i of a cent per pound, which is 40 40 transaction is only or of a 60 cent is only points, per pound, the actual than net points less than the loss on the actual cotton. The net loss on these less the loss cotton. loss these points of a cent per is i of transactions, therefore, therefore, is Narrowing or $1,000. transactions, $1,000. Narrowing per pound, pound, or of the the basis basis has has given the merchants imperfect protection. of merchants the given imperfect protection. Changing basis basis and changing spreads betwfeen betw'een markets markets make the the operChanging changing spreads operation of hedging hedging far far from the the simple simple matter usually given in in illustrations. illustrations. ation of usually given Fluctuations in in spreads spreads between markets markets cause to be be shifted, cause hedges Fluctuations with shifted, with hedges to in the of making sales in markets are temporarily too high sales markets of which are too the object making temporarily object high in markets are temporarily in relation purchases in markets which are temporarily low in relation to to others. and purchases others. is watched changing basis is for the purpose of shifting hedges Similarly, basis for the of Similarly, changing purpose shifting hedges in the to more remote months in in order to to avoid avoid squeezes near-by positions. positions. the near-by to squeezes in or loss in the possibilities of gain or loss through the relationship relationship The possibilities of gain changes in through changes of prices and future prices and through changes in price differenfuture prices in cash prices of cash through changes price differentials between different different grades grades are that aa series are so so numerous that series of tials of illustrations illustrations of the will best bring bring out the the intricacies operation, thus suppleintricacies of the hedging will best thus hedging operation, supplementing the illustrations given above. Let us first take two illustrations illustrations above. us the first take two illustrations given menting of gain or loss loss because because of aa change in differentials grades. In differentials between grades. of In change in gain or order to make the the illustration illustration as as clear clear as possible, it as possible, it will order to will be be assumed assumed that in the the general price trend trend occurs ther the the cash in ei occurs in that no change either cash general price change in market (physical) or the futures the time the hedge is placed or from the time the futures the hedge is placed to to (physical) the is undone or closed out. out. it is or closed the time time it are selling cotton futures futures are dealer When December cotton at 20 a cotton 20 cents, cotton dealer cents, a selling at in the the physical of good acquires physical market a stock stock of grade superior a grade good middling, middling, a acquires in superior at an cost to basis grade (middling) at average cost of 20.71 cents, of the basis to the 20.71 or 71 71 cents, or grade (middling) average the of points per pound above the price of the future. He hedges the December future. price points per pound hedges
Hedging Hedging
in Practice in Practice
231
"long" cotton by by aa sale sale of of the the December future at 20 future at cents. His 20 cents. His basis basis "long" cotton therefore, 71/ I 00 of per pound. good middling of a cent sells his cent per his good is, 71/100 therefore, is, pound. He sells middling cotton a month later later to to aa mill mill at at aa price price averaging 45 points cotton a averaging only only 45 points above or December, simultaneously undoing his hedge by buying 20 at 20 or "on" December, his simultaneously undoing hedge by buying at cents. The result result of of his his transaction transaction is is aa loss, as follows: follows: cents. loss, as this this
Cash Transaction Transaction Bought good 71 at 71 Middling at Bought good Middling points "on" Dec. Dec . ..• points Sold good :\[i(Mling 45 Sold good at 45 Middling at points "on" Dec Dec. . ... points Loss (due (due to to change change in in Loss differential) ......... 26 26 differential)
Futures Transaction Futures Transaction Sold December future future ...• ____
20.00~ 20.00^
Bought December future future .. Bought
20.00~ 2
.
.
-0-
cent per in the loses 26/100 of aa cent per pound the decline The merchant loses decline in the 26/100 of by the pound by of 1£ merchandising profit the sale of the actual cotton is on sale the actual the cotton is more merchandising profit it will than 26/100 26/100 of of aa cent cent per per pound, pound, it will be reduced by this amount. If than If by this of a cent it will will be balanced his profit is is exactly exactly 26/100 26/100 of cent per pound, it balanced by by his profit per pound, If is less less than his the loss on the the exchange. If his profit is 26/100 of a cent per the loss of a cent 26/100 exchange. profit per actual loss pound, the the transaction will show an actual books. Had the the loss on his his books. transaction will pound, in relation price differential middling in to December futures futures relation to differential between good good middling price merchant instead of the have gained the would advanced instead of declining, have corredeclining, gained correspondingly instead of losing. instead of losing. spondingly In the the above transaction transaction the the merchant was was holding premium grade grade In a premium holding a let us physical market. market. Now, let us assume the held strict on the the physical the merchant had held strict middling, aa discount acquired at an average cost of say at discount grade, low middling, cost of 94 grade, acquired average say 94 points below or or "off" the price price of of the the December future. "off" the future. With the the Decempoints his strict ber future future selling at 20 cents, his strict low middling thus cost at ber would thus 20 cost 19.06 19.06 cents, selling middling cents per pound. pound. He hedges hedges by by aa sale the December future. Later he he is is sale of of the cents per future. Later able to to dispose of the the actual actual cotton cotton at at a price price averaging, able 38 "off" "off" dispose of averaging, say, say, only only 38 at 20 the December future, is still still at 20 cents. transaction shows cents. This transaction the shows future, which is the following result: result: the following
basis. If his his basis.
Cash Transaction Cash Transaction Bought Strict Middling Strict Low Middling Bought at 94 "off" 94 94 "off" December .... at 94 at Sold at Strict Low Middling Sold Strict Middling 38 December...... 38 38 "off" December 38 "off" difProfit (due to to change in difProfit (due change in ferential) .. . . . . . . . . . . .. 56 56 ferential)
Futures Transaction Futures Transaction Sold December future future ...• ....
20.00~ 20.00^
Bought December future. future • Bought
20.00~ 20.00^
.
.
-0-
of a cent has gained 56/100 of per pound the merchant has cent per Here the the gained 56/100 pound by by the
in the for strict strict low middling advance in basis. Had the the basis basis for middling in the basis. advance in relation relation
232
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
to to
December futures instead of the merchant would futures declined declined instead of advancing, advancing, the of the have lost. that the the effect effect of narrowing between the the price price of the lost. Note that of a a narrowing have the price of the future employed for the hedge is physical cotton the and of for cotton the future the hedge is price employed physical if the is detrimental to the the seller a hedge, hedge, if the physical commodity is a of a seller of detrimental to physical commodity premium grade. It is is favorable, favorable, if if the the commodity hedged is is a discount commodity hedged premium grade. It grade. grade. These transactions transactions have have purposely purposely been been stripped of details, as such as These details, such stripped of commissions on the the sale sale and purchase purchase of the futures, of delivery, costs of of the commissions futures, costs delivery, the merchandising merchandising profit profit on the the purchase purchase and sale the physical physical sale of of the and the to as as of in order to bring out as clearly as possible the influence of changcotton, in the influence order cotton, changclearly bring possible of different different grades. ing relationships in the the prices prices of the illustraillustragrades. In the ing (basis) in relationships (basis) in tions below, the the transaction transaction is is similarly similarly reduced to to its its simplest terms, in tions below, terms, simplest in order to to bring bring out out the the effect effect of of aa change in the relationship the the between the order change relationship futures markets. markets. cash (physical) (physical) and futures cash cotton selling the exchange 21.60 cents, A. & Co. at 21.60 With December cotton Co. cents, A. selling on the exchange at contract to the physical* physicarmarket at aa price price of market at of 23 cents for contract to sell sell on the for forward 23 cents sales price of middling middling cotton, the basis basis grade. price includes includes cost delivery of cost cotton, the grade. This sales delivery of of delivery delivery and A. A. 8c & Co.'s Co.'s expected merchandising profit of 40 points of expected merchandising profit points of the per pound. pound. The purchase the December future (40/100 of of aa cent) cent) per future as as purchase of (40/100 of making the time the short a hedge hedge is is made at at 21.60 21.60 cents. time of making the a cents. Between the short sale sale for forward forward delivery the time for delivery, A. & Co. acquire A. Co. and time for & for the the delivery delivery, acquire the necessary cotton the physical market at a cost of 20.10 cents per pound. at a cost of market the cotton on cents 20.10 necessary physical per pound. of the the December future at the This is is I! less than than the the price price of the time future at This cents less time the the 1| cents of the contract was made. made. In In the the meantime the the price price of has declined the future future has declined contract was 8c Co. close A. & hedge transacto full 2-cent drop. A. close out their their hedge transaca full to 19.60 19.60 cents, 2-cent drop. cents, a tion by selling the future, future, when they they buy physical cotton. the physical cotton. The tion by buy the selling the transaction shows the following following result: result: transaction shows the Cash Transaction Transaction Sold cotton for delivery at for cotton Sold delivery at Bought cotton at cost of .. Bought cotton at cost of .
.
Gross profit profit ......•••••.. ............. Cost to to deliver deliver .......... ............ Cost
23.00~ 23.00^ 20.l0~ 20.10^
21.60 21.60$*
Loss ................•... Loss ....................
2.001
.
.
1
19.601
1
2.90< 2.90
1.001 1.00^
c
profit ..........••.. .............. Net profit
1.90
Loss Loss
2.00~ 2.00^
on futures futures ......•••• ..........
Futures Transaction Futures Transaction Bought future December future at at Bought Sold December future future at at ..
loss on transaction transaction ...• Net loss ......10~ 10^
only have have A. A. & to realize realize their their expected profit; they they 8c Co. failed to Not only Co. failed expected profit; of the have because of of the the narrowing narrowing of spread between the price a loss loss because sustained a between have sustained price spread futures or, a specific the physical physical market and December futures a or, say, say, an grade on the specific grade in relation to December futures. advance in the basis basis on spot spot cotton relation to cotton in futures. The in the advance
Hedging Hedging
in Practice
233 233
in Practice
in the decline in in the futures market was greater the decline the price price of of decline in the futures decline greater than the of cotton the grade of the physical physical market. cotton on the the specific specific grade
us assume assume that that the the reverse reverse of occurs. A. A. Se of this this situation situation occurs. & Co. Co. let us Now let their forward the physical physical market and place place their their hedge sale on the forward sale make their hedge the exchange before, later their specific at the later acquiring cotton at the as before, on the acquiring their specific cotton exchange as same cost cost-20.10 the price price of the December future of the future declines cents. But the declines 20.10 cents. from the only! cent-50 points-from the price price prevailing hedge was 50 points the hedge prevailing when the only i cent bought. A. A. Se books now show the the following: Co.'s books & Co.'s following: bought. Futures Transaction Futures Transaction
Cash Transaction Transaction
Sold cotton for for delivery delivery at at 23.00^ 23.00tfr Sold cotton Bought cotton at ....... . at ........ cotton 20.l0tfr 20.10^ Bought ............. Gross profit profit ........... Gross 2.9011 2.90^ Cost to deliver deliver .....•.... Cost to .......... 0011 1. 1.00^ Net profit profit .............. 1.90tfr .............. Net Loss on futures futures .......... .50tfr Loss on Net profit profit on transaction transaction . . 1.40^ 1.4011 .
Bought future at at 21.60tfr Bought December future Sold December future at Sold December future 21.10~ at .. .
.
Loss Loss ....•...•.....•..... ....................
.50~
.
of making Instead of making 40/100 40jlQO of of aa cent profit per per pound, pound, A. A. 8c Se Co. Instead cent profit Co. have future markets have made an extra profit of of 11 cent. physical and future cent. The physical extra profit again out of but the the change to the of alignment, the advantage has been to advantage again got alignment, but change has got out of all all those placing long long hedges hedges in the December future. future. of in the those placing explaining why hedges are perfect Perhaps the the simplest of explaining are not not perfect simplest method of why hedges Perhaps insurance is to review aa very very common condition arise to review condition which may from insurance is arise may time to time. time. Let Let us us suppose that the the standard basis grade time to standard or or basis of some grade of suppose that at between, say. 10 and 20 commodity has been selling for some months has for at 10 been 20 between, say, commodity selling per pound. pound. Grade Z, Z, however, however, is which, let us cents cents per is an inferior inferior grade let us grade which, or water suppose, has aa valueless valueless moisture moisture or 10 per water content content of of 10 of its cent of its suppose, has per cent or weight. This factor causes it to sell or less consistently at a 10 per factor it to sell a causes more less at 10 weight. consistently per cent the price price of of the the standard the standard cent discount discount from the standard grade. standard grade. With the at 20 20 cents per pound, pound, Grade Z will will sell 2 cents less, or at sell at at 2 cents per cents per or 18 18 per pound pound less, cents. If, If, however, however, the the price price of the standard should, for reasons of the standard grade cents. for reasons should, grade such as as aa very production for the year, year, soar 40 cents pound, for the short production soar to to 40 cents per very short per pound, grade rise sharply, sharply, but because of the 10 water 10 per likewise would rise cent water of the grade Z likewise per cent content sell at at aa 4-cent 4-cent per pound discount-at 36 cents content it it would now sell at discount 36 cents per pound Z rose to per pound. If the standard rose to 80 cents, grade would sell at 72 cents, If sell at the 72 cents, grade cents, per pound. with the the spread rising as as the the standard rose. LikeLikethe price of the standard rose. with constantly rising spread constantly price of fall from 20 cents to price should fall 20 cents to 55 cents, the spread wise, if the standard price the standard wise, if cents, the spread fall from 2 or the two grades grades would fall per pound pound differential between the cents per or differential 2 cents at the 5-cent level. at the 20-cent 20-cent level level to to i| cent cent per per pound pound at the 5-cent at the level. a merchant Consequently, if anticipating a rise in the market should if a rise in the market should anticipating Consequently, Z at of cents purchase 20 tons of grade at 17i cents (when the standard grade tons the standard grade grade 17J (when purchase 20
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
234 234
was selling cents) and hedge hedge it it by by aa sale the exchange at 20 of futures sale on the futures 20 cents) selling at exchange of later at at 20 20 cents cents per per pound, pound, contracts for delivery delivery three three months later contracts calling calling for if, when the the delivery date arrives, the price of the standard grade and if, the date of the standard arrives, delivery price grade has risen to to 60 60 cents cents per per pound, pound, he he would be required to sell his grade to sell his has risen grade required discount of 6 cents cents per per pound pound instead the 2-cent discount of at at the Z at a discount instead of at a of 6 2-cent discount the time time of of his his purchase. purchase. He would therefore incur which prevailed prevailed at at the therefore incur 4 cents aa loss cents per per pound pound on the the twenty-ton twenty-ton hedge operation because loss of of 4 because hedge operation of the sharp change in the differential differential between the the two two grades. grades. If, in the of the If, on sharp change the other hand, hand, the the exchange declined to 5 cents per pound, market the other declined to 5 cents exchange per pound, the differential cents to cent and he the differential on grade grade Z would fall fall from 22 cents to i| cent 1 have an extra profit of of 11 cents hedge. would have extra profit cents per the hedge. per pound pound on the In order to relate relate such such premiums premiums and discounts basis, the the following order to to basis, discounts to following observations may be be helpful: helpful: observations may in terms Spot contracts are are drawn in terms designed to facilitate the distribufacilitate the distribudesigned to Spot (trade) (trade) contracts tion that facilitate tion of of actual actual cotton; futures contracts, contracts, in terms that hedging. This This is in terms facilitate hedging. is cotton; futures distinction can be brought in price. price. The distinction brought a fundamental reason reason for for differences differences in
out by by supposing that in in September a merchant and aa spinner discussing are discussing supposing that September a spinner are the the relative relative value value of of aa spot spot contract for "middling seven-eighths," f.o.b. contract for f.o.b. Houston "middling seven-eighths," and the future. Typically, the spot for the December New York future. contract will will be for spot contract Typically, the exact place of delivof seven-eighths-inch seven-eighths-inch staple deliveven-running cotton of the exact even-running cotton only, the place of staple only,
ery will will be be named, named, and the the time time of of delivery buyer will will will be specified. ery specified. The buyer delivery will know what he he will will get get and when and where. where. The future is aa basis future is basis seven-eighths seven-eighths with mixed lots lots (of cotton) composed composed of many descriptions contract, with of many contract, (of cotton) descriptions (grades) (grades) deliverable (under the exchange contract) at at several points (discount several points deliverable or (under the exchange contract) (discount or premium below below or above the the contract price) on any or above of the contract price) the delivery day of any day delivery month. premium The spot contract is is more expensive expensive for for aa merchant merchant to to fill fill and more desirable desirable spot contract its price features tend hold than than the the future; tend to to increase increase its for spinner to to hold for a a spinner these features future; these price as related to to the the price price of of the the future. future. as related in considering Another fundamental fundamental condition to be be taken taken into into account account in condition to Another considering basis is is that that stocks stocks gather gather carrying carrying charges. charges. For For ten-cent these amount cotton these ten-cent cotton basis to to 66 points points per per pound pound per per month. month. Theoretically, therefore, the the basis basis for for to 5 5 to Theoretically, therefore, spots relative to a futures delivery should advance as the is month as is month the to a futures relative delivery spots carried period stocks must be carried (for delivery approached, since the shorter the stocks the shorter since the (for delivery period approached, futures contract), the smaller the cost cost of This condition is of carrying condition is smaller the on aa futures carrying them. This contract) the usually referred to as the "carrying charge" theory. the referred to as "carrying charge" theory. usually as applying to a basis in in aa' broad sense a range range of • • . Using Using the the term term basis sense or as of applying to available when qualities (grades), the basis tends to be relatively low available supplies to basis tends be the relatively supplies qualities (grades) are heavy heavy and demand is not urgent, urgent, and vice vice versa. is not versa. During are During aa delivery delivery month a futures futures contract contract will sell middling seven-eighths at at aa delivery point of will not not sell of a delivery point middling seven-eighths the cost of than current price of the future by than the cost of making delivery below the future more the of below current the making delivery by price rule it it will upon aa sale sale of of the the future, to 20 20 points. points. As a rule will command aa 15 to future, or 15 upon basis for for grades premium, and at at times times aa high high premium. premium. The basis grades other than midpremium, the premiums dling seven-eighths consists of the basis for that grade plus premiums dling seven-eighths consists of the basis for that grade plus or minus the or discounts for for such such grades, grades, as with middling middling seven-eighths. a as compared or discounts seven-eighths. When a compared with ,
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,
Hedging Hedging
in Practice
in Practice
235
sharp for middling middling has has caused the bash for that grade grade to up, the the for that to run up, the basis sharp demand for be advance will will eventually be checked by spinners ,\\ il( hill~ their purchases to advance their by spinners suiidiin^ eventually purchases to other descriptions descriptions (grades) (grades) and by by merchants merchants (who are carrying middling other are (who carrying middling s8 hedges) buying buying back back their their hedges hedges and selling under hedges) their spots. selling their spots.
only are are the the relation relation of spot and future prices and the the spread of spot Not only future prices spread for the the purpose purpose of avoiding unprofbetween different different months watched for of avoiding an unprofitable hedging interests int~rests are to shift itable situation, are also also constantly shift alert to situation, but hedging constantly alert their contracts in order to make an additional Suppose October their contracts in order to additional profit. profit. Suppose cotton as a a hedge cotton futures futures have been bought bought as risen 150 points 150 points hedge and have risen since buying hedge hedge was placed, placed, whereas whereas December futures adsince the the buying futures have adonly 110 points. points. The October contract vanced only contract can be closed the closed out and the hedge to December at at aa profit profit to to the the hedger. proshifted to retains his his prohedge shifted hedger. He retains profits by by the the difference difference between the the price the tection and profits tection at which the price at is sold at which the October future is sold and the the price price at the December future is future is bought. bought. of some of of the the difficulties that may may attend hedging These illustrations illustrations of difficulties that attend hedging given to to indicate indicate that, that, simple as the hedge appears in theory, have been given as in the hedge appears theory, simple it is is by no means an automatic device; it device; nor does its likeness to insurance does its to likeness insurance by that the can ever mean that rest wholly safe in the assumption that, insured can' in the insured ever rest safe the wholly assumption that, automatically with the placing of his protective transaction, all his risks with the his all of his risks transaction, automatically placing protective passed to to other shoulders. have been passed other shoulders. Reavis Cox, the New York Journal Journal of Mr. Reavis editor of of the Cox, market editor Commerce, of Commerce, in in aa pamphlet, Hedging Cotton (at pages 8-9), weighs the advantages the (at pages 8-9) weighs pamphlet, Hedging advantages of with its attendant basis risks, and compares them with the the with its attendant of hedging, basis risks, hedging, compares risks involved involved in in unhedged unhedged operations, operations, as risks as follows: follows: ,
the comparative of the the fluctuations in "basis" the fluctuations As to to the sizes of fluctuations in "basis" and the fluctuations comparative sizes may be be termed termed "basis" risk and price risk, respectively, there which may "basis" risk risk, price respectively, there seems to to be be no general general rule. rule. In In 1923-24 for various various grades grades (5 risk for seems "basis" risk 1923-24 "basis" grades (5 grades of cotton) cotton) ranged ranged from almost two-fifths to price risk. to almost of almost two-fifths almost one-half one-half of of the the price risk. In 1924-25 risk was from one-third to one-fourth In "basis" risk one-third to one-fourth as as large 1925-26 "basis" 1924-25 and 1925-26 large in prices, prices, in
as price risk. risk. In In 1926-27 risk was was one-fourth large as price "basis" risk one-fourth to to one-fifth as price one-fifth as as price as large 1926-27 "basis" risk. In In 1927-28 there was aa wider wider variation variation between the grades, "basis" risk the grades, "basis" risk 1927-28 there ranging from one-third to one-eighth of price risk. Summarized briefly, these to of risk. one-third these one-eighth briefly, ranging price figures indicate indicate that that the the individual's risk, when he he is is hedged, hedged, has individual's risk, has been from figures one-eighth to two-thirds two-thirds as as great great as as it it would have been had he not not been hedged. hedged. one-eighth to In other other words, words, hedging hedging is is of of substantial substantial value, but it destroying it falls short of of destroying falls short value, but all risks from price price fluctuations. fluctuations .••. all risks with aa "perfect" hedge, the the merchant would have to to operate the Even with operate with the "perfect" hedge, greatest care. he has decided to hedge all his cotton, is longer conto all his he is conhe has no care. Once cotton, hedge longer greatest cerned with the the rise rise and fall prices. His only is "basis." If "basis" "basis." If "basis" fall of of prices. interest is cerned with only interest risk.
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s the Commodity 8 Theodore Theodore D. D. Hammatt, Economist of of the Exchange Authority, Authority, Hammatt, Economist Commodity Exchange of Commerce, Hedging Cotton York: Journal Journal of Commerce, January, Cotton (New 1938) January, 1938). (New York: Hedging .
in in
236
Commodity Exchanges Exchanges and Futures Futures Trading Commodity Trading
goes against against him, him, he loses; loses; if if it it goes his favor, makes aa profit. profit. Even ,with in his with favor, he makes goes goes in a "perfect" hedge, have to use the most careful judgment in deciding would have a he to use the most careful in "perfect" hedge, judgment deciding to go go long long in in the the spot spot market and short in futures, futures, or in the whether to short in or short short in the in spot long in futures, have to a separate decision market he would and and to make a have decision futures, long spot separate for each grade. for each grade.
The following editorial from the the New York Journal Journal following editorial under date date of of May May 23, 23, 1929, effectively summarizes the the 1929, effectively
of of Commerce advantages of advantages of
hedging, despite basis basis risks: risks: hedging, despite Basis versus versus Price Price Risks Risks Basis It has It has been shown in in a series series of articles Journal of of articles published in The Journal published in Commerce that that the the merchant who hedges hedges does not thereby himself does not guarantee himself thereby guarantee against losses losses from fluctuations in the the "basis"-that is, the the premiums over or fluctuations in "basis" that is, or against premiums over discounts from the the quotations quotations for for the the nearest basing month at discounts at which spot nearest basing spot cotton has has been sold. speaking, however, however, the in basis basis are sold. Generally cotton the variations variations in are Generally speaking, of actual less than the the long-time long-time swings swings of with the result much less actual cotton cotton prices, with the result prices, loss greatly that the the hedged hedged merchant has has his his risks risks of of loss that reduced. greatly reduced. "basis" risk is apt to Over short short periods periods of of time time the the "basis" risk is be much smaller smaller than the the apt to be the futures price risk, indicating that the futures such conditions offers that market under conditions offers an risk, indicating price especially good insurance against loss to the hedger. Nevertheless, there are insurance loss to the there are Nevertheless, against hedger. especially good notable exceptions to this this generally satisfactory rule. rule. The statistics compiled notable statistics compiled exceptions to generally satisfactory by The Journal of Commerce indicate that even over short periods conditions indicate that over short conditions Journal of by periods be such that that the the hedged hedged merchant is heavier risks risks than the may is subjected to than the subjected to heavier may be unhedged one. In 1927, for instance, basis risk on low middling exceeded the for one. basis risk In the exceeded instance, 1927, unhedged middling actual price price risk risk over over aa period period of three three months. The maximum loss loss that that the the actual hedger might might have have suffered suffered was 1.571 per pound, pound, for while the the unhedged for instance, instance, while 1.57^ per unhedged hedger a maximum loss merchant could could only sustained a loss of 1.361 per pound. have sustained of 1.36^ per pound. only Illustrations of this sort sort do not not provide provide any valid general against of this Illustrations any valid arguments against general arguments for exercising hedging, but but they they undoubtedly undoubtedly show the the need for judgment at at exercising good good judgment hedging, call for a minimum amount of all times times and under conditions that ordinarily ordinarily call of for a conditions that all is not only present but, caution. Basis Basis risk risk even even for for the the short periods is in the short periods the caution. only present but, in as large case of lower lower grades grades of may be many many times large as profits. times as as normal profits. of cotton, case of cotton, may are under observation, Thus, or short-time short-time transactions transactions are vigiobservation, vigiThus, whether long-time long-time or lance is required, required, if if losses losses are to be avoided. not an automatic process, is not are to avoided. Hedging lance is automatic process, Hedging is has been done to to organized by 'PI( Klin.and much harm has organized commodity commodity markets by *|>u 'C!ill~ mistaken notions of this sort. sort. An intelligent the limitations limitations of the of this mistaken notions intelligent appreciation appreciation of of contract market market provides provides the the best best assurance that that it it will will be used to to secure secure of a a contract it. the maximum benefits benefits to to those those who resort resort to to it. the
Hedging in in the the Grain bought from the in Trade. Grain is is bought the farmer farmer in Grain Trade. Hedging the elevators large by country grain elevators during the harvesting seasons. seasons. volume during by country grain harvesting large in the These organizations of primary primary importance the country are of markets. importance in country markets. organizations are their Although they a warehousing business, their principal function is a do function is business, warehousing principal Although they for merchandising. They purchase grain outright for the purpose of resale the of resale merchandising. They purchase grain outright purpose in the the intermediate intermediate and terminal terminal markets. markets. Three main types of country in types of country
Hedging in in Practice Practice Hedging
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elevators exist: exist: elevators
those controlled controlled by by farmer's farmer's organizations, those as organizations, known as elevators; single by an individual individual or or elevators, owned by elevators; single elevators,
co-operative co-operative corporation; and line elevators, in in aa chain owned by line elevators, by one company. corporation; company. In the the Report Report of of the the Federal Federal Trade Commission on the the Grain Trade (1922), is stated that 50 per per cent of the it is stated that cent of the 8,500 elevators of of 8,500 country grain elevators country grain (1922) it 99 This does the United States hedge their purchases. not States customarily their the does mean customarily hedge purchases. that 50 per cent of the the elevators elevators always their purchases purchases of grain cent of of grain that 50 per always carry carry their unhedged. The use use of of the the hedge hedge varies varies with with the type of the type of company unhedged. company and with the of selling. The line elevators are probably the most are the method of line elevators with selling. probably the consistent users of the hedge. hedge. Operating from 50 to 150 elevators, of the to consistent users 150 the elevators, the Operating line has a tremendous tremendous volume of the of grain line company grain on hand during during the company has marketing season. great risk involved in carrying grain in such The risk in in season. involved marketing great carrying grain policy of of hedging. hedging. volume induces aa consistent consistent policy ,
of line managers of especially the the larger ones, recognize that The managers line companies, larger ones, companies, especially recognize that total of the larger the total of grain purchased and held, the greater the the volume the the the amount held, larger grain purchased greater of risk. involved involved from the the fluctuations fluctuations of of risk of world grain serious the more serious grain prices prices and the If they the possibility possibility of heavy losses. they are are willing willing to the opportunity the of heavy losses. If to forego the for forego opportunity for
price advances, they can by by the the use use of of the profits arising the possibility possibility of price the advances, they arising from the profits market themselves serious losses. hedg-ing mark.et protect themselves against serious losses. . . . a result the ... a the As result hedging against protect large lines tend tend to to pursue pursue a fairly hedging policy, policy, while while consistent hedging large commercial lines fairly consistent even the probably tend tend to to hedge hedge much more frequently than smaller ones probably even the smaller than do frequently 10 the individual elevators, the whole.lO the on whole. the individual elevators,
Country sell on consignment, elevators sell "to arrive." arrive/' A track, and "to consignment, on track, Country elevators sale consignment involves shipping to the terminal market, the the country involves shipping to the terminal market, sale on consignment country elevator bearing the the risk risk of price fluctuations fluctuations until until the is sold. of price the grain elevator bearing sold. grain is Consignment sales are generally hedged. When the grain is sold "to sales are the sold is "to Consignment generally hedged. grain arrive" or or on track, track, however, however, the the same necessity does not exist. Sale of arrive" does exist. Sale of necessity the grain in cars, as it stands on the tracks, removes the time element the tracks, the time element the grain in cars, as it stands and hence the risk of of fluctuating fluctuating prices. prices. Both sales the risk sales "to "to arrive" arrive" and sales sales the is received track are are often the same day the grain is by the elevaoften made the received on track the elevaday grain by tor. The effect of marketing marketing methods upon policy is elevators' hedging tor. effect of is upon elevators' hedging policy summarized in in the the report report of of the the Federal Federal Trade Commission in tabulating in tabulating the percentage percentage of hedging in different with the the percentage percentage of elevators elevators hedging different states, the states, with of consignment and direct direct sales: sales: ". with some exceptions the ". . . . with of consignment exceptions . . . the to of tends proportion of hedging tends to vary directly the proportion with the of hedging vary directly proportion proportion of consignment business reported, and therefore inversely with the percenttherefore business the reported, inversely consignment percentage direct selling." of direct selling." age of for the Some considerations considerations in in the the practice practice of hedging hedging for the country buyer country buyer are outlined outlined below: below: are .
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Vo!. I, p. 213. Report of the Federal Federal Trade Commission on the Grain Trade, I, p. p. 218. 218. the Grain Vol. I, of the Trade, Vol. Report
o 9 Vol. I, p. 213. 10 10
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Commodity Exchanges and Futures Trading and Futures Commodity Exchanges Trading
in the the option Hedging on consigned consigned grain is best best done in grain is Hedging (future) month immeoption (future) when -the will grain will arrive and profitably sold within diately following, except ·the be arrive sold within grain diately following, except profitably the option. current option. the current hedge when the the cash a sufficient To obtain aa carrying cash grain is at at a sufficient carrying charge charge we hedge grain is cost of of carrying discount to to pay pay for for the the cost carrying the to the best option this discount to the best the grain for this grain option for the purpose. Hedging, the cash grain is selling at a greater discount under when cash is a discount grain selling at greater purpose. Hedging, it takes the takes to to carry carry the the grain grain to to that greater profit. profit. the option that option, option than it gives greater option, gives On short crops, when we have have grain better grain grain will short crops, of uneven quality, the better will grain of quality, the usually sell sell at the option option before before the the first first day that option at the of that day of usually option..... Where we hedge hedge for for protection, protection, while while grain transit unsold unsold and the the cash cash in transit is in grain is grain will arrive arrive before before the the middle middle of next option, use the the nearest nearest of the the next then we use grain will option, then cash and the option, because because the the cash the nearest nearest option hand. in hand. option, option usually usually work hand in If cash grain not arrive arrive before before the that option, If the the cash the last last few few days of that grain would not days of option, then we use use the the next next nearest nearest option. option. We usually usually change hedges, when then over our hedges, change over in which the is hedged sell at at the the option option in the grain the same price. price. the cash the cash and the grain is hedged sell bids for few illustrations: illustrations: On July 13, 1926, bids for No. 3 white oats for August white A few oats for 3 1926, 13, July August were shipment 40t The September option 40~, the Decemand September was the 40J. 401, September option September shipment oats for ber 431. 43~. In In this this case, if we were storing ber for a a carrying case, if storing oats charge, we would carrying charge, If we were hedging use the with its its 31 3~ cent cent premium. premium. If hedging consigned consigned use the December with grain the cash arrive before the middle of September, we the before the of would and would arrive cash grain September, in in the September option. hedge the hedge September option. On the the 13th of October the the December has l'eached 44; so the cash cash oats. 13th of reached 44; so has the oats. buy back back the the December option option and sell May in to take the May in order order to sell the take Then we buy 11 11 at advantage of a 4·cent premium, the May option selling at 48. 48. a the of 4-cent May option selling advantage premium, .
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in the Reasons for for Spot Spot Selling Selling above Futures Futures in the the Grain Trade. Trade. In the Reasons of grain trade the situation of spots (lots ready for prompt uncommon situation for trade the spots (lots ready prompt grain delivery) above futures to time may conconoccurs from time to futures occurs time and may selling above delivery) selling tinue for considerable periods. periods. This, This, as as has been explained for considerable tinue earlier, may explained earlier, may as a temporary be due due to to abnormal market influences, influences, such as temporary scarcity of be scarcity of grain, a temporary in excess of current supply (for example, in of current demand excess a supply (for example, temporary grain, in 1947-1948), relief in or a the extraordinary extraordinary shipments European relief a for European the shipments for 1947-1948), or reason short, high-price crop crop followed followed by by aa normal or large crop. A second reason short, high-price large crop. may be be found in the fact fact that that the the grain the futures confutures contenderable on the in the grain tenderable may tract may may not not be be the the full full equivalent grain of grade of grain of a corresponding tract corresponding grade equivalent of futures contract bought in the cash market. grain delivered on a futures contract is a is delivered market. The in cash the grain bought its likely to be so that, although it qualifies as tenderable, under its it as mixed to so be tenderable, that, although qualifies likely is likely proper grade it just just passes passes inspection. inspection. Grain bought bought by by sample likely sample is grade it proper to be be nearer nearer the the top top of its grade in quality; hence the cash grain the of its to grain comgrade quality; premium over the future. (uture. In the the case wheat, a considerable case of of wheat, considerable over the mands aa premium the futures, quantity generally futures, because substantial premiums at substantial sells at premiums over the generally sells quantity the basis to of its high high protein protein content to that of the basis grade as compared content as of its grade on compared the the exchange. exchange. 11 From an J. C. Lyman before before the the Western Grain Dealers Association, Association, C. Lyman an address address by by J. Grain Dealers Journal, Journal, May May 10, p. 560. 560. Grain Dealers 1928, p. 10, 1928,
in Practice Hedging in Practice Hedging
239 239
Hedging by by Terminal Elevators. Elevators. The country buyer of of spot a buyer elevator, a Hedging country elevator, spot grain, generally generally sells the exchanges hedges. Other leading leading futures on the sells futures as hedges. grain, exchanges as in the grain trade trade which sell futures as terminal factors in sell futures the grain factors as a hedge are the the terminal hedge are of "to elevators and the the buyers buyers of arrive" grain. Terminal elevators are "to arrive" elevators elevators are grain. in the the large large central central markets. markets. As crops the market, market, millions millions located in located to the crops come to of bushels of of grain grain are are handled handled by by the of bushels the large terminal companies. large terminal They companies. They are buyers buyers of some of which they resell at once and some of of grain, of are 'which at resell once of which grain, they they for sale a later later time. time. In In volume of handled, the the situaat a store for sale at of grain situathey store grain handled, is similar tion of the the terminal terminal elevator similar to that of the line tion of elevator is to that of the line elevators. elevators. Grain held in in the the terminals terminals is is uniformly uniformly hedged, hedged, although the balance, balance, of held of only the although only long, requires requires protection the elevator elevator is is long, which the in this this way. eleprotection in way. Thus an elevator vator which is is long 800,000 bushels of and has sold 200,000 bushels bushels of wheat has sold bushels 800,000 200,000 long net long long position position for forward delivery will maintain aa hedge for its net delivery will hedge only only on its of "to arrive" grain their comof 600,000 bushels. Buyers of "to arrive" 600,000 bushels. grain usually Buyers of usually hedge hedge their in order order to to protect protect themselves themselves against the risk of price mitments by by sales sales in the of price risk against in fluctuation, while the grain is in transit. is transit. while the fluctuation, grain the Buying Users Buying Hedge. Hedge. Millers Millers who contract Users of contract ahead for for the the delivdelivof the can of flour and usually do protect their commitments by the purchase ery of flour their the usually protect ery by purchase of futures. The exporter exporter who contracts the dealer of futures. contracts to sell grain to sell or the dealer grain abroad or for the of grain grain at markets or points who contracts contracts for the delivery at seaboard markets or points delivery of distant distant from the primary markets markets insures his ability to fulfi11 his conthe primary insures his to fulfill conhis ability tract later, as the physical tract by by purchasing purchasing futures futures which are are liquidated as the liquidated later, physical grain is picked picked up up in in the the cash cash market for for delivery the contracts contracts of of grain is delivery on the sale. sale. extent of of hedging hedging by by the the milling milling interests The extent interests cannot cannot be be determined determined in exactly. larger mills, particularly in the Northwest, apparently the The mills, Northwest, exactly. larger particularly apparently make aa practice practice of hedging their their forward forward contracts the sale of hedging for the contracts for sale of of flour. flour. in the The futures futures are are either either placed placed in the month, month, when the flour is needed, the flour is needed, or or spread over successive months; they are closed out as the actual grain of successive are over closed out as the actual months; they spread grain of the required is the physical market. On the other the quality is obtained on the market. the other physical quality required in close hand, mills which are close proximity proximity to to country markets are located located in hand, mills country markets not hedge at all, rely their ability to obtain the grain may but on their obtain not at to the in the the all, rely ability hedge may grain in and as needed. contiguous markets as needed. markets when contiguous Hedging by by Producers. Producers. The hedge hedge is used chiefly by dealers is used dealers and manchiefly by Hedging a to only a limited, though increasing, extent by producers producers ufacturers and to extent ufacturers limited, only though increasing, by In of cotton In other fields, such as rubber, sugar, and coffee, other such as cotton and grains. of fields, rubber, sugar, coffee, grains. producers hedge extensively. reasons why producers of grains and The reasons of extensively. why hedge producers grains producers are: cotton not use use the the hedge hedge more generally are: (1) relatively few of cotton do not few of generally (1) relatively are raise the millions of producers raise crops which are large enough to warrant of the millions large enough to warrant producers crops of the of the the expense of the hedge protection; (2) a good part of producers' the producers' the good hedge protection; (2) part expense after crops are usually immediately after harvest; (3) producers marketed are are harvest; immediately usually (3) producers are crops generally unfamiliar with hedging techniques; (4) they find it difficult hedging techniques; (4) they find it difficult generally unfamiliar
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Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
for hedge to arrange for for the the margins margins required required for temporarily, to arrange sales; and (5) hedge sales; (5) temporarily, at the existence of government of of prices of a a number of existence of at least, least, the government support prices of support of basic farm farm products. products. basic The producer producer usually usually bears bears the the risk risk in price fluctuations the in price fluctuations during during the risk passes growing season, but, when the the crop crop has has been been raised, raised, the the risk passes quickly season, but, quickly growing into other other hands. hands. In In recent recent years, years, however, however, the has employed been the hedge has into employed hedge in conon an increasing increasing scale by producers, producers, both large conscale by small, acting acting in large and small, through farmers' farmers' co-operative co-operative associations. associations. Farmers Farmers are cert are tending cert through tending more their and more to to use use the the facilities facilities of the exchanges to hedge their growing of the to growing exchanges hedge cocrops, rather than speculate on the price at harvest time. The farm corather than at the harvest time. speculate price crops, suboperatives, which have have greatly increased in in numbers under federal federal subgreatly increased operatives, sidies offer their their services to those hedge at cost sidies since since 1933, to hedge cost to those who desire services at desire to 1933, offer and in in many many instances instances arrange arrange for for the the margins margins required by the the exchange exchange required by under the the general general credit credit of of the the co-operative, co-operative, which may take a mortgage a under take mortgage may the on the the farmer's farmer's crops crops or or other other collateral collateral as as security. case, the any case, security. In any for large-scale, mechanized farms farms are are constant constant users of the the exchanges users of exchanges for large-scale, hedging purposes. hedging purposes. only do grain elevators, but also in rapidly also the individual farmers the individual farmers in Not only rapidly grain elevators, the increasing numbers, numbers, with with encouragement the co-operatives, use the encouragement from the co-operatives, use increasing can all grain exchanges to avoid storage charges. They can sell all their crop to sell their avoid storage charges. They grain exchanges crop for cash, but, if if they they anticipate higher prices, prices, they for cash, but, simultaneously they may may simultaneously anticipate higher buy futures futures on one one of the several several grain holding the the futures futures of the exchanges, holding grain exchanges, buy contracts rather rather than than the the actual or cotton. The farmer who lacks lacks actual grain cotton. contracts or grain in stocks unlimited his farm is thus enabled to carry stocks in unlimited storage facilities to facilities on his farm enabled is thus carry storage a terminal in a quantities at the the lower lower costs costs of terminal market (which of storage storage in (which he quantities at futures pays through the prevailing premium for the futures over spot prices) . for the the spot prices) prevailing premium pays through or cotton This practice practice of spot or cotton and holding futures in in wheat futures of selling This holding selling spot their stead, of course, is not a hedge, but rather the continuation of a rather the continuation of a their stead, of course, is not a hedge, exchange is is used only the sake speculative position. The exchange for the of economy, sake of only for economy, speculative position. than rather that of convenience, liquidity rather for that of price insurance. for and insurance. convenience, price liquidity Cattle feeders feeders are frequent users users of hedging of the the grain are frequent for hedging Cattle grain exchanges exchanges for for purposes. Needing large quantities of corn for their cattle, they their which of cattle, they purposes. Needing large quantities are fattening for for market, market, they they buy buy spot spot corn promlocal farmers, corn from local are fattening farmers, promfarmers' option. payment at any time time during during the ising at any the season at the the farmers' season at ising them payment option. at the feeders pay pay at the price price prevailing prevailing when demand for is The feeders for payment payment is In effect, the farmer can pick any day to demand payment at farmer can to made. In the at effect, pick any day payment that day's prevailing price, price, thereby thereby avoiding charges and yet yet that avoiding storage storage charges day's prevailing for the remaining free to speculate throughout the year for a rise in prices. This free to rise in year remaining speculate throughout prices. practice is because the the feeders, with the is possible only the feeders, simultaneously practice possible only because simultaneously with the delivery of the corn by the farmers, immediately buy hedging futures of the corn futures farmers, by immediately buy hedging delivery the exchange. exchange. When aa farmer farmer demands payment his corn, contracts contracts on the for his corn, payment for a the feeder sells a corresponding the corresponding future future and accounts the farmer feeder sells accounts to to the farmer at at .
Hedging in in Practice Practice Hedging that day's day's price. price. In In this this that
241
way the the feeders feeders eliminate the risks risks of price eliminate the of price way
fluctuations. fluctuations.
Markets Used tor Hedging Grains. widespread practice Grains. The more widespread Markets of for Hedging practice of states hedging in the grain states Minneapolis the leading market for in makes the the for grain Minneapolis hedging leading the hedging hedging of of country elevators. Unless Unless prices between markets markets are are out out the country elevators. prices between of parity parity with with other other markets, markets, the the practice practice is is to to make the the hedging purof hedging purchase in the the nearest nearest futures futures market. market. Though Though Minneapolis leads or sale sale in chase or Minneapolis leads the field for hedging on the the part part of is the the for hedging of country the field elevators, Chicago country elevators, Chicago is for of operations for diverse hedging interests and for country seat more diverse interests for seat of operations hedging country elevators over aa wider wider territory. territory. The Kansas Kansas City is elevators spread spread over Exchange is City Exchange another active grain market. market. There are exchanges throughactive grain are other other grain another grain exchanges throughin out the in Canada; some were suspended during the Second and were the out the country Canada; suspended during country have not not yet yet reopened. reopened. World War and have in the Summary Hedging in the Grain Trade. handlers of Trade. The largest of of Hedging largest handlers Summary of grain-the line elevators, terminal elevators, and northwestern millers the terminal northwestern line millers elevators, elevators, grain -are apparently the the most consistent consistent employers hedge. There are are of the the hedge. are apparently employers of inthat grain grain commission houses houses are a factor; these tend tend to indications that to inare a indications factor; these the extent elevators. crease the extent of of hedging hedging by by country elevators. The commission house crease country a protection often finances as a the country purchaser and, protection to to its often finances the its advances, and, as advances, country purchaser a that purchases be protected by a hedge. requires that be by hedge. purchases requires protected Some grain a practice practice of in the the of hedging, elevators make a grain elevators hedging, only only when in judgment of the managers the market is declining or is about to decline. is to the the market or of is decline. declining managers judgment They do not not hedge, hedge, when in their opinion is upward. in their trend is the price They price trend upward. opinion the Such elevators e'levators are are speculating for the the rise rise and using using the as aa the hedge only as hedge only speculating for the time in their judgment it will be safe to stop-gap against the in their it will time when be safe to judgment stop-gap against speculate again. speculate again. Hedging in in the the Cotton In the the cotton trade hedging hedging is cotton trade is genCotton Trade. Trade. In Hedging genextent and to a varying extent by mills. In the the erally practiced by merchants to a In merchants mills. varying by erally practiced by established a governmental monopoly days before the the British British Parliament established governmental monopoly days before buy all cotton converted in in England, England, it was said that "nine-tenths to to buy all cotton it was said that of "nine-tenths of all from to the Mersey is sold against (hedged) to all cotton cotton shipped America the is sold shipped Mersey against (hedged) 12 either in New York or in Liverpool."12 or in either in Liverpool/' The cotton cotton merchant must be be alert alert and an expert judging the in judging the grade, expert in grade, staple, and character of cotton. His country buyers must also be character of cotton. His also be expert country buyers staple, expert judges of of cotton. cotton. He generally protects his his long by in spot cotton by generally protects long position position in spot cotton judges the exchange. use of the hedge. and one widely selling futures the futures on Another use of the one exchange. selling hedge, widely is to physical markets. employed, to protect protect forward contracts contracts of of sale sale on the the physical markets. employed, is A merchant often often contracts to deliver deliver cotton grade and staple contracts to of an exact cotton of exact grade staple to a buyer buyer abroad. price quoted to the foreign buyer is based the to a abroad. The price to based on the the foreign buyer is quoted price of of the future for the month in which the merchant contracts to make in to the future for the contracts the price
J.
12 12 G. Smith, Smith, Organized J. G. Organized
pany, 1922) 1922) pany,
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Produce Markets Markets (New York: Longmans, Longmans, Green & ComProduce (New York:
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Commodity Exchanges Exchanges and and Futures Futures Trading Trading Commodity
shipment. This This forward forward contract contract shipment.
is protected protected immediately immediately by by aa purchase purchase of the the future future for for that that month. A merchant who accumulates accumulates cotton cotton for for of a export may also employ either the selling hedge as a protection against either the as also selling hedge employ protection against export may in the the field, field, or or the the over-purchases made for for his his account account by by his his agents agents in over-purchases of protection, protection, if if his his agents' agents' purchases purchases have have not not buying hedge hedge as as aa means of buying been equivalent equivalent to to the the sales sales he has has made. been in the the cotton cotton market and in in the the cotton cotton trade trade have have Changed conditions conditions in Changed brought about about aa modification modification of of hedging hedging practices practices for for mills. mills. Hand-toHand-tobrought buying characterized characterized the the textile textile industry industry for for many many years. years. This This mouth buying and risks in practice materially reduced the time risks involved in inventories involved the time inventories reduced practice materially forward sales sales contracts contracts for for the the delivery delivery of of the the finished finished goods. goods. Before Before and forward the 1920-21 collapse of of cotton cotton prices, prices, the the mills mills would sell sell finished finished goods goods the 1920-21 collapse ahead, hedging hedging the the contract contract by by aa purchase purchase of of cotton cotton as far far as as six six months ahead, as with the the forward forward selling selling period period cut cut in in half, half, the the tendency tendency futures. Later, Later, with futures. fill actual of of physical developed to fill actual requirements by immediate purchases to physical requirements by purchases developed is such that the size size of of orders orders for for finished finished goods goods is that considercotton. If considerIf the cotton. be consumed in in obtaining obtaining the the cotton required, required, then then the the able time time must be able hedge protection will be employed regardless of the period covered by of the be will period by hedge protection employed regardless in the is the practice of mills the forward forward contract. contract. Another variant variant in of mills is that that the practice at all; some do not not hedge hedge purchases purchases of of physical physical cotton they mistakenly mistakenly cotton at all; they confine their use use of of the the hedge hedge entirely entirely to the protection protection of of forward sales to the sales confine their of finished goods. of finished goods. Among the the southern mills the the use use of the hedge hedge has has expanded in recent recent of the southern mills expanded in Among it and some are but many mills make no use of it still avowedly years, use of mills are still but many avowedly years, In the the South mills, opposed cotton early it. In to it. mills, which do hedge, hedge, purchase early purchase cotton opposed to the movement of in thus anticipating season. By of the the in the the crop-moving By thus anticipating the crop-moving season. in the cost of crop, they are able to effect a saving in the cost of handling and in the a in the to effect able are saving handling crop, they it as as more efficient cost regard it in a efficient to to buy a market of transportation. market cost of They regard buy in transportation. They in more distant close distant markets. than to to wait wait and buy markets. These purclose at at hand than buy in purof chases are protected by sales of exchange futures, and then, as sales are as of spot chases of futures, then, exchange protected by spot manufactured of orders are taken for goods, enough of the hedged sales are for the taken are sales are orders goods, enough hedged in cotton closed only the "long" spot cotton in inventory. the to protect closed to "long" inventory. only spot protect is
The buying of many mills, both north and south, south, but particularly many mills, buying policy policy of particularly the the according to the method which seems to is to to purchase to to avoid the former, avoid former, is purchase according rather to speculating in the largest possible degree rather than to follow anyone parfollow in the one largest possible degree any parspeculating will be found which, depending on conditions, ticular Mills will or methods. Mills ticular method or which, depending conditions, will call or purchase or seller's seller's call either buyer's will employ outright without hedging, purchase outright buyer's or hedging, employ either will all sold under other conditions all goods sold will be hedged while conditions other the purchasing while hedged by by the goods purchasing all cotton purchased situations all will be immeof in yet of cotton cotton futures, futures, and in purchased will yet other situations 13 18 sales. diately future sales. hedged by by future diately hedged 13 Report the Cotton Trade, Senate Federal Trade Commission on the the Federal Trade, Senate of the Report of
No. 53. No. 100, 100, p. p. 5S.
Document Document
Tied in Practice TT cd:ri ng in Practice zing
243 243
arguments advanced advanced by by mills mills which do not not use use the the hedge hedge center The arguments center proposition that that the the prices prices of prices of finished around the finished goods the proposition the prices goods and the of not move together. together. When the of cotton rises, it is is of raw cotton cotton do not the price of cotton it rises, price stated that that it stated it does does not not necessarily necessarily follow follow that that there there will will be an appreciable appreciable advance in in the the prices prices of of finished goods. On the the other hand, finished goods finished goods. other hand, finished goods dormant the and their prices may decline before any may lie lie market on the their decline before may prices may any in prices of cotton is in evidence. Hence, since finished-goods weakening cotton is in in of evidence. since Hence, weakening prices finished-goods prices generally lag behind or precede the the movement of is or precede either lag of spots, it is prices generally either spots, it urged that the hedge affords satisfactory protection. that affords no the urged hedge satisfactory protection. Call. cotton trade Buyer's and Seller's Seller's Call. In the the cotton trade aa considerable considerable volume Buyer's of business business is is done on "buyer's practice of call" and on "seller's call." The practice "seller's call." "buyer's call" of in of selling buyer's call originated in the cotton export trade on sales on call the cotton trade sales buyer's selling originated export of cotton of cotton to English mills mills which wanted to in a particuto English to assure in assure shipments a shipments particular month, lar month, but but did not not want to to fix fix the the price immediately. the cotton of the cotton immediately. price of practice is is now used used extensively extensively in in both both the the buying of The practice the selling buying and the selling of cotton on the domestic markets. markets. cotton the domestic buying cotton cotton from farmers, gives them the the When buying dealer frequently farmers, a dealer frequently gives at fix at their later right to fix the price at their option at any later day's current quotation to the current right day's any option quotation price limit of, to choose (with a limit of, say, days in in which to the day) choose the is known say, sixty sixty days (with a day) . This is as aa seller's may then then sell as a cotton seller's call. call. The dealer dealer may sell to to a cotton spinner allow spinner and allow him to to fix price at his option at any subsequent day's current quotafix the at his at current the price any subsequent day's option quotaa reasonable, tion reasonable, specified specified period). the dealer tion (within In other other words, dealer words, the (within a period) I'll has bought bought on seller's call. has seller's call call and sold call. sold on 'buyer's 'buyer's a grade Let us us assume assume that that middling middling inch to the the inch cotton, Let cotton, a grade superior superior to basis grade, basis grade, is is selling near in Houston, at 20.25 the near 20.25 cents, while the Houston, Texas, Texas, at cents, while selling in active future, active (three off), is selling at 20 cents. The trader months is at 20 cents. trader future, May off) selling May (three will quote quote this to aa spinner at 25 points on or the price price of of will this cotton or above the cotton to 25 points spinner at May, this quotation being being known as the "basis" this as the this quotation "basis" or or premium for this May, premium for cotton at over the the basis basis grade. In practice, the basis for any basis for cotton at Houston over the grade. practice, any grade does not, as a rule, change rapidly, although the market price as a the does rule, change rapidly, although not, grade price itself in the the basis basis take take place place more slowly. itself may may do so. so. Changes obtain slowly. To obtain Changes in the the price of grade at any moment, the basis or differential basis the actual actual price at or of anyone one differential moment, any grade any that grade grade at that time time is to or the then price for that is added to subtracted from the for at that or subtracted then price of the used. This provides provides a very very effective effective way futures month used. of the futures of quoting way of quoting its constantly physical cotton, in view of its changing value. To get in of value. view the cotton, constantly changing get the physical it North corresponding price at Charlotte, Carolina, it is necessary only is at Carolina, Charlotte, necessary only corresponding price of points points required required to to pay the expenses to ship to to add the the number of it pay the expenses to ship it if trader the there, say, 75 points. Consequently, if the trader buys the quality in the in 75 there, say, buys quality points. Consequently, as a hedge futures as question at 20.25 sells May May futures 20 cents; at 20 20.25 cents, in cents, he sells cents; in hedge at question at at 25 other words, words, he he buys buys the the physical physical cotton cotton at 25 points points on or or above May other May sells May May on the the exchange as aa hedge. hedge. Then he offers it, landed landed in in offers it, and sells exchange as him Charlotte, at 135 points "on" May, which give 35 points profit, would 35 points profit, Charlotte, at 135 points give May, .
.
,
244 244
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
if if the the freight charges total total only points. Being hedged, he other charges 75 points. Being hedged, only 75 freight and other is concerned, meanwhile, meanwhile, not not about price price fluctuations the trend of is concerned, fluctuations or or the of or price prices, but but only with possible possible changes price spread, in the the basis, basis, or only with spread, prices, changes in for it the specific grade and May futures on the exchange, for it is between the is between futures the May exchange, specific grade the latter in in which he he makes his his profit profit or the latter or loss. loss. sells the the hedged hedged lot, say, two weeks later, later, to to aa mill mill in in The merchant sells lot, say, Charlotte at at 135 points on or price of of May, or above the 135 points the current current exchange exchange price May, the mill mill wants wants the the usual usual privilege privilege of or choosing the day but the or the of calling choosing day calling (within a reasonable time limit) on it will fix the price of the a it fix of the reasonable will the time which (within price limit) cotton. This procedure is called "selling the cotton on buyer'S call." The cotton. buyer's call." procedure is called "selling the cotton merchant agrees waits until until the the mill price on the mill fixes the price the basis basis of, fixes the of, agrees and waits say, 19.75 cents for May. soon as this is done, the merchant buys back for As this is the 19.75 cents as done, buys say, May. at 19.75 cents. The an equal equal amount of of May May futures futures on the the exchange 19.75 cents. exchange at or 21.10 sale price to mill is is therefore therefore 19.75 21.10 cents. sale price to the the mill cents plus 1.35 cents, cents. 19.75 cents cents, or plus 1.35 The profit profit to to the the merchant will will be, be, as as stated points. 35 points. stated above, above, 35 cents (the cotton 21.10 will make on the the spot spot cotton 21.10 cents price he The merchant will (the price it at) less for sold it he sold less 20.25 cents (what paid for it), or 85 points. his 20.25 cents (what it) at) points. On his paid at 20.00 cents and will make aa profit profit of points, for 20.00 cents futures for he sold sold at futures he will of 25 25 points, total of 110 bought back at 19.75 cents. he will make a total gross profit back at cents. will Hence he 19.75 gross profit of bought but but has expenses of 75 points, thus making the net profit points, he has of 75 thus 35 the net making points, expenses points, profit 35 points. points. 14 listed p. 245 245 will will illustrate the operations the of the The transactions transactions 14 listed on p. illustrate the operations of cotton buys on seller's seller's call call and call and sells call sells on buyer's cotton merchant who buys buyer's protects himself himself from price price risks risks by by hedging hedging the transactions. the transactions. protects Hedging in Sugar Industry. Industry. In In wheat and cotton relatively little cotton relatively little in the the Sugar Hedging hedging is done by individual growers. fundamental reason for this, for A reason is individual this, growers. by hedging in particularly in the cotton trade, is that the individual production of aa individual of the is that the cotton trade, production particularly make contract large of the growers is not sufficient to one contract unit; sufficient to is not number of the unit; large growers consequently, they operate operate mainly mainly through through co-operatives. the sugar sugar co-operatives. In the consequently, they trade, producers producers and refiners refiners of both cane and beet beet sugar of both trade, employ the sugar employ facilities of Coffee and Sugar Exchange extensively for facilities of the the New York Coffee Sugar Exchange extensively for a hedging. also employ employ the the selling hedge as as a protection Dealers also against protection against selling hedge hedging. Dealers the in their hands. manufacturer who requires refined sugar refined in A manufacturer the raw sugar their hands. requires sugar sugar his and cannot cannot obtain obtain his his requirements requirements immediately may safeguard his posiimmediately may safeguard posithe tion by by the the purchase purchase of futures. Then, as he obtains the refined sugar, as refined he obtains tion of futures. Then, sugar, he will out his his purchase purchase of of the the futures. futures. Canners, will close close out Canners, manufacturers, manufacturers, of sugar, wholesale grocers, grocers, all large-scale users use of bakers, and wholesale users of all large-scale of bakers, sugar, make use the protection afforded by the the hedge. hedge. afforded by the protection ,
of the New York Coffee Coffee and Sugar Mr. John C. Gardner, president of Gardner, president Sugar John C. at under on August 14, 1947, at a symposium the ausExchange, speaking the aus14, 1947, August symposium Exchange, speaking i* All 14 this material material has has All this
Pierce, Pierce,
been adapted adapted from aa pamphlet by MerrH, Lynch, issued by been Merril, Lynch, pamphlet issued &: Beane, the New York Cotton Exchange Fenner & Fenner of the York, 1947) Bcane, Members of Exchange (New (New York, 1947) •.
Hedging in in Practice Practice Hedging Jan. Jan.
Jan. Jan.
Feb. Feb.
245 245
Debit Credit Credit - Merchant buys buys from aa farmer farmer 100 bales 100 bales Middling 15/16 20 points points "on" (or at 20 15/16 inch at Middling (or allowing the to above) May futures, futures, allowing the farmer farmer to above) May fix fix the the price price when he chooses, chooses, but before before April 16. merchant is is now long 16. The merchant the of the April long of basis information's sake only, May basis only. For information's sake only. only, May then was 20^. 20~. The farmer farmer probably probably receives then receives $8,000 account when he delivers the delivers the $8,000 on account cotton final adjustment will it is cotton and it is agreed final will agreed adjustment be made when the the price price is is fixed. fixed. be 29 - The merchant sells the cotton mill, on sells the to a a mill, 29 cotton to buyer's call, call, at points "on" May, May, of 135 points of at 135 buyer's which 90 points points are for freight, freight, commissions, are for commissions, the mill mill the the and other other expenses. gives the expenses. He gives fix to the it right to fix the price 'When it pleases, but when right price pleases, before April 16. The merchant now has before April 16. sold has sold the basis. basis. (The the for 20.80^ for (The market was then 20.80~ May.) May.) 10 farmer notifies notifies the the merchant to 10 - The farmer to fix fix the price price of the basis 20.90~, the of his his sale sale on the basis of of 20.90^, the day's day's price price of of the the May May futures, the futures, plus .20^ plus .20~ of 21.1O~. (as agreed on Jan. or aa total total of 21.10^. 2) (as agreed Jan. 2), The merchant merchant is long of the cotton, is now long cotton, of the but at the same time sells aa May May futures futures but time sells at the at 20.90$ as a hedge hedge at 20.90~ .......•.... $10,450.00 contract contract as $10,450.00 previous advance) advance) The amount (less (less any any previous paid the is ...................... $10,550.00 the farmer is $10,550.00 paid mill notifies notifies the the merchant to to fix the 15 fix the 15 - The mill price on its its purchase from the the merchant price purchase at the then then current level of 18.80~ per of 18.80^ current level at the per pound for May, making the sale price the to sale for making price to May, pound the mill mill 18.80^ 18.80~ plus plus 1.35<# 1.35~ (as the (as agreed agreed on Jan. or 20.15^. 20.15~. The merchant receives receives or 29) Jan. 29), 10,075.00 from the the mill mill ••.•...................... 10,075.00 to merchant, at at the the time time of shipping The merchant, shipping to all the mill, mill, will will have to to pay pay freight the freight and all other equal to 90 points, or ..... . 450.00 90 to 450.00 other charges, charges, equal points, to the mill the same date that the price price to mill date that On the is the merchant buys buys aa May contract. is fixed, fixed, the May contract. The price price of the May May futures 18.80~, is 18.80<, futures then is of the 9,400.00 making the cost ........................ . the cost 9,400.00 making total result result of of the the completed The total completed spot spot futures hedge hedge transaction and the the liquidated transaction liquidated futures is therefore therefore ............ • . . . . . . . . . . . • . .. $20,400.00 is $20,400.00 $20,525.00 $20,525.00
2 2
,
Apr. Apr.
,
making aa profit profit of of ...................... making
$125.00 $125.00
pices of the National Association Association of Commodity Commodity Exchanges Exchanges pices of the National as follows:follows: Trades, described hedging in the the sugar trade as described hedging sugar trade Trades,
and Allied Allied
246
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
Hedging by by a Raw Sugar Sugar Producer. Producer. In there are active In Cuba there are about 160 active about 160 Hedging mills grind cane cane and process process it into raw sugar. The cane is planted that grind it into is mills that sugar. planted and in part cultivated in part by by farmers, farmers, known as and in part by mills in cultivated as "colonos," the mills "colonos," part by the themselves company-owned land. During the season, extends land. During themselves on company-owned the grinding which extends grinding season, from the first of to the the end of May, the the colono delivers cane to to the the first of January of May, delivers his his cane the January to it on the is paid for mill and is for it the basis of the average New York market price mill basis of the average for paid price for sugar. are made fortnightly. time, the the mill mill settlements are the same time, sugar. These cane settlements fortnightly. At the is grinding its its own company-owned you can see the mill mill is grinding cane. From this this you see that that the company-owned cane. the owner each fortnight of two batches batches of batch proprobecomes the each fortnight of two of raw sugar, sugar, one batch cane and the the other other produced produced from the its own cane duced from its the cane cane bought bought from its colonos. Since is sold of twelve the Cuban crop period of twelve its farmers farmers or colonos. sold over a Since the a period crop is months, the the mill mill assumes aa very very substantial substantial market market risk the grinding risk during months, during the grinding It is season. is the the almost universal universal practice practice of the modern enlightened mill owners season. It of the enlightened mill to sell to Exchange all or aa substantial the colono sugar which sell on our Exchange all or substantial part of the colono sugar part of required to to take take over over during during the the grinding They may may likewise likewise they season. They are required they are grinding season. the been hedge part of the sugar that has produced from their own cane. Many of that has their cane. hedge part sugar Many produced mills, of of course, course, make sales sales of to American seaboard refiners during refiners actual sugar to seaboard of actual mills, sugar during the but, since there is limit to capacity, is a to refiners' refiners' storage a limit the grinding since there season; but, storage capacity, grinding season; if they it is is necessary necessary that that the the Cuban producers producers have have some other it sales outlet, other sales outlet, if they half of are declines during the protect themselves themselves against against market declines the second half of are to to protect during the the year. year. also utilizes Hedging by by the the Colonos. cane farmer or colono also utilizes our Colonos. The cane Hedging Exchange. Sugar cane requires 12 to 15 to mature. During this period period to months cane to 15 12 During this Exchange. Sugar requires the colono incurs certain cultivation cultivation expenses. Sugar prices may be very high the colono incurs certain be very high expenses. Sugar prices may during the year of cane growth, but the col ono is able to cash in these but the is not able in on the colono not to cash these of cane during growth, year it is high prices, prices, since he is not paid paid for for the the cane cane by by the the mill mill until until it is actually is not since he actually high cut and delivered. delivered. Therefore, Therefore, if if he he anticipates anticipates aa substantial in the the cut substantial decline decline in in his cane will be market during during the the crop crop year year in which his cane will be harvested, harvested, he sells sells sugar sugar If his futures for delivery 66 to to 12 his forecast forecast has has been correct, correct, in advance. advance. If futures for delivery 12 months in he will will receive receive less less money money for the cane, cane, but this this will will be offset in a general general way offset in for the he way delivered to the mill, by the profit on his his futures futures sale. is delivered sale. When the to the the profit the cane is mill, he by is stilI unless he is still bearish the naturally repurchases repurchases his his outstanding futures, unless bearish on the outstanding futures, naturally market and wishes wishes to to remain remain short. short. In that that case, that his position market case, his changes from that position changes of hedge hedge seller seller to to outright speculator on the bear side. the bear side. of outright speculator Hedging by Seaboard Cane Refiners. Cane refining is aa big big volume business business is Seaboard Refiners. refining Hedging by requiring large pIants ample capital. Despite the fact that sugar used the fact that is used and sugar is ample capital. Despite requiring large plants daily by every citizen in or less equal quantities, its distribution from less its in more or distribution citizen equal quantities, daily by every trade buys the refiner level uneven. The distributing is extremely level is the refiner distributing trade buys on what extremely uneven. are called called "moves," at one time a 30 to 45 days' supply. a time to 45 at 30 on are "moves," taking days' supply. This means taking that the refiner must must buy buy large quantities of sugar, it into refined, of raw into refined, the refiner that sugar, process large quantities process it take his the trade is ready to off it in his warehouses until the trade is to take it off his hands. until it hands. his warehouses in it and carry ready carry Many times, his inventories uncomfortable on a declining market, become inventories his when declining market, Many times, he has has to to resort resort to to our our futures for temporary temporary protection. futures market for he protection. situation of of the beet factories Hedging by by Beet Beet Processors Processors and Growers. The situation the beet factories Hedging that different the in our western states is not greatly different from that confronting the Cuban is not in our western states confronting greatly delivers them beets raw sugar mill. The farmer grows the beets and delivers to the factory. to the factory. raw sugar mill. grows the
IT('d;':u.? in Practice Practice uz in
247 247
The ,beets beets are are processed processed by by the the factory, factory, and the resulting refined refined sugar the resulting is sold sold sugar is over aa period period of of twelve twelve months. months. After After deducting taxes, discount, freight, and deducting taxes, discount, freight, and net the of the selling expenses, the net proceeds of the year are divided approximately on an are divided selling expenses, proceeds year approximately even basis basis between the the factory factory and the the farmers. this case will note that farmers. In this case you you will note that the beet the beet processor processor does does not not take take the the same market market risk risk as mill, because because as the the Cuban mill, he does does not not pay pay for for his his beets beets at a fixed fixed market price during the harvesting period. at a price during the harvesting period. if the market Nevertheless, if the is declining, the factory and the farmer receive is both the factory the farmer receive Nevertheless, declining, a a lower average average net net price. price. If the market market is the harvesting harvesting seaIf the is attractive attractive during seaduring the is not son, not at the beet to sell its expected it is at all all uncommon for for the beet factory sell part of son, it factory to part of its expected production on the the Exchange, repurchasing later sugar is beet later as as the the sugar is sold. sold. The beet production Exchange, repurchasing farmer can can also sell futures futures against his growing he anticipates a decline, also sell if he decline, against his growing crop, crop, if anticipates a is sold, repurchasing later later as the sugar sold, but but it as the it is is probable that repurchasing sugar is probable that our American than do the the cane farmers farmers farmers use use the the Exchange Exchange less less for for this this purpose purpose than in Cuba. farmers in Users of of our large Hedging by Industrial Users Sugar. Many large industrial industrial users users of Sugar. by Industrial Hedging Many of of of sugar, such as as the the bottlers, bottlers, candy candy manufacturers, manufacturers, bakers, bakers, and others, others, use use sugar, such the Exchange the Exchange as as aa matter matter of of ordinary business routine. For example, a candy business routine. a ordinary candy example, orders for manufacturer may may book orders for the the Christmas or trade several manufacturer or Easter Easter trade several months in advance. finds it it inconvenient or to buy in advance. If or impossible necessary sugar If he finds the necessary buy the impossible to sugar from aa refiner, of refiner, he merely merely purchases purchases an equivalent amount of sugar futures equivalent sugar futures for processing in his is needed for on the the Exchange. the sugar sugar is his plant, plant, he goes goes Exchange. As the processing in to closes out his purchases for f~r prompt prompt delivery delivery and closes his Exchange Exchange to aa refiner refiner and purchases hedge. the price price of of sugar sugar has advanced, refiner more, the refiner If the advanced, he pays more, but makes hedge. If pays the an approximately offsetting profit his futures purchase. 1£ the on his If the market has futures has purchase. approximately offsetting profit declined, he naturally sustain a loss on his futures, but then sustain a loss but then he would his would declined, futures, naturally be paying paying ·less for his his refined refined sugar. It frequently industrial that an industrial be less for sugar. It frequently happens happens that user will will overestimate overestimate the the demand for for his He buys too sugar his production. user too much buys production. sugar that his his production production is moving too on a declining a is moving too slowly and then then finds finds that declining sugar slowly sugar market. In this this case case he he would protect protect himself himself against loss by by selling market. In against inventory inventory loss selling futures in an amount equal equal to his processed processed sugar to his futures in sugar.. . . . sugar markets markets of of the the world have become aa homogeneous homogeneous whole whole as a as a The sugar result the quotations constantly going approresult of of the going out from our Exchange. Exchange. By By approquotations constantly in freight, priate adjustments for differences differences in freight, insurance, duties, .the .the buyers insurance, and duties, buyers adjustments for priate the world market value and sellers in London, Havana, Java, Java, or Peru know the value sellers in London, Havana, in New York. of sugar well as the sugar brokers in York. . . . as do the as well of sugar brokers sugar as the farmer, In summary, our Exchange provides price price insurance the insurance for for the In farmer, the Exchange provides summary, our industrial user It has beet and cane cane processors, processors, the the refiner, refiner, and the the industrial user of has of sugar. beet sugar. It the financing of distribution distribution and facilitated facilitated the of materially lessened lessened the the costs costs of financing of materially all the growing crops warehouse stocks; it has linked all the markets of the world it linked of the warehouse and stocks; growing crops and supplied ready market for for both buyers at all sellers at all continuous ready a continuous buyers and sellers supplied a it and price information, it has facilitated times; by by supplying accurate statistical statistical facilitated accurate information, times; price supplying in supply the forecasting of future future trends business trends in the supply and demand and enabled business forecasting of plan ahead more intelligently. intelligently. men to to plan .
.
.
.
Hedging in the Coffee in the Coffee Trade. Hedging
.
.
The export of coffee has coffee has export movement of
Brazilian government the Brazilian been controlled controlled for many years years by by the its for many been government under its the control at valorization schemes. So effective has the control been at times that price has times that price valorization schemes. So effective
248
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
levels levels
have been been to to aa large artificially maintained. This has has tended tended extent artificially have large extent to reduce interest in the market and to to hamper hedging. its usefulness usefulness for for hedging. in the reduce interest to hamper its free are Periodically, however, the schemes collapse and free markets are revived. the schemes revived. however, collapse Periodically, The New York Coffee Coffee and Sugar Exchange has endeavored to aid hedging has to aid Sugar Exchange hedging its market. roasters by by broadening broadening its Until 1928 by producers, producers, dealers, market. Until 1928 dealers, and roasters by the contract traded in was aa Rio contract, contract, with Santos coffee deliverable Santos coffee in was deliverable contract traded the as Contract Aremains, at price price differentials. A-remains, but contract known as differentials. This contract-known at
Santos is no longer longer tenderable tenderable thereon; thereon; a separate Santos contract, coffee is Santos coffee contract, separate Santos in. Trading in Rio as Contract D, is traded in. in and Santos Santos is now traded Contract D, known as Trading in of coffees separately insures a greater degree of accuracy in relative quotaa insures relative coffees separately greater degree accuracy quotations the market market more useful useful to to the trade. the trade. thus makes the tions and thus Rubber is also Hedging in the Trade. is an import also in Trade. Rubber the import commodHedging dealers ity. Hence the majority of hedges placed by dealers constitute sales of of constitute sales the majority of hedges placed by ity. in futures against against their their purchases purchases in in the the primary markets in the Far East. the futures East. primary The manufacturer manufacturer of of tires tires or or other rubber goods, however, may may employ other rubber goods, however, employ A for the contract the both the buying and the selling hedge. contract for the forward delivery the buying selling hedge. delivery of rubber goods, goods, when the the crude rubber rubber is is not not on hand, is of manufactured rubber hand, is a the the month protected by a purchase of the future for the or when the of future for or months the purchase protected by raw material material will will be needed. needed. The price price of the manufactured goods, of the of goods, of of the the future; course, will will be be based based on the the price price of future; on the the other hand, aa other hand, course, is employed when large selling hedge is stocks of of or or contracts contracts for for large inventory inventory stocks employed selling hedge crude rubber are carried are not offset by definite forward contracts and are are carried not offset by definite forward contracts crude for the the manufactured manufactured article. producers in the Far Far East article. Large estate producers in the for East and Large estate merchants in in Singapore, Colombo, the Dutch East Indies, Europe, the East merchants Colombo, Indies, Singapore, Europe, and the United States also use the New Rubber Exchange extensively also use the York States the for Exchange extensively for hedging their production or market operations. or market their operations. hedging production Oil. Hedging in in Cottonseed Oil. Cottonseed comes on the market in Cottonseed the market in Hedging of is cent the October and approximately approximately 75 per cent of the crop is marketed within 75 per within crop aa period period of of three three months. months. Crude oil oil mills, crush the the seed seed and mills, which crush are the sell the crude crude oil oil to to refiners, refiners, are the purchasers Although of the the seed. seed. Although sell the purchasers of the seed crop is within this short period, the mills marketed within this short the seed crop is not period, the mills may may not six months or crush of their their purchases purchases until until six later. In the or a year crush some of later. In the year risks in the risks inherent in the commodity are subject to to inherent are the the meantime they and they subject commodity to risks of price price fluctuation fluctuation for for crude oil. the oil oil. The mills to risks of mills protect oil protect the in the which is is in in their their tanks tanks or or still the seed, unextracted, by sales of futures still in sales of futures seed, unextracted, by on the Exchange. A large part of for the the of the the market for the New York Produce Exchange. large part crude oil mills is furnished by the contra-hedging operations of refiners. crude oil mills is furnished by the contra-hedging operations of refiners. refiner buys buys futures against his his requirements, requirements, closing his hedges hedges futures against The refiner closing out his as the the crude is bought bought from the the mills. mills. later as oil is crude oil later Hedging by Smelters. Custom copper pursmelters purCopper Smelters. by Custom Copper Hedging copper smelters ores OT concentrates and smelt the copper concentrates the same. same. The smelting smelting chase copper ores or copper chase copper operation requires requires from 60 60 to to 90 90 days. there is lapse is a a lapse days. Not infrequently infrequently there operation
JTedging Hedging of of as as
in Practice in Practice
249 249
much as as four four months between the the time purchased and time the the ores ores are are purchased the the smelting treatment completed. During this period the the smelter this period smelter can can smelting treatment completed. During a in himself the in the price of copper by selling futures protect himself against a decline decline of futures against protect price copper by selling contracts. In the the meantime, meantime, should should the the physical physical contracts. In the market price of the price of copper decline, decline, the the loss loss will will be offset by the the profit the offset by obtained when the copper profit obtained futures contracts, previously sold, sold, are are bought back. It is the general futures back. It is the contracts, previously bought general profits only practice of of custom smelters smelters to to seek seek their their profits in the the treatment treatment practice only in a reverse (smelting) charges. charges. However, reverse situation situation could could also also arise. arise. A However, a (smelting) smelter might might commit himself himself to to deliver price deliver refined refined metal at smelter a specified at a specified price before raw-material needs In order before his his raw-material needs are are covered covered for a contract. for such a contract. In order not to to run an undue price price risk, risk, he he may under such circumstances buy not such circumstances may buy futures contracts when he he enters enters such such a commitment. Then, Then, should there futures contracts should there unforeseen advance advance in in the the price price he has to pay pay for materials, be an unforeseen for his his raw materials, has to this this would be offset offset by by aa profit profit on his his long futures transaction. futures transaction. long Hedging by Fabricator. A fabricator fabricator of use the of metals metals can use the futures futures by a Fabricator. Hedging markets to companies markets to to equal semiadvantage. This applies equal advantage. applies to making semicompanies making manufactured metal as well as to metal products, products, as well as to consumers of of metals metals who mantimes with with aa ufacture finished goods. A fabricator fabricator may may find finished goods. find himself ufacture himself at at times hand, and at at other his commitments may large inventory inventory on hand, other times times his exceed large may exceed both instances the futures futures market market offers prohis stocks. In both instances the offers facilities for prohis stocks. facilities for protected by a sale of future contracts; tection. Inventories can be a tection. Inventories sale of future contracts; outoutprotected by standing and uncovered commitments, by a purchase of futures. uncovered of futures. commitments, by standing purchase In periods periods of uncertain business business prospects, prospects, the the protection protection of invenIn of uncertain of inventories-whether of raw materials or fabricated products-against sudden or materials fabricated products against sudden torieswhether of price declines is course valuable. course most valuable. Where inventories is of of declines of fabricated fabricated inventories of price a sudden price drop would at least be partially products are hedged, a are at least hedged, price drop products partially offset by by aa profit profit on the the futures futures transaction transaction when the the short offset short sale sale is is liquiliquithere may not be parallel between prices dated, not be there movements between dated, although although may parallel prices of raw materials materials and finished goods. of finished goods. Hedging by by aa Miner. A mining mining company, believing that prices will will that prices Hedging company, believing decline, yet anxious to maintain maintain continued continued operation and employment anxious to decline, yet operation employment of its employees, employees, may may use use the the mechanism of the futures of the to sell of its futures market to sell production well well ahead in the form of its production in the of contracts for future contracts for its future delivery. delivery. It then has the the choice buying back back these if of buying choice either either of futures contracts, these futures It then has contracts, if production is is sold through trade trade channels, or of delivering actual its production or of actual sold through its channels, delivering metal, processed processed from its production, against its production, futures the outstanding metal, against the outstanding futures contracts of their their maturity. maturity. at time time of contracts at in different feature of its use Summary. of hedging indususe in is its different indushedging is significant feature Summary. A significant or important interests are subject to an exceptional tries by large to are interests which or tries by subject large exceptional important terminal eleIn the the grain trades, the degree of of risk. risk. In the country, eleline, and terminal country, line, grain trades, degree consistent users users of the hedge hedge as price vators, as well as most millers, millers, are are consistent of the as price as well as most vators, In the the cotton cotton trade, trade, the the merchant, merchant, with less the less control insurance. In control over over the insurance.
250
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
selling price of of his his goods than the the spinner, hedges more consistently. goods than consistently. In selling price spinner, hedges the sugar trade, all interests are are active active hedgers. hedgers. Producers, all interests the Producers, merchants, merchants, sugar trade, the coffee, coffee, rubber, rubber, cocoa, other trades benefit in the and converters converters in trades benefit other cocoa, and many many a the hedge. hedge. In In no line line does the producer appear as a leading from the does the as factor leading factor producer appear in actual IK JI(·<1J.\ill;!. but this this does not mean that that he he does benefit from in actual does not does not not benefit -d^inji. but it. Because Because the the grain elevator, the cotton merchant, the crude-cottonseedit. the cotton the crude-cottonseedelevator, merchant, grain oil mill, and other other middlemen who purchase the producer producer can free oil mill, free purchase from the the risk risk of of price price fluctuation fluctuation by by hedging, they can do themselves themselves from the hedging, they business on aa narrower narrower margin margin of profit than would be be possible possible otherbusiness of profit otherwise-and narrower margin margin of profit means simply that the price to of profit wiseand aa narrower that the simply price to the producer the producer is is closer to the the price price for the middleman sells than closer to for which the sells than could possibly possibly be be the the case, case, if if the the middleman were were compelled to take the to take the compelled full measure of of price into account, the full price risk risk into his offer to the offer to account, when quoting quoting his are the interest of proproducer. Co-operatives are constantly increasing the interest of constantly increasing producer. Co-operatives producers in in hedging hedging their their combined smaller smaller parcels parcels through through the the facilities ducers facilities of the the co-operatives. of co-operatives. fact that Despite the fact that the the so-called risks cannot be hedged hedged-and, so-called basis basis risks and, Despite the as a consequence, as consequence, many many hedges hedges cannot cannot give complete or perfect insuror insurgive complete perfect ance-the to eliminate eliminate speculative risks is well advised ancethe operator seeks to well risks is advised operator who seeks speculative to adopt of as matter to hedging as a matter of permanent rather than haphazard policy. than rather adopt hedging permanent haphazard policy. the long the In the run, with the exercise of good judgment, wise foresight, with exercise of wise long run, good judgment, foresight, and willingness to to shift positions quickly, quickly, the the hedge hedge is prove to shift positions certain to to prove is certain to willingness be insurance insurance against major hazards of price and credit. be hazards of credit. against major price
~
CHAPTER
CHAPTER
XIII X III) J
The Commodity Act. 11 Commodity Exchange Exchange Act.
On ,September 21, 1922, the Congress the United Vnited States of the States enacted enacted 1922, the ^September 21, Congress of on grain future exchanges and for legislation regulating transactions transactions future for and legislation regulating grain exchanges other purposes. purposes. (V.S.C., title 7, secs. 1-17.) It was known by the short other title sees. It was 7, (U.S.C., 1-17.) by the short title of of "The Grain Futures Act." This act was amended on June title Futures Act/' act was 15, June 15, 1936 No. of 1936 (Public 675 of the the 74th its appli675 extended its 74th Congress), (Public Congress), which extended application to cation to future trading and dealings on exchanges in certain comfuture trading in comcertain dealings exchanges in addition modities to grains. grains. The word "grain" is deleted from modities in addition to the "grain" is deleted from the law as amended, and the the word "commodity" is used instead. Commodity law as amended, is instead. used "commodity" Commodity is defined wheat, cotton, rice, corn, is to mean wheat, defined to cotton, rice, corn, oats, oats, barley, flaxseed, barley, rye, rye, flaxseed, mill eggs, Irish potatoes, wool tops, grain sorghums, mill feeds, butter, Irish wool fats feeds, butter, grain sorghums, eggs, potatoes, tops, fats and oils oils (including lard, tallow, cottonseed oil, peanut oil, soybean (including lard, tallow, cottonseed oil, peanut oil, soybean other fats oil, all other fats and oils), cottonseed meal, meal, cottonseed, peanuts, cottonseed oil, and all cottonseed, peanuts, oils) soybeans, and soybean meal. It does not undertake to regulate meal. to It does not undertake comsoybeans, soybean regulate commodities other than than those those specifically mentioned; consequently, modities other it does does specifically mentioned; consequently, it cocoa beans, rubber, not imported articles not cover cover imported articles such such as cocoa as coffee, beans, rubber, silk, silk, coffee, tin, and the the coverage coverage is products to domestic the like. like. In fact, limited to domestic products is limited tin, fact, the in most most instances instances supplement of agriculture. the amendments in of Since the agriculture. Since supplement and enlarge upon the the provisions provisions of of the the original Act, it it is is necessary to consider original Act, necessary to consider enlarge upon in its its present present form the the original Act as amended. Act as in original The Commodity Commodity Exchange Act rests rests upon to of Congress the power Exchange Act Congress to upon the power of regulate interstate commerce. constitutionality of the Act (in its The of commerce. the Act interstate its constitutionality regulate (in application to grains) was upheld by the United States Supreme States was the to grains) Supreme Court upheld by application v. in 1923. (Board of v. Olsen, 262 U.S., 1.) The court sustained of in Trade court sustained 1923. (Board Olsen, 262 U.S., 1.) the right right of of Congress to legislate with respect to transactions in grain, grain, with to in transactions to the legislate Congress respect for future as involving the sale thereof for future delivery, as commonly conducted thereof sale delivery, commonly involving the commodity exchanges. exchanges. The broad, broad, general foundation for the Act for the on commodity general in is set forth in Section 3. This recites that transactions in commodities This that transactions recites 3. forth Section commodities set in is in large for exchanges are are conducted in future delivery the for future large volume by delivery on exchanges by the public generally and are used extensively by producers, dealers, and manuare used extensively by producers, dealers, public generally ,
1i
This chapter This chapter
trator of the of the trator
is from aa digest, digest, dated June, Mehl, Adminisis adapted Adminis1936, by by J. J, M. Mehl, June, 1936, adapted from Commodity Exchange Authority, V.S. Department of of Agriculture, and ill U.S. Department is Agriculture, and Exchange Authority, Commodity
used here here with with his his consent. consent. used
251 251
252
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
in interstate facturers for hedging commodities commodities shipped shipped in for hedging interstate facturers that transactions have aa direct direct or or indirect indirect effect effect that such such transactions
commerce; commerce; and upon interstate upon interstate commerce and, therefore, are subject to of Congress of are subject to the the authority and, therefore, authority Congress under the interstate interstate commerce clause of the the Constitution. clause of Constitution. the Contract Markets. Any Any exchange exchange or any to of trade, Contract Markets. trade, desiring any board of desiring to conduct futures market in in any any of of the Act, a futures the commodities named in in the the Act, conduct a must first be designated as aa "contract by the the Secretary Agriof Agrifirst be "contract market" by Secretary of designated as culture. trade" is is meant "any of trade" or association, culture. By association, "any exchange By "board of exchange or whether incorporated or unincorporated, of persons shall be engaged or of who shall unincorporated, engaged persons incorporated in the business of buying or or selling selling any commodity or receiving in or the business of buying the same any commodity receiving the for sale sale on consignment." for consignment." Generally speaking, it it is is unlawful unlawful for person to to make or for any or enter enter into into Generally speaking, any person or any contract of sale for future delivery on or subject to the rules of any of for to of sale future delivery the rules any contract subject any in the of the the commodities covered board of of trade trade in the United States States of of any covered board any of by the Act, unless such contract is through a of a is made by or or a the unless such contract member of a Act, through by by board of that has has been designated designated by the Secretary of Agriculture of trade trade that the Secretary of Agriculture by It is as a contract contract market. market. It unlawful also to transmit through the the mails mails is unlawful also to transmit through as a offer to contract or any or in any offer to make such contract in interstate interstate commerce any conor any conor of such firmation such contract contract or to to transmit transmit any report of of firmation of or report any quotation quotation or or the price involved in such contract, contract, unless unless made by or through a member in such the price by through of trade which has has been been designated market. A a contract a board of of trade contract market. of a as a designated as further requirement requirement is that contracts contracts of for future of sale sale for future delivery further is that delivery must be evidenced by by aa record record in in writing, writing, showing showing the thereto, the parties the date, evidenced date, the parties thereto, and their addresses, the the property property covered, covered, and its terms of its price and terms their addresses, of price for a period delivery, record must be be kept kept for period of years, or of three three years, or for for delivery, which record if the of aa longer period, if so required by the Secretary of Agriculture. Such so Secretary Agriculture. longer period, required by record must be be kept kept open open to to inspection by representatives representatives of the United of the record inspection by States Department of Agriculture and of the United States Department of Agriculture of the States Department States Department not of Justice. Contracts for future delivery do not include the sale of for future include the of Contracts sale of comdelivery Justice. for deferred shipment the physical physical markets for or forward modities on the or modities forward shipment delivery. delivery. Conditions for Designation. Designation. In order to be be designated a contract Conditions for order to as a contract designated as market, a of trade the following conditions: a trade meet board must of the market, following conditions: at a 1. be located located at a terminal terminal market where cash cash commodities It must be 1. It commodities of the kind kind specified in the contracts of sale of commodities for future in the contracts of of sale for future of the specified in delivery are sold in sufficient and under such conditions to sold sufficient volumes as to conditions as delivery are fairly reflect reflect the the general general values values thereof thereof and the the differences in value value differences in fairly between various various grades. grades. between official inspection 2. There must be available available official service approved 2. the inspection service approved by by the Secretary of Agriculture. of Agriculture. Secretary of trade trade located the conditions in I1 and 22 located where the A board of conditions described described in as a contract above do not not obtain obtain may may be be designated designated as market, if if such contract market, above such
The Commodity Exchange Act Act Commodity Exchange
253 253
of commodities on its of trade trade provides provides for for the the delivery delivery of its futures futures board of
contracts at a delivery point or points and upon terms and conditions at a or points contracts conditions delivery point upon terms approved by the Secretary of Agriculture. of the Secretary Agriculture. approved by 3. provide for for the the making making and filing-by the board or by the the 3. It It must provide or by filing by the of Agriculture members thereof, thereof, as the Secretary as the direct of reports Secretary of Agriculture may may direct-of reports in in accordance accordance with with rules rules and regulations regulations and in the manner and form in the and at at such times times as as may may be prescribed prescribed by by the the Secretary Agriculture, of Agriculture, Secretary of details and terms terms of of all all transactions transactions entered by the the showing the details into by entered into showing the board or the members thereof, thereof, either either in in cash board or the cash transactions transactions consummated in a a board board of trade, or or transactions transactions for at, on, or in of trade, for future future delivery. at, on, or delivery. It must provide, 4. It provide, in in accordance rules and regulations regulations of 4. accordance with rules of the the of for the a Secretary of Agriculture, for the keeping of a record by the board or record of the board or Agriculture, Secretary by keeping members thereof, thereof, showing the details and terms of all cash and futures of all cash terms futures showing the details in a into by by them, them, consummated at, of transactions transactions entered entered into a board of or in on, or at, on, trade, which record record must be be in in permanent permanent form, the parties to the trade, form, showing showing parties to all the persons for whom made, any assignments all transactions, transactions, including made, any assignments including the persons for or transfers or transfers thereof thereof and the the parties parties thereto, the manner in in which thereto, and the such transactions transactions are are fulfilled, discharged, or terminated. Such record terminated. or record fulfilled, discharged, must be be kept kept for for aa period period of o.f three three years years from date, or for a longer period, date, or for a longer period, if so so directed all times if directed by by the the Secretary of Agriculture, times be be of at all Secretary Agriculture, and must at open to the inspection of any representative of the United States Departto the of of States United the open any representative inspection Department of of Agriculture of the Agriculture or or of the United States of Justice. States Department Department of Justice. 5. It must provide provide for for the the prevention prevention of by the the board board 5. It of dissemination, dissemination, by and members thereof, thereof, of of false false or misleading or knowingly inaccurate inaccurate or knowingly or misleading reports concerning crop crop or or market information information or or conditions conditions that that affect affect reports concerning or tend or tend to to affect affect the price of any commodity commodity in in interstate the price of any interstate commerce. It must provide provide for for the the prevention prevention of manipulation of prices and 6. of prices 6. It of manipulation the cornering of commodities by by dealers the cornering of any dealers and operators. any commodities operators. It must not all privileges 7. It not exclude from membership membership in, privileges on, 7. such in, and all on, such board of of any of trade any duly duly authorized representative of lawfully formed trade any authorized representative any lawfully conducted co-operative association of producers, having and conducted of producers, co-operative association having adequate adequate financial responsibility, which is is engaged in any cash commodity cash financial responsibility, in business, any engaged commodity business, if such has complied complied and agrees to comply with such terms if terms such association association has to with agrees comply conditions as are lawfully lawfully imposed imposed on other board other members of such board and conditions as are of such of of trade trade rules, rules, however, however, may may not be so trade. Board of so made or or construed construed of trade. as forbid the payment of patronage dividends dividends by a co-operative to forbid of patronage the payment as to assoby a co-operative association to its its bona fide fide members. ciation to final orders 8. It 8. It must provide provide for for making making effective effective the the final orders or or decisions decisions 6 entered pursuant to paragraph (b) of Section 6 of the Act. These relate of of Section the Act. entered pursuant to paragraph (b) relate the revocation or suspension of trading trading privileges privileges and the revocation or of to the the denial denial of to suspension of floor merchants or of registrations as futures or floor brokers of persons commission brokers as futures registrations persons violating the the act. of violating act. found guilty guilty of
254 254
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
furnish to the Secretary 9. Each contract contract market market must promptly promptly furnish to the of Secretary of Agriculture copies by-laws, rules, rules, regulations, regulations, and resolutions resolutions made all by-laws, of all copies of Agriculture or issued by it, it, or or the the governing board thereof, or any committee, and of or board of issued by or thereof, committee, any governing all changes and proposed changes therein. therein. all changes proposed changes all times 10. contract market market must allow allow inspection by authorat all times by author10. Each contract inspection at of Agriculture or of of ized representatives representatives of of the the United States States Department of ized Agriculture or Department of of the of Justice of the books, records, and all the States Department all the United States books, records, Justice Department journals of of proceedings proceedings of market, of its govgovminutes and journals contract market, of such contract of its minutes all erning board, of all committees, and of all subsidiaries and affiliates all of subsidiaries and of affiliates board, committees, erning of such contract marketwhich market-which books, books, records, records, minutes, journals of of of such contract minutes, and journals proceedings must must be be kept kept for a period period of three years the date for a of three date thereof thereof years from the proceedings if or for a longer period, if the Secretary of Agriculture shall so direct. the of shall or for a so direct. Agriculture longer period, Secretary of warehouses in 11. contract market must require require the in 11. Each contract the operators operators of which or any commodity commodity is is made deliverable of which any deliverable on futures or out out of which futures contracts to reports, keep keep such records, such warcto make such reports, such contracts warerecords, and permit permit the Secretary of Agriculture may prescribe. house visitation visitation as as the of Agriculture may prescribe. Such Secretary warehouses must be be open to inspection inspection by by any representative records and warehouses records any representative open to of Agriculture the United States of the Department of Agriculture or of of the United States of the States States Department of Department of Justice. Department Justice. 12. directed by by the the Secretary Agriculture, each contract so directed 12. When so of Agriculture, contract Secretary of provide for for aa period, period, after after trading for future delivery any market must provide future for in any trading delivery in delivery has ceased, in to settlement by delivery. Such in month has which make settlement to ceased, delivery by delivery. nor more period may not be less than three nor than ten business days, to ten not be less than three business days, to may period after be fixed fixed by by the the Secretary of Agriculture after notice and )I('arillg, if he of notice if be he Agriculture hearing, Secretary finds this prevent squeezes finds is necessary to this is congestion. The necessary to prevent squeezes and market congestion. Secretary's hereunder cannot cannot affect made. affect contracts contracts already order hereunder Secretary's order already made. 13. market must require require the party making making delivery the party 13. Each contract contract market delivery on any futures contract to furnish the party receiving delivery written notice any futures contract to furnish the party receiving delivery written notice of the the date delivery at one business business day to the of date of at least least one of delivery the date date of of day prior prior to delivery. Secretary of Agriculture, after notice and hearing, may of after The notice Agriculture, Secretary delivery. hearing, may than ten ten business business days-if require longer longer notice notice of of delivery-not delivery not more than require daysif he of delivery finds that that the the giving giving of longer notice notice of nccessary to to prevent prevent finds of longer is necessary delivery is in trading. or diminish unfair unfair practices practices in trading. The Secretary's order hereunder or order hereunder Secretary's cannot affect affect contracts contracts already made. cannot already made. 14. contract market must require require that that contracts 14. Each contract of sale contracts of sale of of comcomfor the future delivery delivery shall provide for of commodities modities for for future shall provide the delivery modities of commodities delivery of grades grades conforming to United States have States standards, if such of such standards standards have standards, if conforming to been officially officially promulgated. promulgated. been contract market must require that receipts 15. require that 15. Each contract of federally licensed receipts of federally licensed in be satisfaction warehouses accepted of futures in satisfaction of futures contracts, without diswarehouses contracts, without disaccepted if such warehouses all reasonable crimination, if warehouses meet all reasonable requirements imposed crimination, requirements imposed as warehouses to location upon other as to location and suitability for warehousing other for upon suitability warehousing 9.
The Commodity Exchange Act Act Commodity Exchange
255 255
and delivery delivery purposes. purposes. It is entirely the warehouseman, It is warehouseman, entirely optional optional with the \1owever, whether whether he he will will operate operate under federal federal or or state license. state license. However,
Co-operative Associations. Co-operative producers associations of of producers Co-operative associations Co-operative Associations. in meeting the requirements set forth in section 5 (e) of the Act are entitled forth section 5 the Act are entitled (e) of meeting the requirements set all privileges contract markets. to membership membership representation representation in, markets. to in, and all on, contract privileges on, This has been held held to to include include the the right right to to clear trades through through the clear trades the estabestabThis has been lished clearing house of an exchange. (The Board of Trade of the of of the City of lished clearing exchange. (The City of Chicago v, v. Henry A. Wallace, et al., and Farmers National Grain et National A. Farmers of Chicago Wallace, al., Henry Corporation, 67 Fed. Fed. [2d], 402.) Control over membership trading membership and trading Corporation, 67 [2d], 402.) privileges, except as to co-operative associations, is left with the exchanges. left the exchanges. privileges, except as to co-operative associations, is the A co-operative association entitled to the benefits of the is described to benefits of the is described association Act entitled co-operative as a "lawfully formed and conducted co-operative association of proassociation of proas a co-operative "lawfully is engaged in any any ducers, having adequate adequate financial responsibility, which is financial responsibility, ducers, having engaged in cash commodity business." business." Such aa recognized association comply association must cash commodity recognized comply and agree agree to comply with with such terms terms and conditions imposed conditions as as are are imposed to comply members, except that no exchange rule may lawfully forbid other members, may forbid except that exchange rule lawfully on other of patronage patronage dividends dividends by such co-operative associations to the payment payment of the to associations co-operative by its bona fide fide members. its The words "co-operative producers" are association of are defined defined to of producers" to mean "co-operative association "any co-operative association, corporate or otherwise, not less than 75 75 or less than association, otherwise, "any co-operative corporate per cent in good faith owned or controlled, directly or indirectly, by proin faith or cent or controlled, directly good indirectly, by proper of agricultural products and otherwise with an Act Act ducers of ducers otherwise complying agricultural products complying with 18, 1922 (V.S.C., 1934 ed., title 7, secs. 291 and of of February of Congress of 1934 title 1922 sees. 291 18, ed., 7, February Congress (U.S.C., 292). as as now or hereafter hereafter amended, amended, including 292) including any any organization organization acting acting of such associations associations and owned or by such for a group for a or controlled controlled by such assoassogroup of ciations." of Congress Congress of February 18, is the the Capper. of February ciations." The Act of 18, 1922, 1922, is Cappercertain standards up certain standards for Volstead Act, Act, setting for co-operative Volstead associations. setting up co-operative associations. for non-members shall One such standard is is that that the the business business done for shall not not for members. Section exceed in value value that that done for 2 of the Commodity Section 2 of the exceed in Commodity Exchange Act provides provides that that business business done by by aa co-operative association Exchange Act co-operative association or with with the not be be for or federal government, or any the federal for shall not thereof, shall government, or any agency agency thereof, considered either either member or non-member business business in com· in determining considered comdetermining Volstead Act. pliance with with the the CapperCapper-Volstead Act. pliance co-operative association association meeting meeting the requirements of the requirements A co-operative of the the Act Act may may not be excluded from membership membership in, trading privileges on, aa con· not in, and trading conon, privileges exclusion is is authorized tract market, market, unless unless such exclusion and hearing authorized after tract after notice notice and hearing before the the Commodity Commodity Exchange Exchange Commission, before the Secretary Commission, comprising comprising the Secretary the of of Agriculture (Chairman), the Secretary of Commerce, and the Attorney of the Attorney Commerce, Agriculture (Chairman) Secretary General. Such co-operative association, however, is automatically barred is General. co-operative association, however, automatically barred from further a contract contract market upon upon failing to meet meet its further trading its obligatrading on a failing to obligathe clearing clearing house of of such market. its trading is tions market. In that tions with the that event, its event, trading is trades to limited to closing open trades and discharging existing contracts. Such limited closing open discharging existing contracts. Such ,
,
256
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
trading must be be in with the the rules governing in accordance the market governing accordance with rules of of the trading must such cases. cases. Co-operative associations of the federated federated type to comof the are authorized authorized to type are Co-operative associations its pensate, on a commodity-unit basis or otherwise, its regional member a basis or otherwise, regional commodity-unit pensate, associations rendered or or to to be rendered in in connection with be rendered connection with for services services rendered associations for organization work, educational activities, or the procurement of patronthe of educational or activities, work, organization procurement patronto patrons part of compensation may be distributed patrons age. distributed to of such such compensation However, no part may be age. However, (whether or non-members) non-members) of federated co-operative of either either such federated co-operative (whether members or regional or or local local member associations, than association, or of its regional otherwise than of its associations, otherwise association, or of as a dividend on capital stock or as a patronage dividend out of the net a the net stock or as as a dividend capital patronage earnings or or surplus federated co-operative of such such federated association. earnings co-operative association. surplus of of Futures Commission Merchants and Floor Floor Brokers. Brokers. Registration Futures Merchants Registration of in the futures commission business of Before any any person person may may engage Before the business of futures engage in merchant in in soliciting orders for the purchase or sale of orders for or sale of any merchant the soliciting any commodity commodity purchase the rules delivery on or or subject subject to to the rules of contract market, he for future future delivery of any contract for market, any must register register as as such with the the Secretary such with of Agriculture. is true true Agriculture. The same is Secretary of of persons acting as floor brokers. Futures commission merchants Futures merchants floor brokers. must of persons as acting also with the the requirements requirements of also comply of the the Act governing the handling governing the handling comply with of margin margin funds funds belonging belonging to to customers. customers. of is defined include "indiA futures futures commission merchant is defined to to mean and include "individuals, associations, partnerships, corporations, and trusts [that trusts viduals, associations, partnerships, corporations, are] [that are] in soliciting in accepting accepting orders the purchase purchase or engaged in for the of or in orders for or sale sale of engaged soliciting or any commodity for future delivery on or subject to the rules of any or the rules for future to of any commodity delivery any subject contract market market and that, that, in in or in connection or in connection with with such solicitation or contract solicitation or acceptance orders, accept accept any any money, money, securities, of orders, or property securities, or (or extend property (or acceptance of credit in in lieu lieu thereof) thereof) to to margin, margin, guarantee, guarantee, or trades or credit or secure consecure any trades or conany or may may result resul t therefrom." therefrom." The term term "floor broker" tracts [[which] which] result result or tracts "floor broker" in or is person who, who, in or surrounding defined to to mean "any is defined "any person surrounding any any 'pit,' 'pit/ 'ring,' 'ring/ 'post,' or other place provided by a contract market for the meeting of a or contract for the other meeting of place provided by 'post/ in for persons similarly engaged, shall engage in executing for others any order shall others order engage executing any persons similarly engaged, for the purchase or sale of of any for future future delivery or subthe purchase or sale subfor any commodity commodity for delivery on or ject to the rules of any contract market, and for such services receives who for of the rules contract services receives to market, any ject or accepts any commission or compensation." or other other compensation/' or accepts any It will be noted noted that that the the registration registration requirements, requirements, both both as It will be as to to comcomfloor brokers, brokers, apply only to persons are mission merchants and floor to mission merchants who are apply only persons or of in the execution or handling of orders for others. Exchange engaged in orders for the execution others. Exchange handling engaged members executing their own orders orders and trading trading exclusively their for their executing their exclusively for own account account are not required required to to register. register. However, However, aa correspondent are not of correspondent of in a commission house, soliciting business in his his own name and being a dicommission house, soliciting business being dimust as as a futures commisrectly responsible to customers, be registered to futures commiscustomers, registered rectly responsible sion sion merchant. in each of commission merchant must display his offices where A futures of his futures commission offices where display in
The Commodity Exchange Act Act Commodity Exchange orders are accepted the the original or accepted are solicited or an orders solicited or original or of his of registration certificate. certificate. his registration
257
official official duplicate duplicate copy copy
The requirements requirements for for registration registration are give are simple. simple. Applicants Applicants must give and continue to give such information and facts as the Secretary of Agriinformation to facts as the continue give Secretary of Agriculture may deem necessary necessary concerning concerning the business in the appliculture may the business in which the applicant is or or will will be be engaged. In the case of futures commission merchants, cant is In case of the futures commission merchants, engaged. information includes includes the the names and addresses such information addresses of of managers of branch managers of offices of all all correspondents correspondents and agents offices and of in soliciting or agents engaged engaged in soliciting or accepting orders for the purchase or sale of any commodity for future for the of orders or sale for future any commodity accepting purchase if a also the a partnership, delivery; the names of of officers partners, if partnership, and officers and partners, delivery; also if the of the Secretary of Agriculture so of officers, of so officers, directors, directors, and stockholders, stockholders, if Secretary Agriculture the case case of in the of corporations. corporations. All All registrations registrations expire on the thirtydirects, in the directs, thirtyexpire of December of first of each each year, year, but are renewable upon upon application, first day are renewable day of application, or suspended revoked or violation of the unless registration has been revoked unless for violation of the registration has suspended for A Act and the the period period of suspension has has not not expired. fee not to exceed Act of suspension fee not to exceed expired. is authorized authorized for for registrations registrations and renewals $10.00 renewals and for for copies of $10.00 is copies of registration certificates. certificates. registration The Secretary of Agriculture Agriculture can can suspend suspend or revoke registrations registrations after or revoke after Secretary of hearing, upon upon proof proof that that the regulations made under notice and hearing, the Act or or regulations notice the Act have have been violated. violated. The decisions the Secretary Agriculture decisions of of the the of Agriculture Secretary of with to violations are subject to review by the United States to are to review with respect violations the United States by subject respect in the circuit in in which the Circuit Court of of Appeals Appeals in the circuit petitioner is is doing the petitioner Circuit doing business. business. Protection of of Customers' Margin Moneys. Moneys. The Act requires Customers Margin Protection all futures futures requires all commission merchants merchants (whether or non-members of of a a contract contract (whether members or all with treat and deal all margin moneys, including securities market) to deal to treat securities margin moneys, including market) property, as as belonging belonging to to the the customer customer from whom received. and property, received. Moneys Moneys margin or trades, involvinvolvreceived from different different customers customers to to margin or guarantee received guarantee trades, the be ing commodities covered by the Act, may commingled in a common covered in a commodities Act, by may commingled ing but all all such moneys, moneys, securities, property must be separately fund, but securities, and property fund, separately accounted for for and may may not not be commingled with the comthe funds accounted funds of of the the comcommingled with may not not be be used used to to margin margin or the trades mission merchant, and may or guarantee mission merchant, the trades guarantee or contracts of of or to extend credit credit to to any or to other than than the or contracts the one one for for any person person other requires physical moneys, the same are are held. held. This requires of moneys, whom the physical segregation segregation of securities, property belonging belonging to to the the commodity customers of of a a comcomsecurities, and property commodity customers commission merchant not mission firm. may not use such moneys in his A firm. use such mission may moneys in his but is is given given rather rather wide discretion invest business, but discretion to to deposit own business, deposit and invest such the purpose purpose of of safekeeping. for the funds for such funds safekeeping. Margin moneys moneys of of customers may may be deposited or more banks banks deposited with one or Margin of a a contract contract market. or with the clearing house organization organization of market. They They may may or with the clearing house in general be invested invested in in obligations obligations of of the the United States, obligations be States, in general obligations subdivision thereof, of any any slate or of of any any political political subdivision thereof, in in obligations state or o obligations fully fully 9
258
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
guaranteed as to principal principal and interest interest by by the the United States, as to in States, and in guaranteed as defined "investment in and under authority defined in securities" as of Section Section 5,136 "investment securities" 5,136 authority of of the may be loaned on the security of negotiabe the of Statutes. They of Revised Statutes. the Revised They may security negotiable warehouse receipts to to the the extent the current value of extent of of the current loan loan value of such warehouse receipts ble receipts. Investments and loans, however, must be made in in accordance accordance loans, however, receipts. Investments with rules regulations and subject subject to the to conditions rules and regulations conditions prescribed prescribed by by the Secretary of Agriculture. Secretary of Agriculture. Commission merchants merchants are are authorized to withdraw and apply authorized to such apply such portions of customers' margin moneys as are necessary in the are in as the of customers' normal margin moneys necessary portions course of business to to margin, margin, guarantee, guarantee, secure, transfer, adjust, of business settle course or settle secure, transfer, adjust, or the contracts trades of customers or resulting market positions with of customers or resulting contracts or or trades the positions with the house any or with the clearing organization of a market, and or of a member with market, clearing organization any the payment may also withdraw and apply margin moneys moneys to to the commis· of commismay also apply margin payment of other sions, brokerage, interest, interest, taxes, taxes, storage, and other charges lawfully sions, brokerage, storage, charges lawfully in connection with the trades of accruing the contracts contracts and trades of customers. customers. The accruing in purpose of of the described margin margin provisions provisions is is to hold the described to preserve preserve and hold purpose all moneys, intact intact for for customers all moneys, securities, property deposited by securities, and property deposited by their being to guarantee guarantee trades trades and to to prevent prevent their used for any other for them to other being any to customers trading purpose. The word "customer" refers refers to in commoditrading in purpose. ties covered by by the the Commodity Commodi ty Exchange Exchange Act. Act. ties covered Limitations on Trading. Section 4a authorizes the Commodity Ex4a Section Limitations authorizes the Commodity ExTrading. change the Secretary Agriculture, the of the of Agriculture, Commission consisting of the SecreSecreSecretary of change Commission-consisting of Commerce, and the Attorney General-after notice and !!, .11 ;11,:, tary after General of the notice Commerce, .uiii/.. Attorney tary to fix limitations both both upon upon the the amount of trading that may of speculative fix limitations that to speculative trading may be done by by any any person person during business day the amount be day and upon any one business during anyone upon the of the net position, position, long long or that may may be be had by by any any or short, of the speculative short, that speculative net at any time. The limitations affect only speculative trading and person limitations at time. affect only speculative trading any person speculative positions. positions. Hedging Hedging transactions specifically exempted exempted transactions are are specifically speculative also transactions known as spreads and the may exempt also transactions as the Commission may exempt spreads or straddles. or straddles. in the given wide discretion discretion in the matter of tradis given The Commission is of fixing fixing tradit ing limits when, after notice and hearing, it appears that such limits are after notice that limits limits are when, hearing, appears ing necessary to prevent excessive speculation constituting an undue and excessive to speculation constituting necessary prevent unnecessary burden upon upon interstate any commodity. in any interstate commerce in unnecessary commodity. The Commission may may fix fix different trading limits for different commodities, limits for different trading different commodities, fix and delivery may fix different trading limits for markets, months different and for markets, may delivery trading limits limits on daily buying and selling operations. The limits may differ differ daily trading trading may selling operations. buying those fixed fixed for for net net positions. positions. from those are subject to the Spreading and straddling transactions are the trading trading limits limits straddling transactions subject to Spreading unless fixed for speculative transactions, unless exempted therefrom by the therefrom fixed for transactions, exempted by the speculative fix separate Commission. The Commission may may fix and different trading different Commission. separate trading limits for for spread straddle transactions. transactions. limits spread and straddle !:,
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Speculative trading limits limits apply to the the trading trading of of futures futures commission apply to Speculative trading merchants and floor floor brokers brokers only to the trading is is for the extent that such trading extent that for only to the account account or benefit of of such futures merchants or or benefit futures commission merchants the or floor floor brokers. In other words, words, the the trading trading limits limits apply to the the parties parties in interest brokers. in interest apply to rather than to to those those acting acting in aa strictly strictly agent in executing rather trades. agent capacity capacity in executing trades. not They apply to all traders, or not members of a contract market. all of a to whether contract market. traders, They apply Hedges Exempted. Exempted. Hedging Hedging transactions transactions are tradare exempted the tradHedges exempted from the in addition to ing limits. limits. Aside Aside from and in to his hedging trades, trades, aa hedger his hedging ing hedger in not may have speculative trades in excess of the trading Trading trades the excess of limits. Trading trading limits. may speculative limitations to futures futures transactions transactions and do not not affect or affect cash cash or limitations apply only to apply only actual commodity. of the spot transactions or holdings holdings of the actual commodity. spot transactions are Hedging transactions are defined to "sales transactions defined to mean "sales of of any any commodity Hedging commodity for future future delivery or subject to the rules of any of to for or the on to rules of board of trade trade to delivery subject any offset in quantity the extent that that such such sales sales are are offset by the ownership puror purthe extent quantity by ownership or chase of of the the same cash cash commodity, commodity, or, purchases of any comchase of comor, conversely, conversely, purchases any modity future delivery delivery on or or subject subject to to the the rules rules of board of for future of any of trade trade modity for any board extent that are offset offset by to the the extent that such purchases purchases are the same cash to sales of of the cash by sales the In computing the amount of any commodity may commodity." In of which any commodity commodity/' computing may Act be hedged the hedged by by any person t.q.e specifically authorizes the inclusion of: authorizes the inclusion of: any person specifically " is raising, "(A) the amount of of such commodity commodity such person person is raising, or good in good or in (A) the faith intends intends or or expects to raise, within the next twelve months, faith to the next twelve raise, months, expects land (in the United States or its on land States or its Territories) which such (in the Territories) which such person owns or leases; or leases; person " "(B) of such such commodity commodity the the sale sale of of which for for future future (B) an amount of a delivery be a reasonable hedge against the products reasonable would be the or hedge against delivery products or of such by-products of such commodity commodity owned or purchased by by such or purchased such by-products person, or the purchase of which for future delivery be for future or the of would be delivery purchase person, a reasonable reasonable hedge hedge against the sale of any product or by-product sale of a the or any product against by-product of commodity by by such such person." person." of such commodity all The latter latter provision provision is believed to to be sufficiently to cover is believed cover all sufficiently broad to all risks to necessary hedging of all reasonably related risks incident to the purchase related incident the of reasonably necessary hedging purchase or sale of commodities and products products and by-products including or sale of thereof, including by-products thereof, various forms forms of forward sales, sales, as as well well as incident to the merchanrisks incident as risks to the of forward various or processing of any commodity. dising of or any commodity. dising processing Unlawful Practices. It is unlawful for It is for any Transactions and Practices. Unlawful Transactions any member of aa contract or any any correspondent, correspondent, agent, or employee of such such contract market or of agent, or employee of in or or in connection with with any any order to make, make, or making of order to or the the making in connection of member in in interstate any contract of sale of any commodity in interstate commerce, or any sale or of contract commerce, of any commodity any any contract of sale of of any any commodity for future future delivery, delivery, made or be made or to to be of sale contract commodity for for or on behalf behalf of any person: person: of any for or
" (A) to cheat or or defraud such person; .. attempt to to cheat or person; or attempt (A) to cheat or defraud or
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Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
.." (B) (B) willfully wil1fully to to make or to be be made to to such person any false or cause cause to false person any report or thereof, or willfully to to enter to be be or cause cause to or statement statement thereof, or willfully enter or report false entered for for such person person any false record thereof; entered thereof; any " deceive such such person "(C) willfully to to deceive or attempt to deceive person by by any deceive or attempt to any (C) willfully means whatsoever whatsoever in in regard regard to to any order or or contract such order contract or or means any such the disposition disposition or or execution execution of such order or contract, or order or of any such or the contract, any in regard to to any any act of agency with respect act of to such in regard agency performed performed with respect to order or or contract contract for for such such person; person; or or order " fill "(D) to bucket such order, or to fill such order by ofFset or to order by offset against the to bucket order, against the (D) order or orders of any other person, or wil1fully and knowingly or order or orders of any other person, willfully knowingly and without without the the prior prior consent person to to become the of such person consent of the buyer in respect to any selling order of such person, or become in to order of or any selling person, buyer respect of such person." the seller in respect respect to to any any buying buying order of person." seller in the described acts It be observed that the the above above described in conacts are are unlawful in conobserved that It will will be in with either cash commodity transactions in interstate <:ommerce nection interstate commerce nection with either cash commodity transactions future delivery. or for future delivery. transactions for or transactions Accidental Omissions, Exceptions. The apparent intent and purpose purpose Accidental Omissions, Exceptions. apparent intent of the words "willfully and knowingly and without the prior the without consent of the words "willfully knowingly prior consent in the of person" used used in the above above quoted paragraph (D) of section of section 4b of such such person" quoted paragraph (D) for transactions transactions wherein wherein aa fu tures commission is to make due allowance futures allowance for commission is to a cusmerchant may may inadvertently find himself himself on the the opposing of a cusinadvertently find opposing end of tomer's order. order. This This may may happen happen when such futures futures commission merchant tomer's his own orders is also trading his own account, having his orders and for his is having is also account, and is trading for those of customers executed through independent floor brokers floor brokers who at at those of customers through independent with other the instant of of executing orders by trade with each other on the exchange orders trade the the instant by executing exchange are acting for the not know that that they they are the same principal. principal. It happens floor It happens floor do not acting for also that orders of customers required to be executed are sometimes executed are sometimes overalso that orders of customers required to overlooked, in in which circumstances circumstances the the commission merchant or or floor floor broker broker looked, may be be done with the prior consent may wish wish to to assume the the trade. trade. This may the prior consent may it be in an may that in inactive market aa firm, of the customer. Again, Again, it may that of the customer. inactive firm, it is having customers' buying orders it unable to execute at a fair orders which is unable customers' to at a fair execute buying having be simprice, may wish to hedging sales of its own make of its sales to which wish would be simhedging price, may the inactive inactive market. market. In such circumstances, ilarly affected by the affected by circumstances, presumably, ilarly presumably, in respect might properly properly become buyer buyer in to the selling a a firm to the a firm might order of of a respect selling order if the customer willing and gave his prior consent. customer, if customer were his the consent. customer, gave willing prior further exception apparent further exception has has special to cotton. An apparent It cotton. It special application application to authorizes futures merchants and floor brokers "who shall floor brokers authorizes futures commission merchants shall have in hand, simultaneously, buying and selling in hand, have orders at at the the market simultaneously, buying selling orders for a like of cotton cotton for for different different principals principals for like quantity quantity of for for future future delivery delivery in the the same month" to to execute exe<:ute such such buying buying and selling the in "at the orders "at selling orders price." But such execution must take place "on the floor of the market price." take such execution the floor of the place
The Commodity The Act Commodity Exchange Exchange Act
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where such such orders orders are exchange are to to be be executed executed at at public across exchange where outcry across public outcry the ring." the ring/' The legislative of this this particular The which was was modimodiamendment, which legislative history history of particular amendment, fied and from its fied and changed indicates that that its its first first intended intended form, indicates changed from its original original form, was to to authorize authorize ex-ring purpose orders execution of of buying and selling purpose was ex-ring execution buying and selling orders received and and held simultaneously. Subsequent modifications, however, received simultaneously. Subsequent modifications, however, it so so as as to to require changed of such such orders in the orders in the same same manner changed it require execution of as other orders are executed. executed. as the provisions The primary of section section 4b appear to be be to to primary purpose purpose of the provisions of appear to prevent of customers customers who have every reason to to prevent advantage advantage being being taken of every reason their orders orders are are being executed by a disinterested party as believe that their executed a disinterested being by party as agent. agent. Wash Sales, Cross Trades, Section etc. 4c makes Section 4c makes unlawful Sales, Cross unlawful Trades, Privileges, Privileges, etc. is of of the any the character character of, or is is commonly known is, or is of, or any transaction which is, commonly as a "wash sale," trade as to the trade "cross trade," or "accommodation "accommodation trade" trade" sale," "cross trade," or or which a is fictitious or is a fictitious sale; also any transaction which is, is of or is of the sale; also the is, or any transaction is commonly known to character of, the trade as a "privilege," "indemto the as trade a of, or is "indemcommonly "privilege," nity," "advance guaranty," "bid," "offer," "offer," "put," or "decline "call," "advance "decline nity," "bid," "put," "call," guaranty," or All that are used used to guaranty." transactions. that are to cause cause any be reported, to be guaranty." All transactions any price price to reported, is not or recorded which is not a true price are registered, or true and bona fide fide price are registered, unlawful. unlawful. Permissive Permissive Ex-Ring Ex-Ring or or Ex-Pit Ex-Pit Transactions. Transactions. It It is is specifically provided specifically provided in in Section Section 4c 4c that that nothing nothing contained contained therein therein shall be construed construed to to prevent prevent shall be the the exchange exchange of of futures futures in in connection connection with with cash cash commodity commodity transactions transactions or or of of futures futures for for cash cash commodities or or of of transfer transfer trades trades or or office office trades, trades, if if made in in accordance accordance with board-of-trade board-of-trade rules rules applying applying to to such such transtransactions if such rules rules have not not been disapproved disapproved by by the the Secretary Secretary of of actions and if The of the apparent purpose of the latter provision is to authorize, Agriculture. latter Agriculture. apparent purpose provision is to authorize, under proper proper conditions, conditions, trades trades and transfers transfers of of interestsas interests-as between between different commission houseswhich houses-which involve involve futures futures concondifferent customers customers and commission for but reasons must tracts, for practical reasons be off the exchange floor or be made off tracts, the exchange floor or practical outside outside of of regular regular trading trading hours hours by by private private arrangement. arrangement. With With reference reference to to the the prohibitions prohibitions of of sections sections 4b 4b and and 4c, 4c, it it is is specifically specifically that these shall not that these shall not be construed to impair any state laws laws provided be construed to impair any state provided which which might might be be applicable. applicable. Bucket Bucket Shops, Shops, Misrepresentation. Misrepresentation. Section Section 4h 4h makes makes it it unlawful unlawful to to conduct conduct any any office office or or place place of of business business anywhere anywhere in in the the United United States States for for the the purpose purpose of of soliciting soliciting or or accepting accepting any any orders orders for for the the purchase purchase or or sale sale of of any any commodity commodity for for future future delivery delivery or or for for conducting conducting any any dealings dealings in in any any commodities commodities for for future future delivery, delivery, if if such such orders orders or or dealings dealings are are executed or consummated consummated otherwise otherwise than than by by or or through through aa member member of of aa executed or contract It isis also also unlawful unlawful for for any any person person falsely falsely to to represent represent contract market. market. It
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Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
himself to to be be aa himself
of a contract contract market, to be the the representative or to member of market, or representative or agent agent of such member, member, or or to to be be aa registered futures commission merfutures of such or registered chant, or to represent falsely that orders solicited or handled by such or that solicited orders to or chant, by such represent falsely person are by or or through through any of a contract contract or by are executed on or any member of person market. This This provision, provision, together together with with the requirements of 4f (2) the requirements of section section 4f market. (2) that registered registered futures registration futures commission merchants must display that display registration certificates, affords the the public public protection protection against firms against bucket shops shops and firms having exchange connections. connections. no exchange having Provisions of of Law Affecting Affecting Non-Members of Exchanges. Provisions of Commodity Commodity Exchanges. of trading limits by the the Commission will will apply, fixed by limits which are are fixed The trading apply, of of contract contract markets. course, to to non-members as well as markets. Genas well as members of course, erally the record-keeping record-keeping requirements to members and requirements apply apply to erally speaking, speaking, the as futures to persons persons registered registered as futures commission merchants. merchants. However, section to However, section 4i it obligatory obligatory upon upon all all persons, persons, whether members or non-mem4i makes it bers, to report and to to keep keep books books and records records that that are inspection, to inspection, are open to report bers, open to in commodity futures during persons deal deal or or trade trade in whenever such persons during one commodity futures an fixed from day in equal to or in excess of an amount to be fixed in amount to in of to be or excess equal day time to time by by the the Secretary of Agriculture and whenever such persons to time of time Secretary Agriculture persons in any or future or attain attain aa long long or or short short position position in have or future equal have commodity or any commodity equal to in excess excess of of an amount to to be be fixed the Secrefixed from time to to time by the to or Secreor in by tary Agricul ture. of Agriculture. tary of all persons. operation of bucket shops is prohibited to all persons. False of bucket as to The operation False shops is prohibited as representation by any person as being a registered futures commission a as futures being registered representation by any person is unlawful, unlawful, as is also any trading in futures the commodialso any futures of of the merchant is as is trading in ties mentioned on any trade which is not aa contract of trade is not ties contract market. market. any board of The agents agents and employees of futures commission merchants, and of of futures of merchants, employees for cheating, their correspondents, may may be prosecuted prosecuted for fraud, bucketing, their correspondents, cheating, fraud, bucketing, and so forth, under section section 4b. 4b. The prohibitions relative of section so forth, section 4c 4c relative prohibitions of and like in the to in privileges the like apply to as well to non-members as well as to dealings as apply dealings privileges to to members. the Act of Penalties and Procedure. Procedure. Under the of 1922 Penalties the Commodity 1922 the Commodity of Exchange Commission-consisting of the Secretary of Agriculture, the of the Exchange Commissionconsisting Secretary Agriculture, the the Secretary of Commerce, and the Attorney General-had original jurisGeneral had of Commerce, Attorney Secretary original jurisdiction in all except cases. By By the June 15, in all the amendments of of June diction 15, 1936, 1936, except criminal cases. the is given original jurisdiction in all noncriminal cases in all noncriminal the Commission is cases given original jurisdiction and involving contract markets, the Secretary of Agriculture is given the of Secretary Agriculture is given involving contract markets, original jurisdiction in all non-criminal cases. all other non-criminal in cases. original jurisdiction Proceedings before Exchange Commission. Violations the Commodity Violations before the Commodity Exchange Proceedings of cease and by contract contract markets, markets, except except of cease desist to desist orders, are subject orders, are subject to by the original jurisdiction by the Commodity Exchange Commission. Such Commodity Exchange original jurisdiction by Commission is is authorized to to suspend, a period period not not to to exceed six for a six suspend, for months, or to revoke the the designation designation of conof any of trade as a a conto revoke trade as months, or any board of certificates, affords
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tract market, or is tract upon aa showing that such trade has has failed failed or is such board of of trade market, upon showing that failing to to comply with the the requirements requirements for for contract contract market designadesignafailing comply with tion or is tion or is not not enforcing enforcing its its rules rules of of government made a condition for a condition for government such designation. designation. An appeal appeal from the the order of the the Commission lies the Circuit Circuit Court order of to the lies to of of Appeals Appeals in in the the circuit such board of trade has has its in which such circuit in of trade its principal principal place of business. Likewise, in the event that the Secretary of business. in event that the the of AgriculLikewise, place Secretary of Agriculture ture should refuse refuse to to designate any board board of market, a contract of trade trade as as a contract market, designate any appeal thercfrom lies first to the and next to the Circuit lies therefrom first Commission Circuit to the next to the appeal Court of of Appeals. Appeals. Court of the the Act provides provides that that failure board of Section Section 5b of refusal of of failure or or refusal of any any board trade trade to to comply comply with with any any of of the the provisions provisions of of the rules of the or any rules the Act or of the any and regulations regulations of of the the Secretary of Agriculture Agriculture thereunder thereunder shall be shall be Secretary of cause for for suspension cause for not not more than than six the or for for revoking six months or suspension for revoking the contract market market designation of such board of trade. contract of such board of trade. designation alternative means for proceeding against Section provides an alternative Section 6b provides for proceeding conagainst contract markets. Instead of suspending or revoking the market tract or revoking markets. Instead of suspending contract market the contract designation of exchange, the Commission may make and enter cease of an the enter cease designation exchange, may and desist a desist orders a of trade or against its directors, officers, board orders against of or its trade directors, officers, against against employees, requiring requiring them to to cease violaagents, or or employees, desist from the cease and desist the violaagents, and tions complained of. of. Thereupon after the lapse of the period allowed of tions complained after the the allowed Thereupon lapse period if such orders the persons persons against for appeal, appeal, if are not complied for orders are with, the complied with, against whom they they are are issued are guilty of aa misdemeanor and upon upon conviction issued are conviction guilty of be fined not less than $500 nor more than than $10,000 may fined not less than or imprisoned $500 nor $10,000 or may be imprisoned not more than one year, or both. day during which there is for or both. Each for not there is year, day during a separate failure refusal to to obey obey such offense. orders is cease and desist desist orders is a or refusal such cease failure or offense. separate Proceedings before Secretary of Agriculture. The Secretary of of Agriculture. before the Secretary Proceedings Secretary of all contract trading privileges privileges on all Agriculture is authorized to to deny deny trading is authorized contract marAgriculture or has violated kets any person person who is is violating violating or violated any of the provisions as to to any of the kets as any provisions of Act or any of of the the rules rules and regulations regulations made pursuant to its or any the Act its of the pursuant to requirements or who has has manipulated manipulated or to manipulate manipulate or is is attempting attempting to requirements or in the market price price of commodity in interstate commerce or for of any interstate or for future the future any commodity to the of delivery on or subject to the rules of any board of trade. or of trade. rules any subject delivery In the the case case of of persons persons registered registered as as futures futures commission merchants In merchants or or floor brokers, the the Secretary may suspend for a period not to exceed six for not to floor brokers, exceed six Secretary may suspend period if found guilty of months or or revoke revoke the the registrations registrations of persons, if of such persons, guilty of of the violating having violated violated the the provisions provisions of the rules of having the Act or or of or the rules and violating or regulations thereunder. to such futures commission merchants futures thereunder. As to made merchants regulations of Agriculture and floor brokers, the the Secretary Agriculture may floor brokers, or revoke revoke may suspend Secretary of suspend or their registrations with with or or without without denying privileges on their registrations denying them trading trading privileges contract markets. markets. contract of Agriculture the Secretary Agriculture must be pursuant to notice Proceedings by by the notice Secretary of pursuant to Proceedings
Commodity Futures Trading Commodity Exchanges Exchanges and Futures Trading
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and hearing, hearing, and from his his orders there is of appeal is the to the the orders there the right and right of appeal to United States Circuit Court Court of of Appeals Appeals in the circuit in the in which the circuit in the States Circuit United petitioner petitioner
is business. is doing doing business. of the Criminal Violations of consections conthe following Criminal ODenses. Offenses. Violations following named sections non-contract markets), stitute misdemeanors: section section 44 (trading (trading on non-contract secstitute misdemeanors: markets) section 4a (exceeding trading limit), section section 4b (cheating, tion 4a limit) (cheating, speculative trading (exceeding speculative 4c (wash sales, cross trades, privileges, deceiving, bucketing, etc.), section 4c section cross trades, deceiving, bucketing, etc.) privileges, (wash sales, futures commission merchant merchant without without being being etc.), section 4d (engaging (engaging as as futures etc.) section to or registered as such or failing to comply with requirements concerning as failing comply registered requirements concerning 4e (engaging customers' margin moneys) moneys), section without section 4e floor broker broker without customers' margin as floor (engaging as as such) such), section a bucket bucket shop or being registered registered as section 4h (conducting being (conducting a shop or to be member a self market representing self falsely to a of a contract or aa of contract or falsely representing to 4i (failing and section registered futures futures commission merchant, merchant, etc.), section 4i registered (failing to etc.) of Secreport keep records of trades of amounts designated by Secand records trades when of designated by report keep a person retary of Agriculture). Upon Upon conviction, person may of Agriculture) fined not more conviction, a retary may be fined for than $10,000, with the the costs costs of prosecution, and imprisoned than of prosecution, $10,000, together together with imprisoned for not more than year, or or both. both. not than one year, corners and Market manipulation manipulation and attempted manipulation and corners attempted manipulation attempted corners of any commodity are likewise misdemeanors and are corners of likewise any commodity attempted subject violators to to fine fine and imprisonment. imprisonment. Fine Fine and imprisonment imprisonment may may subject violators fail to upon any person shall fail to evidence any contract be imposed be shall contract evidence who any imposed upon any person in section 4 of the Act Act by by aa record record in mentioned in of the in writing therein section 4 as therein writing as required; also upon any any person person who shall knowingly or also upon shall knowingly deliver or carelessly carelessly deliver required; or be delivered, for transmission through the mails or interstate for to be transmission the or cause mails or interstate cause to delivered, through commerce, false or misleading or or knowingly knowingly inaccurate inaccurate reports reports concernor misleading concerncommerce, false ing crop or market information or conditions that affect or tend to affect market information or that affect tend to affect or conditions or ing crop in the price of any commodity in interstate commerce. interstate the price of any commodity General Powers of of Secretary Secretary of of Agriculture. Agriculture. The Secretary Agriculof AgriculSecretary of ture is authorized authorized to to make and promulgate promulgate such rules and regulations ture is such rules regulations as in in his his judgment judgment are reasonably necessary to effectuate the are reasonably as effectuate any of the necessary to any of or to accomplish any of the purposes of the Act. is authorprovisions or to the of the Act. He is authorof accomplish any purposes provisions ized to fix renewals fix and establish fees and charges for registrations establish fees ized to charges for registrations and renewals thereof and for for copies copies of registration certificates, of registration not to to exceed exceed $10.00 thereof for certificates, not $10.00 for or copy. is to communicate to each registration, renewal, renewal, or He is authorized authorized to each registration, communicate to copy. of any to publish, publish, the proper proper committee committee or or officer officer of contract market and to the any contract not withstanding withstanding the the provisions provisions of of section the Act, the full facts 8 of section 8 of the not full the facts Act, concerning any any transactions transactions or or market operations, the names concerning operations, including including the of parties parties thereto, thereto, which in in his his judgment judgment disrupt or tend to disrupt or tend of to disrupt any disrupt any harmful or market or or are or against against the best interests producers are otherwise the best otherwise market interests of of producers Section 8 directs and consumers. consumers. Section directs the the publication publication of results of investiof the the results of investiand of gation of statistical information, and so forth, but prohibits statistical so the information, forth, but prohibits the gation ,
,
,
,
,
,
,
.
The Commodity Exchange Act Act Commodity Exchange
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publication of of data data and information which would separately disclose the the publication separately disclose business transactions transactions of of any any person person and the trade secrets names of the trade business secrets and names of as to to persons persons found guilty violating the the Act Act pursuant pursuant customers, except of violating customers, guilty of except as to in accordance with with the the procedure prescribed in in to formal formal charges charges and in procedure prescribed section 6. section 6.
CHAPTER X XIV ~ CHAPTER IV) J The Law of Commodity Commodity Exchanges-Relations Exchanges Relations State - Relations with the State Relations with with Members
Legal of the Organization. Legal Nature of Organization. Modern commodity commodity exchanges exchanges are usually organized under Membership Corporation Laws. Older Older usually organized Membership Corporation Laws. as exchanges, such as the New York Cotton Exchange and the Chicago the Chicago exchanges, Exchange Board of of Trade,l as corporations Trade, 1 were organized of the act of the organized as corporations by by special special act differ in this this respect legislature. from stock exchanges, which are stock which are legislature. They They differ respect exchanges, associations. usually voluntary associations. The legal distinction between a corporadistinction between a usually voluntary legal corporation association is tion and a voluntary that the is that former is is recognized by law the former voluntary association recognized by law as an entity as the individual individual members; the memmembers; the entity separate separate and apart apart from the bers bers consequently consequently are are not not individually responsible for the debts or for the debts or acts acts individually responsible the of the the corporation. In the second place, the corporation deriving its the corporation. place, corporation deriving its from the powers the Membership Corporation Law is subject directly to is powers Membership Corporation subject directly to regulation and control control by by the the state, state, whereas whereas the the unincorporated unincorporated associaassociaregulation tion, although although amenable to to the the general general body body of of law, law, does does not not derive derive its its tion, from direct the state and powers direct the state is, therefore, not subject to direct control. not to direct is, control. therefore, powers subject For the the purposes purposes of of the the exchange, exchange, there there is is little little inherent inherent advantage advantage in in either either form of of organization. organization. The law law governing governing exchanges, exchanges, whether whether incorporated or or voluntary, voluntary, is is the the same. same. It It has, has, in in fact, fact, been been held held that that an an incorporated even exchange, though incorporated, is essentially a voluntary associais a associaexchange, though incorporated, essentially voluntary tion. tion. "The "The board of of trade, trade, so so far far as as we can see, see, is is only only aa voluntary voluntary organization, which which its its charter charter fully fully empowers empowers it it to to govern govern in in such such mode organization, as it may may deem most most advisable advisable and proper." proper."22 as it Although formed under under membership membership corporation corporation laws, laws, commodity commodity Although in are exchanges are in large large measure measure organizations organizations sui sui generis. generis. They They differ differ exchanges from from voluntary voluntary associations, associations, such such as as clubs, clubs, fraternal fraternal bodies, bodies, and and religious religious societies, in in that that they they are are formed formed to to serve serve aa commercial commercial purpose. purpose. They They societies, The The Chicago Chicago Board Board of of Trade Trade was was at at first first unincorporated, unincorporated, but but became became aa corporation corporation is is "The "The Board Board of of Trade Trade of of the the City City of of Chicago." Chicago." 22 People v. Chicago Board Board of of Trade, Trade, 80 80 111. Ill. 134, 134, 137 137 (1875); (1875); accord, accord, Turner Turner v. v. People v. Chicago Chicago Board Board of of Trade, Trade, 244 244 Fed. Fed. 108 108 (C.C.A. (C.C.A. 7th 7th 1917) 1917), cert, cert. denied, denied, 245 245 U,S. V.S. 667 667 Chicago (1917); Thomson ThomsOD v. v. Thomson, Thomson, 293 293 111. Ill. 584, 584, 127 127 N.E. N.E. 882 882 (1920) (1920). (1917) 11
in in 1859. 1859. Its Its corporate corporate title title
,
;
.
266 266
The Law The
of Commodity Commodity Exchanges Exchanges
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differ from from stock stock corporations corporations in in that that they they possess possess an extensive extensive control control differ far-reaching disciplinary disciplinary control control over the the admission admission of of members and aa far-reaching over over the the members after after their their admission. admission. In In this this they they resemble resemble voluntary voluntary over associations more than than corporations. corporations. associations Although the the exchanges exchanges are are formed for for aa commercial commercial purpose, purpose, they they Although are not not organized organized for for profit. profit. The exchanges exchanges derive derive most of of their their revenue revenue are from the the dues dues paid paid by by members, members, and these these are are usually usually fixed fixed at at amounts from sufficient sufficient
merely to to cover cover operating operating expenses. expenses. merely
The exchange exchange itself itself engages engages in business in no trading; trading; it it affords affords facilities facilities for for its members to to engage engage in business in establishes rules rules ,and regulations for for the the conduct conduct of of trading trading and the the and regulations and establishes settlement of of disputes disputes between members and in in other other ways ways contributes contributes settlement to the the maintenance maintenance of of an efficient efficient market place. place. Thus, Thus, it it is is an organizaorganizato tion which which fills fills an an important important place place in in the the business business world, world, but it it neither neither tion from the from profits nor attempts to profit its activities, thereby differing the its to nor activities, thereby differing profit attempts profits 3 of stock stock corporations corporations and copartnerships.s vast majority majority of vast copartnerships. to the the relationship relationship between the the members, members, the the exchanges, When we come to exchanges, third persons, persons, the the resemblance resemblance to to aa corporation corporation becomes more proproand third partner possesses possesses authority authority to to bind his his firm, firm, but but only the nounced. Every Every partner nounced. only the of a a corporation this officers authorized representatives repr~sentatives of have this power. or authorized officers or power. corporation of an exchange, The same rule rule applies to commodity exchanges; aa member of exchange, commodity exchanges; applies to unless elected elected to to aa representative representative office, has no authority to bind unless office, has authority whatever to if they exceed their their it; nor nor can officers make the the exchange exchange responsible, if can officers it; they responsible, of stockholders actual or implied powers. of exchanges and stockholders of members of The or actual exchanges implied powers. 4 4 corporations the same footing. stand upon thus stand footing. upon the corporations thus The death has no effect the legal effect upon life of of an exchange, a member has of a death of upon the legal life exchange, nor has his bankruptcy or retirement. The exchange, as aa corporation, as retirement. or nor has his bankruptcy exchange, corporation, in the its memof changes of its continues the identity its existence existence independent continues its changes in identity of independent of the real bers. title to all and personal property owned by to all real title bers. The legal by the personal property legal dissolution the exchange is vested in that body. But upon dissolution the resemblance in that body. upon exchange is vested closer than its is closer association its resemblance of to a voluntary association is a to an exchange of an voluntary exchange its remaining assets, When a corporation dissolves, its to a a corporation. dissolves, to a remaining assets, corporation corporation. are sold distributed after paying all debts, are sold and the proceeds are distributed among are all after paying debts, proceeds among to the shares the to the number of shares they hold. When an of hold. the stockholders stockholders according they according exchange is however, the net proceeds must be apportioned the is dissolved, however, dissolved, proceeds apportioned exchange for his his seat equally among its $30,000 for its members. The member who paid seat $30,000 paid among equally 5 5 But, the member who paid $3,000. though will receive no more than the But, will receive $3,000. paid though its
of Trade, 111 S.W. 894 (Mo. 8sMoffatt Moffatt v. reversed v. Kansas Kansas City Trade, III (Mo. App. 1908) reversed App. 1908), City Board of v. St. 250 Mo. 168, 157 S.W. 579 (1913); Albers v. St. Louis Merchants' on other grounds, 579 157 Merchants' 168, on other grounds, 250 (1913) v. Hatch, 109 N.Y. Belton v. Exchange, 473 (1896); N.Y. 593, 17 N.E. N.E. 39 S.W. 473 Hatch, 109 Mo. 140, 138 Mo. 593, 17 140, 39 (1896) Exchange, 138 Brewst. 225 (1888); Leech v. Harris, 2 Brewst. 571 (Pa. 1870). 571 2 v. Leech Harris, 225 (1888) (Pa. 1870) titles in CYC., those titles see those 4* On Partnership and Corporations, CYC., C.]., C.J., and C.J.S. C.J.S. Corporations, see Partnership and 17 N.E. 225 116 Belton N.Y. 593, 225 (1888). 109 N.Y. v. Hatch, 593, 17 Belton v. Hatch, 109 (1888) ,
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assets are thus distributed equally equally upon upon dissolution, witha member who withdissolution, a draws is not entitled to any share of property. of the entitled to is not the corporation's draws any share corporation's property. The exchange, exchange, being being aa membership membership corporation, does not issue issue stock, does stock, corporation, in but its shares are certificates of membership. This difference in nomendifference but its shares are certificates of membership. clature represents represents aa fundamental fundamental difference between the stock corporathe stock difference between clature corporathe class class of corporations to to which commodity exchanges belong. tion and the of corporations tion commodity exchanges belong. for membership corporation corporation "means aa corporation A membership not organized organized for corporation not 6 pecuniary profit. profit. . . .,""6 pecuniary a stockstockControl Membership. The only requisite for Control Over Membership. for becoming becoming a only requisite transholder of of aa stock stock corporation is to to purchase purchase shares have them transshares and have holder corporation is ferred books. As membership membership corporations, however, ferred on the the books. exchanges, however, corporations, exchanges, as a possess as complete a control over admission of members as do copartover as control of admission copartpossess complete nerships. The purchase a certificate in an exchange purchase of of a of membership certificate of exchange membership in nerships. confers no privilege privilege whatever whatever upon upon the be admitted confers the purchaser. purchaser. He can be to enjoyment of of privileges privileges only only by by permission permission of itself.77 to the the enjoyment of the the exchange exchange itself. Furthermore, unlike unlike the the stockholder business corporastockholder of the ordinary of the Furthermore, corporaordinary business of the member of the extent tion, exchange may may be be disciplined to the extent of of an exchange to tion, the disciplined fine, suspension, or expulsion. or fine, suspension, expulsion. Corporate Powers. As aa corporation, corporation, the the exchange may hold hold and exchange may Corporate Powers. convey title to real and personal property in its name. The exchange title to real in its own convey exchange personal property 8 may sue and be sued as an entity.s sue be sued as an may entity. The foregoing points of of differentiation differentiation between the exthe commodity foregoing points commodity exchange and the corporation and partnership indicate its unique legal the indicate its change corporation partnership unique legal character. It resembles aa partnership, partnership, but it not aa partnership. partnership. It is character. It resembles it is It is is not an incorporated body, but but in in many many respects it bears bears no resemblance resemblance to to incorporated body, respects it stock corporations. It perhaps closest closest in incidents to voluntary in its It is stock corporations. is perhaps incidents to its legal legal voluntary associations; yet, yet, as has been indicated, there are respects in as has are numerous respects in associations; indicated, there it differs differs from unincorporated unincorporated societies, which it or associations. associations. societies, clubs, clubs, or The Dissolution Dissolution of of Exchanges. Exchanges. Exchanges Exchanges may be terminated terminated either either may be by act act of of the the members or by act of law. law. The control the courts act of or by is sufficontrol of of the courts is suffiby cient to to enable to decree decree the the winding winding up up of but this of an exchange, enable them to but this cient exchange, is naturally naturally aa power power not not to to be be exercised exercised on slight cause. Another means of of cause. is slight in the involuntary dissolution may may be found in the right right of to forfeit the state of the state to forfeit involuntary dissolution the charter for sufficient cause. sufficient cause. charter for the The right right of of exchanges exchanges to to dissolve voluntarily is is usually provided for for dissolve voluntarily usually provided 9 9 in the the laws they are are formed. formed. Actual Actual dissolutions have been been in laws under which they dissolutions have arisen for the courts for the so rare that that little little occasion occasion has has arisen courts to pass upon questions to pass so rare upon questions which might might arise in the the process process of of winding winding up. is no doubt that that arise in up. There is assets are thus distributed
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N.Y. MEMBERSHIP CORP. LAW, Sec. 2. Sec. 2. N.Y. McCarthy Bros. Co. v. v. Chamber of Commerce, Minn. 497. Bros. Co. 105 Minn. 117 N.W. 921f 923 (1908). Commerce, 105 497, 117 McCarthy (1908) . Board 111. App. of 131 McHenry v. Chicago of Trade. I~l Ill. 275 (1907). v. . 275 Trade, App. (1907) Chicago McHenry
e 11
N.Y. MEMBERSHIP CORP. CoRP. N.Y.
e 6
1*
LAw, Sec. 55. Sec. 55. LAW,
The Law of of Commodity Exchanges Commodity Exchanges
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the courts possess the the power power to to dissolve the dissolve an exchange courts possess a majority exchange when a majority of its members consent consent and petition petition the the court court to a dissolution of its to decree decree a dissolution exchange is is no longer longer functioning. has also because the the exchange It has also been held because functioning. It that, discord prevents prevents efficient efficient conduct conduct of the exchange, of the the affairs affairs of of the that, when discord exchange, the may order aa dissolution dissolution upon upon petition petition "because the court court may "because the the object of object of its existence cannot be attained . . . . such circumstances cannot be attained. its corporate existence Under such circumstances corporate it better for for all all that that the the minority minority may pracit is is better may reincorporate reincorporate upon upon some pracif they they so the majority may no longer be forced ticable basis, basis, if so desire, ticable forced desire, and the majority may longer be to keep keep up up aa feeble useless organization organization in they take take no interest in which they feeble and useless to interest 10 and from which which they they derive benefit."lo derive no benefit." The state, the creator creator of of corporations, corporations, possesses possesses the the general power as the state, as general power to void void franchises they are are abused to to the the detriment the public. public. l11l to franchises when they detriment of of the An illustration illustration of trade and is an attempt unlawfully to of such abuse is restrict trade attempt unlawfully to restrict it was found that Illinois case dictatcommerce. In In an Illinois case it that the the exchange exchange was dictatthe number kind ing to its the and of traveling solicitors to be to members of to its solicitors traveling ing method of their remuneration. employed and the of their remuneration. These acts were held acts the were held employed court said: said: "Public to be be in in restraint restraint of of trade, trade, and the the court policy requires "Public policy to requires of powers, that corporations, in the exercise powers, must be be confined in the exercise of confined strictly that corporations, strictly State provides for the the creation within their charter charter limits. limits: . . . The State provides for creation of of within their corporations. The corporation corporation is its creature, is its creature, and must always always conform corporations. to its its policy. policy. This This duty duty on the the part part of to do to of corporations no acts acts hostile hostile to corporations to the policy of the State grows out of the fact that the legislature is prepreof the that of the fact State the to the policy grows legislature is in view the the public public interest interest when a charter sumed to have had in to have charter was 12 granted . . . . "12 ." granted. When an exchange the marshaling marshaling and distribution its distribution of of its dissolves, the exchange dissolves, for dissolving assets are are closely closely analogous analogous to to the the procedure procedure for a partnership. assets dissolving a partnership. creditors have have first first claim claim upon upon the the assets, the surplus remainThe creditors assets, and the surplus remaining after payment of the creditors is to be divided equally among is to divided of the creditors the equally among the ing after payment 13 13 standing. in good members in standing. good Commodity Exchanges and the the State. State. Statute Statute and case case law affecting Commodity Exchanges affecting a of covers commodity exchanges covers a period period of eighty years. Through legislaeighty years. Through legislacommodity exchanges of law defining tion and judicial judicial interpretation interpretation aa body body of the regulatory tion defining the regulatory phases of powers of of the the state, has been built. built. The important of regulatory state, has important phases regulatory powers relate the defined relate to the position of the exchange in power which have defined to of have been the in which position exchange power in a interstate commerce, the the exchange as a factor in restraint of trade, and as factor restraint of interstate commerce, trade, exchange the limits within which these these organized organized markets markets chartered by the the state chartered by limits within state the of the exercise state's are control by by exercise of the state's police this section, to control are subject police power. power. In this section, subject to .
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10 Hitch Hitch v. v. Hawley, Hawley, 132 N.Y. 212, 212, 221; 221; 30 30 N.E. N.E. 401, 132 N.Y. 401, 404 (1892). (1892). Sec. 1651. 11 14-A C.]., Corporations, Corporations, Sec. 3687, and 19 id., Sec. Sec. 3687, 19 C.J.S., 1651. 14-A C.J., C.J.S., id., 12
People People
111. 556, 170 Ill. Stock Exchange, v. Chicago Chicago Live Exchange, 170 N.E. 1062,1066 Live Stock 556, 571; 571; 48 N.E. 1062, 1066 (1897). (1897) v. Hawley, 132 v. N.Y. Hawley, 132 N.Y.
v.
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is People v. 18 Chicago Live Exchange, supra, Stock Exchange, Live Stock 12; Hitch supra, note 12; People v. Chicago 212, 30 N.E. N.E. 401 401 (1892). 212, 30 (1892) .
Commodity Exchanges and Futures Trading and Futures Trading Commodity Exchanges
270
the regulation by by public public authority authority will will be considered, of regulation the subject considered, leaving leaving subject of members for treatment elsewhere brought against exchanges by elsewhere actions actions brought for treatment against exchanges by and by by private individuals-non-members of the the exchanges. non-members of exchanges. private individuals a recognition Running throughout the current of judicial opinion is recognition current is a of the throughout opinion judicial Running "is An exchange "is regarded of the the usefulness usefulness of of the the commodity exchange. of exchange commodity exchange. regarded by the courts, not only as a valuable and efficient aid to commerce, a valuable efficient aid to commerce, but by the courts, not only as as aa potent potent agency elevating the the standard business ethics ethics and honor. standard of of business honor. for elevating as agency for recogSuch beneficent beneficent aims approbation, and courts aims deserve courts of of equity, deserve approbation, equity, recognizing their their worth, worth, have have abstained to abstained from subjecting such associations associations to subjecting such nizing visitation correction when their their declared and practices are kept are declared objects visitation or or correction objects practices kept 14 in harmony harmony with with the the spirit the generallaw."14 of the in spirit of general law/' closing words words of of the the above quotation quotation are Legislation are significant. The closing significant. Legislation and adverse have intervened intervened to to control activities which decisions have control exchange activities which adverse decisions exchange "in harmony the general not been been "in harmony with with the the spirit but have of the have not law," but general law," spirit of adverse have not not been frequent. decisions have adverse decisions frequent. Efforts to to brand the the exchanges exchanges as in restraint trade as combinations restraint of combinations in of trade Efforts in violation of the or violation of the Sherman Anti-Trust have been been Anti-Trust Law have as monopolies or as monopolies in in a a case case brought former question question was decided in brought by the unsuccessful. The former unsuccessful. by the Coffee and Sugar Exchange; Attorney the New York Coffee Attorney General against against the Sugar Exchange; 15 the latter, in action against the Cotton ExchangeY; York Cotton an the New in action the latter, against Exchange. for an injunction The Attorney Attorney General's General's petition petition for the New injunction against against the that in Exchange alleged that operations in futures during York Coffee Coffee and Sugar York futures operations Sugar Exchange alleged during a certain month-the contracts calling calling for but cleared the contracts for actual actual delivery, certain month but a cleared delivery, by offset offset and substitution in the the clearing clearing housewere, house-were, in in effect, substitution in a conconeffect, a by of and demand. The spiracy to interfere with the free working of supply the free with interfere to working supply spiracy result of the transactions transactions was alleged the price price of of sugar to have increased increased the of the result alleged to sugar since sugar was of in February, February, 1923, an article of interstate commerce, article interstate in 1923, and since commerce, sugar in violation the restraint restraint was was alleged to be be in violation of the federal laws. of the federal anti-trust anti-trust laws. the alleged to The opinion opinion of Chief Justice Justice Taft, injunction, draws the injunction, of Chief draws a a clear clear Taft, denying denying the of individuals individuals and the the part part of the exchange line between between conspiracy conspiracy on the line as exchange as affording aa market place place for for trading. trading. affording are not that less "It is true true that that spot spot sales sales arc not encouraged encouraged and that less actual actual deliveries "It is deliveries in some of the take place place in in this this Exchange Exchange than in the Exchanges for sales sales of take of other other Exchanges for in every commodities, but actual actual deliveries are provided provided for contract and may deliveries are for in contract commodities, but every may
be lawfully lawfully enforced by either either party. party. enforced by be The usefulness usefulness and legality legality of of sales sales for for future future delivery, of furnishing delivery, and of furnishing an Exchange Exchange where under well-defined well-defined limitations rules the business can can limitations and rules the business an 14 Moffatt Moffatt v. v_ Kansas Kansas City City
111 S.W. of Trade, App. 1908). Board of S.W. 894, 900 (Mo. Trade, III 894, 900 (Mo. App. 1908) Coffee & Sugar Exchange, Inc., Inc., 263 263 U.S. 44 Sup. New York Coffee U.S. 611, 611, 44 Sugar Exchange, Sup. U.S. 593, Ct. 225 225 (1924) (1924); Moore v. v. New York Cotton Exchange, Exchange, 270 46 Sup. 270 V.S. Ct. 367 Ct. 593, 46 367 Sup. Ct. is United 15 United States States v. v. ;
(1926) (1926) • .
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The Law of Exchanges of Commodity Commodity Exchanges
271
be carried carried on, have been been fully fully recognized recognized by in Board Board of of Trade this court court in on, have Trade v. v. by this Christie Grain and Stock Christie Stock Co., 198 V.S. 236, 246. Those have studied the 198 U.S. who have 246. studied the 236, Co., of such such Exchanges Exchanges for economic effect effect of for contracts for future contracts for future deliveries deliveries generally generally that they stabilize prices agree that prices in in the the long long run run instead flucinstead of of promoting their flucagree they stabilize promoting their tuation. tuation. . . . The machinery machinery of such an Exchange Exchange has has been been at times made of such at times the of promoting promoting corners corners in the commodity commodity dealt in by by such manipulators the means of in the dealt in such manipulators .
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and speculators, thereby restraining restraining and obstructing interstate speculators, thereby obstructing foreign foreign and interstate trade. instances, the the manipulators manipulators subject themselves to to prosecution prosecution trade. In such such instances, subject themselves and indictment indictment under the the Anti-Trust Anti-Trust Act. Act. United States v. Patten, Patten, 226 States v. U.S. 525. 525. 226 V.S. this is is not But this not to to hold hold that that such such an Exchange Exchange with with the it affords the facilities facilities it for affords for making for future future deliveries deliveries is conspiracy is itself a combination contracts for itself a combination and conspiracy making contracts thus to restrain restrain interstate interstate and foreign foreign trade. trade. thus to There is is not not the the slightest evidence adduced to show that that the two corporate corporate evidence adduced to the two slightest or any of their officers or entered into a combination or defendants, or of their officers or entered members into a combination or defendants, any to conspiracy to raise the price of sugar ...• raise of the conspiracy sugar. price The mere fact the defendants were operating the Sugar fact that that the defendants were Exchange and Sugar Exchange operating the Clearing Association, even if concede that some persons not identified, if concede we that not comidentified, comClearing Association, persons and bining conspiring with criminal intent, used the Exchange and Clearing with used criminal the intent, bining Clearing Exchange conspiring Association to cause the the rise rise in price-concessions Association to cause in sugar concessions which there testithere is is no testisugar price to support-furnishes for enjoining reason for mony to defendants from continuing mony enjoining defendants continuing support furnishes no reason the for a or for a mandatory mandatory injunction to reframe the the rules rules of of the the Exchange Exchange or the injunction to Exchange and Clearing Association. . . . Exchange Clearing Association. The Government in in effect this court court to to enforce rules and regulations asks this enforce rules effect asks regulations future abuse the Sugar prevent the for the shall prevent for the conduct of the the future conduct of Sugar Exchange Exchange which shall 16 of its lawful is legislati,-e beyond our power." power."16 of its This is lawful functions. functions. This legislative and beyond .
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17 In ExchangeP the v. New York Cotton Exchange, the contention was advanced In Moore v. that the usual contract contract between between the the exchange telegraph company, a telegraph that the usual exchange and a company, binding the the latter to transmit transmit quotations quotations only persons as to such as the Exsuch persons the Exlatter to only to binding in of violation the in violation of the Sherman change first approved, constituted a monopoly a constituted first monopoly change approved, Law. The reasoning reasoning back back of of this this contention contention was as futures as follows: follows: The futures contract calls calls for delivery of of an article article of interstate trade of interstate trade and, contract for delivery therefore, and, therefore, to control its fulfillment fulfillment tends tends to to constitute interstate commerce. Hence, control constitute interstate its Hence, to price quotations was, in effect, a restraint of trade. of trade. in a restraint effect, price quotations was, But the the court court held held that that contracts contracts made on the the exchange exchange were "purely "purely local in their inception and in their execution" and, consequently, did in in their their execution" local and, consequently, did inception contract with the of the not constitute interstate commerce. commerce. The object the contract the constitute interstate not object of the court telegraph company was thus described and approved, the court holding described was thus holding approved, telegraph company to further further and protect that evident purpose purpose of the contract contract was to protect of the "the evident that "the its business. business. The terms terms are entirely appropriate to that that are entirely its legitimate to appropriate and legitimate of the end. The effect the making making and execution the contract contract upon interinterexecution of of the effect of end. upon
16 United 16 United States v. New York York Coffee Exchange, Inc., Inc., 363 U.S. U.S. 611, Coffee & Sugar States v. 611, 619-621; 619-621; Sugar Exchange, 44 Sup. Ct. 225, 227-28 (1924). 44 Ct. 227-28 225, (1924) Sup. IT 270 V.S. Ct. 367 11270 593, 46 46 Sup. 367 (1926) (1926).. U.S. 593, Sup. Ct. .
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Commodity Exchanges Exchanges and Futures Futures Trading Trading Commodity
state trade or commerce, if if any, is indirect Neither in in incidental. Neither indirect and incidental. or commerce, state trade any, is comrestrain purpose nor in effect does it directly or unreasonably restrain such it or does in effect unreasonably directly purpose nor 18 merce or or operate to create monopoly." 18 a monopoly." create a merce operate to But, court has has ever ever held held that in the the course that an exchange course But, although exchange in although no court 10 of its its ordinary ordinary operations is in restraint of trade,19 in restraint of is operating a monopoly of trade, operations operating monopoly nevertheless members may may become amenable to to criminal prosecution nevertheless prosecution the under anti-monopoly anti-monopoly laws laws for for engineering engineering "corners."20 addition, the "corners." 20 In addition, under members action exchanges themselves provide for disciplinary action against for themselves against disciplinary exchanges provide in short, guilty misconduct. The corner, corner, in exis prohibited by such misconduct. of such short, is prohibited by exguilty of of regarded with with disfavor disfavor by by the courts, changes, courts, and made a subject subject of changes, regarded civil criminal liability. civil and criminal liability. rules and by-laws by-laws of of exchanges The customary customary rules exchanges which prohibit prohibit members dealing with with those those who have been suspended or expelled from dealing expelled and from suspended or dealing with bucket shops or trading outside of regular hours have have all bucket or all of with outside trading regular hours dealing shops been sustained valid and not not in restraint of trade. Rules Rules or in restraint of trade. as valid or by-laws sustained as been by-laws establishing rates of of commission have likewise likewise been under establishing uniform rates attack as as tending tending to to restrain restrain trade. trade. Though has tended attack Though some opinion opinion has is the to sustain this view, view, the the weight weight of authority is distinctly the other way. other way. sustain this to authority distinctly in that The opinion in a case pointed out that "public policy requires a Minnesota case pointed "public policy requires opinion be that shall definite, certain, and uniform, and this this seems shall that such such charges uniform, definite, certain, charges equally true as to commissions for sales the peculiar made under for the as to commissions sales when true peculiar equally condition,S the grain business is conducted. board of trade is business A conditions under which the conducted. of trade board grain its customers alike requires its its members to to treat treat all the matter all its in the alike in which requires matter of for services destroys competition than does a railroad no a services more of charges for does railroad destroys competition charges 21 the same rate rate for all shippers it charges for conveying when it conveying freight."21 freight." charges all shippers the It is not not easy to establish clearly the the line line which separates It is establish clearly acts which easy to separates acts fall as being being in restraint restraint of the ban as of trade trade from those fall under the those which have free from that that design. design. Regulations Regulations prescribing the number of of been held free prescribing the their solicitors to employed by by members, members, or their salaries, or restrictor limiting to be employed or solicitors restrictsalaries, limiting ing to exchange held objectionable. the employment exchange members have been held ing the employment to objectionable. current of of opinion seems best summarized as follows: courts best as The current follows: courts will will opinion not interfere with regulations regulations designed to further the purposes of the to further the not interfere with of the designed purposes 22 22 exchange, unless they they are clearly adverse to public adverse to are clearly interest. exchange, unless public interest. is l8Id. 606, 46 46 Sup. Chicago v. v. Christie at 606, of Trade of id. at Ct. at at 369-70; of the the City of Chicago Christie 369-70; Board of Sup. Ct. City of Ct. 637 Grain & U.S. 236, 236,25 Sup. Ct. & Stock Co., 198 U.S. 637 (1905). 25 Sup. Co., 198 (1905) i See, States v. 19 however, United States v. Tarpon Exchange, 142 2d 125 F. 2d 142 F. See, however, 125 Tarpon Springs Springs Sponge Sponge Exchange, a judgment (C.C.A. in which the the court, court, while while reversing judgment which sustained in 5th 1944), sustained (C.C.A. 5th reversing a 1944) the demurrer to to an indictment, "Much depends purpose the observed (at the purpose indictment, observed 128) (at p. p. 128): depends on the for which the the exchange exchange is is operated. operated. . ••."" for 20 20 United States v. Patten, U. S. see also Peto v. S. 525, States v. 141 (1913); 33 Sup. Ct. 141 226 U. Peto v. Patten, 226 see also 525, 33 (1913) Sup. Ct. F. 2d 2d 353 353 (C.C.A. (C.C.A.7th 101 F. HowelI, 7th 1938). Howell, 101 1938) 21 State v. 21 State v. Duluth Board of of Trade, 413 (1909). 107 Minn. 506,551; 121 N.W. 395, Trade, 107 506, 551; 121 395, 413 (1909). 22 22 Daniel v. v. Chicago Chicago Board of of Trade, 2d 815 41 164 F. F. 2d 815 (C.C.A. 7th 1947). See 41 Trade, 164 (C.C.A. 7th 1947). See C.J., further examples Sections 157, for further cases. 157, 158, 158, for Monopolies, Sections C.J., Monopolies, examples and cases. .
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273 273
Pursuant to to the the power power of of Congress Congress to to pass pass laws laws to to regulate regulate interstate interstate Pursuant the right right of of the the state state to to exercise exercise police police power power over over its its commerce and the creations-or in in guise guise of of that that righta right-a host host of of bills bills designed designed to to regulate regulate creationsor or throttle throttle exchange exchange activities activities has has appeared appeared both both in in Congress Congress and in in or the state state legislatures. legislatures. By By police police power power is is meant the the state's state's prerogative prerogative the of regulating regulating private private enterprise enterprise in in the the interest interest of of public public health, health, safety, safety, of morals, comfort, or general welfare. Determination of the limits of the the Determination of or welfare. the limits of morals, comfort, general exercise of of that that power power is is aa matter matter for for the the courts; courts; determination determination of of when exercise to exercise exercise the the power power within within these these limits limits is is aa matter matter for for the the and how to legislative body. right, in other words, exercised subject in other must be The exercised words, right, subject legislative body. to judicial judicial determination determination of of its its legality. legality. "While the the legislature legislature may may deterdeterto the exigency exigency exists exists for for the the exercise exercise of of the the police police power, power, it it is is mine when the the for the courts to determine are the subjects for the exercise of this are the for exercise this what of for the courts to subjects have some reasonable that the act power, it is necessary that the act should reasonable relarelashould it and is necessary power, see that tion to to the the subjects subjects of of such such power. power. The court court must be able able to to see that tion of the offenses or the the act act tends tends in in some degree degree to to the prevention prevention of offenses or the preservapreservathe tion of of the the public public health, health, morals, morals, safety, safety, or or welfare." welfare." 23 23 tion at the legislative legislative branch may may not not regulate regulate private private enterprise Thus the enterprise at
its
its
all activities. activities. To be nor may may it it regulate regulate any any and all be subject to the the pleasure, nor subject to pleasure, of an police power of the state a'n activity or subject of legislation must afafof the state be activity legislation subject police power with aa public public interest. ... furnishes at best an fected with interest. But "this "this phrase at furnishes best fected phrase indefinite standard. . . . Certain properties and kinds of business it obviof business it obviCertain properties indefinite standard. ously includes, like carriers, telegraph and telephone common like carriers, includes, telegraph telephone companies companies.. ously .
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.... . . A business business is a public interest merely because it it is is is not affected with a not affected merely because public interest in large warranted in having a feeling in are warranted of concern in the public because the or because having a feeling of public are large or respect of its maintenance. is the interest is the interest meant such as as arises arises from the the maintenance. Nor of its respect mere public derives benefit, accommodation, or enjoyderives benefit, the public that the fact that mere fact accommodation, ease, ease, or enjoybusiness. the business. . . . And, ment from the And, finally, or operation of the existence or the existence finally, operation of that a particular of property the by the the legislature declaration by the mere declaration particular kind of legislature that property is not conclusive interest or interest is upon conclusive a public the is affected affected with a business is or business upon the public matter is question is one which is the regulation. of the is the validity of the regulation. The validity of question of 24 always open to judicial inquiry." 24 to judicial inquiry." always open The Cotton Futures Act and the Grain Futures Act were passed Cotton Futures by passed by its power to to regulate interstate commerce. in the exercise of its interstate Congress of exercise the in regulate power Congress in Chicago The United v. States Supreme United States of Trade v. Chicago Board of Supreme Court held in is Olsen, that "the Board of Trade conducts a business which is affected of affected "the Olsen, that to reasonable regulation with interest and is, is, therefore, therefore, subject with aa public subject to regulation public interest 25 in interest." 25 interest." the public in the public cases have upheld Power recent cases the power to Regulate Power to upheld the Trading. Two recent power Regulate Trading. .
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People 111. 340, 83 N.E. 236, 237 (1907). 236, 237 v. Steele, 345-346; 83 231 Ill. 340, 345-346; Steele, 231 (1907) People v. Ct. 426,428 Banton, 47 Sup. U.S. 418, 418, 430-431; 426, 428 (1927). 430-431; 47 273 U.S. Banton, 273 Sup. Ct. (1927) 25 Ct. 470, 262 U.8. 478-479 (1923). 43 Sup. 470, 478-479 U.S. 1,40-41; 25262 1, 40-41; 43 (1923) Sup. Ct. 23
.
24 Tyson v. Tyson v.
.
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274 274
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
in the of an exchange to take take such as may be expedient the regulation such action action as of an may be regulation expedient in exchange to action upon of trading trading in in emergencies, emergencies, despite of such action outthe effect effect of of despite the upon outstanding contracts. contracts. standing In Garcia Sugars Corporation Sugar Exchange, Exchange, v. New York Coffee In Garcia Sugars Coffee and Sugar Corporation v. v. 77 N.Y. N.Y. Supp. (2d) 532, 532, affirmed without opinion Nom., Rifkind Rifkind v. affirmed without opinion Sub. Nom., Supp. (2d) Div. N.Y. Sugar Exchange, Exchange, 258, Div. 871, 216 N.Y. Supp. New York Coffee 216 258, App. 871, Coffee and Sugar App. Supp. (2d) 1023, was held held that that the the exchange power to the power to suspend it was trad1023, it suspend tradexchange had the (2d) ing in in sugar futures contracts order liquidation in of contracts contracts open contracts and order sugar futures ing open in liquidation of a particular particular month at at aa price price fixed fixed by by an exchange committee because a because exchange no quota quota sugar was available available for delivery owing to the the filling for delivery of the the sugar was owing to filling of existing quota, as established by the United States Department of AgriStates existing quota, as established by the Department of Agriculture. culture. In Crowley 141 Fed. v. Commodity Exchange, Inc., Inc., 141 Fed. (2d) it was 182, it Commodity Exchange, Crowley v. (2d) 182, all open held that that the the exchange exchange had the the power power to to close futures silk futures close out all open silk as of of the date when the the War Production Production Board requisitioned contracts as contracts the date requisitioned fix as available supplies of silk silk within within the the United States, to fix the available as the States, and to supplies of such price for settlement of such contracts the closing price on the last day of contracts last the closing price the price for settlement day of trading trading despite despite the the fact fact that that such such price higher than the O.P.A. was O.P.A. the of higher price of the the ceiling price. price. This occurred occurred in in June, June, 1941, prior to to the entry 1941, prior entry of ceiling War. was United States into the The action of the Government, however, States into the action of the Government, however, in connection justified by the emergency powers granted in milithe miliconnection with the the emergency powers granted justified by tary program the action of the exchange was upheld by the court the court and of action the the upheld by tary program exchange it faced because of of the nature of the emergency emergency which It faced by of the reason of the of the because the nature by reason requisitioning of all available available supplies of silk. of all silk. supplies of requisitioning In both of these cases cases the the power power of of the reasonable to make reasonable of these the exchanges In both exchanges to settlements of open contracts in dealing with the emergencies in with the settlements of open contracts dealing emergencies which had arisen was was upheld. upheld. arisen Legality of By-laws By-laws and Rules. Rules. The statutes statutes under which exchanges exchanges Legality of are formed usually give express authority the adoption of by-laws for the are adoption of by-laws and usually give express authority for 26 Even in rules. 26 in the the absence absence of of specific specific authority, the power power to to regulate rules. authority, the regulate their by proper proper by-laws by-laws is requireis inherent. inherent. The general affairs by internal affairs their internal general requireand are: validity of of the the by-laws by-laws rules are: (1) that they they shall ments for for the rules shall the validity ments (1) that be not contravene contravene the the general law or contrary to public policy; (2) to that not contrary public policy; (2) that general and they be clear and definite; (3) that the procedure prescribed that the clear be for definite; (3) procedure prescribed for they shall be followed. adopting or by-laws and rules rules shall the quesfollowed. On the or amending amending by-laws quesadopting its internal internal affairs, tion of authority to to regulate regulate its the court inherent authority court said of inherent said tion affairs, the in the case case of v. Chamber of of Commerce: "This corporation derives of Evans v. in the derives corporation in no manner can it to act act from the the statute, this its it exceed its authority exceed this statute, and in authority to it the authority, but, inherently, it possesses the power to make all necessary to all but, inherently, possesses authority, power necessary rules and regulations regulations for its government government and operation, for its such rules operation, although although such in not be expressly expressly conferred in its in the the creating power may may not its charter, charter, in power creating 26 N.Y. N.Y.
Sec. 20. Membership Corp. Corp. Law, Law. Sec. 20. Membership
The Law of of Commodity Exchanges Commodity Exchanges
275 275
statute, in any any other This, because is an inciincistatute. This> or in other statute. because inherent inherent power statute, or power is dent to to all all corporations corporations and is is independent of the the conferred conferred statutory statutory independent of not to right to adopt rules not opposed to the law which they are organrules to the under are right opposed adopt organthey 27 When the the method of of making making or by-laws and rules is ized." ized." 27 or amending rules is amending by-laws in the statute or prescribed either by statute or in the charter, be either by the procedure charter, the prescribed procedure must be strictly followed. Usually the by-laws provide for their own amendment. the followed. for their by-laws provide strictly Usually cases in in which by-laws by-laws have been held invalid. There have been few cases held invalid. have been found invalid because opposed policy invalid because Those which have to public opposed to public policy or at at variance variance with with the the general general law law of the land have nearly always been or of the nearly always been found so so on the the ground ground that that they they tended to restrain trade or create to restrain a trade or create a 28 monopoly.28 Thus, aa rule rule providing providing that that claims to aa claims due from members to monopoly. Thus, defaulting might be collected by the exchange and applied the be collected member to by defaulting might exchange applied to on other members was was held held invalid invalid debts due other debts two grounds: as conconfirst, as grounds: first, as the Bankruptcy Law and, second, as being opposed to public travening to the and, second, travening being opposed Bankruptcy public 29 On policy.29 the hand, it should be be noted noted that that it has been held it should the other other hand, it has held that that policy. a in favor by-law provisions provisions subjecting the member to to a lien favor of of other lien in other by-law subjecting the members for arising out of exchange transactions transactions has has been held of exchange for claims claims arising not in in contravention of the the bankruptcy bankruptcy law. not law. contravention of be~n few cases Similarly, there have been cases where by-laws Similarly, there by-laws have been held invalid because of of being being ultra ultra vires. vires. Where, the matters matters regureguinvalid because however, the Where, however, lated have been been clearly outside the scope of the exchange's business, the lated the the outside of clearly exchange's business, the scope said: not hesitated hesitated to to intervene. In one such case the court courts have not case the intervene. In court said: courts have "The by-laws by-laws under which the the Board purposes purposes to to hear hear the the charges charges against the the plaintiff, plaintiff, and to to disfranchise refuses to pay in case to pay disfranchise him in case he refuses against as it may impose, are wholly wholly outside such it may outside of of anything authorized such fine fine as anything authorized impose, are in the articles of incorporation. is nothing in the articles to sugby of There is the to articles articles the sugnothing incorporation. by in the corporation to interfere with, regulate, or control the gest power in the interfere the control to or with, regulate, corporation gest power stockholders in the the conduct of of their their separate, individual business. business. Because stockholders in separate, individual the by-laws we have have referred referred to to assume assume to this, they they are to do this, are beyond the the by-laws beyond the in scope of the purposes of the corporation expressed in the articles of incorthe of articles the the of incorof corporation expressed purposes scope poration are its and set its power, power, and the limit limit to which to its are its constitution, set the constitution, poration 30 In Live Stock are void." void."80 In the the case case of of People People v. v. Chicago Live Stock Exchange a are 7 31 a Chicago Exchange,* to as trade. as tending to restrain trade. The by-law regulated by-law was attacked attacked restrain tending by-law regulated by-law the number of to be employed employed by members, fixed their salaries, fixed their of solicitors solicitors to the salaries, by members, must be and required that they of the exchange. At the trial, members of the that the trial, exchange. they required as the invalid the by-law was held invalid as being beyond the purposes of the exchange, of the exchange, the by-law being beyond purposes in restraint as being unreasonable, unreasonable, and furthermore as being in restraint of as being of trade. trade. as being 1
2186 Minn. 448, 450-451; 91 91 N.W. 2786 448, 450-451;
8, 8, 9 (1902). (1902).
28 See preceding section in this this chapter Exchanges and the the State. section in See preceding State. Commodity Exchanges chapter on Commodity
28
Ct. 1906). Cohen v. v. Budd, 52 Misc. Mise. 217, 217, 103 N.Y. Supp. 45 (Sup. 103 N.Y. Budd, 52 (Sup. Ct. 1906) Supp. 45 Paul 48 215, 217; 50 1036 N.W. 1036 (1892). 48 Minn. Fuel Exchange, Paul Fuel 215, 217; Exchange, (1892) si 170 Ill. 81170 556,48 N.E. 1062 48 N.E. 1062 (1897). 111. 556, (1897) 20 29
.
so 80 Kolff Kolff v. St. v. St.
.
.
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Requirements that that members submit controversies of controversies arising arising out of Requirements in all exchange transactions to arbitration are found in the by-laws of all the of most are to arbitration by-laws exchange transactions S2 such exchanges. case 32 such a regulation regulation was held held invalid; a Missouri Missouri case invalid; but exchanges. In a 33 this is is contrary contrary to to the the present present weight weight of sa of authority. this authority. general requirement requirement of by-laws and rules rules is that they clear and of by-laws is that A general they be clear relate to explicit. is particularly particularly essential essential when they to penalties they relate penalties and explicit. This is be forfeitures. An offense offense for a member may punished for which a forfeitures. by expulsion may expulsion punished by that all memor be outlined with sufficient exactness so that all so exactness with sufficient or suspension must be outlined suspension bers may know with certainty the particular acts that will subject bers may certainty the particular acts that will subject them it was noted that earlier chapter to this penalty. In In an earlier that a member to this severe severe penalty. chapter it may be expelled for any conduct detrimental to the best interests of of best interests detrimental the to for conduct be any may expelled York suswas the exchange. of the Cotton Exchange susthe New A of member the exchange. Exchange in his that office pended this by-law the ground that telephone boys his office the under on this boys in by-law ground telephone pended were giving giving out out continuous quotations of exchange prices, a forbidden of exchange prices, quotations it was held the misconpractice. When the the case was taken taken to to court held that that the misconcourt it case was practice. that duct of of employees employees should not not subject the member to to discipline duct discipline and that subject the of the acts and conduct of the exchange the by-law referred referred only only to to the the personal personal acts the by-law exchange 34 In the member.s4 the great great majority majority of validity of cases, the validity member. cases, however, however, where the the decisions decisions have sustained sustained the of aa by-law by-law or rule rule has has been attacked, attacked, the the of 35 s5 regulation in question. invalid by-law or rule does not the in An invalid rule not or does bind the by-law regulation question. 36 In a case involving a members.s6 of the the Coffee it was In a case involving a member of Coffee Exchange, it was members. Exchange, held that that aa suspension the member was wrongful the following of the wrongful under the suspension of following circumstances: A delivery of coffee coffee was was rejected rejected on the that the the the ground circumstances: ground that delivery of coffee was adulterated. Adjudicators were appointed in conformity with in coffee was with adulterated. Adjudicators appointed conformity deliverable under the the rules rules and found that that the the coffee the exchange the coffee was deliverable exchange by-laws and, and, therefore, therefore, must be accepted. accepted. Nevertheless, Nevertheless, the the member by-laws refused to accept the the coffee coffee and in in consequence, court refused to accept suspended. The court consequence, was suspended. the held that not apparently passed upon the question held had that the not the adjudicators apparently passed upon question adjudicators of adulteration the coffee that, since since dealing of adulteration of of the coffee and that, dealing in adulterated food products was was in violation of of the the law, law, the not properly be the member could not in violation properly be products in suspended for refusing to deal in such food products regardless of their of their for to deal products regardless refusing suspended tenderability under the the exchange by-laws. Therefore, held that that it was held Therefore, it exchange by-laws. tenderability the member could could not not be punished punished for his action. action. the for his 82 State 82 v. St. Merchants' Exchange, Exchange, 22 Mo. App. App. 96 (1876): Albers St. Louis Louis Union Merchants' State v. cf. Albers (1876); cf. v. Spencer, 205 105, 103 S.W. 523 (1907). Mo. Commission Co. 103 Co. v. 523 205 105, (1907) Spencer, as 8S See, for example, example, Pacaud v. v. Waite, Waite, 218 218 Ill. 75 N.E. N.E. 779 111. 138, 779 (1905). 138, 75 See, for (1905) 84 84 Lamborn v. v. New York Cotton Cotton Exchange, Exchange, 203 203 App. App. Div. Div. 565, N.Y. Supp. 197 N.Y. 57 565, 197 Supp. 57 (1st Dept. 1922). a result of this decision the by-laws were amended specifically of this As a result decision the by-laws specifically (1st Dept. 1922) responsible for for the the acts acts and omissions his employees partto to make a member responsible omissions of of his employees and partners. (The (The court court indicated that such such aa rule rule would be be unobjectionable.) ners. indicated that unobjectionable.) 85 See to Sec. 85 Exchanges, notes notes to to Sec. 4. and 33 33 C.J.s., notes to Sec. 3b. 3b. See 23 Sec. 4, 23 C.J., id., notes C.J.S., id., C.J., Exchanges, N.Y. 44 86In re re Lurman, 303 (N.Y. 1895), affirmed, 149 N.Y. 588, 44 N.E. 1125 149 N.E. se/n 90 Hun. 303 1125 588, Lurman, 90 (N.Y. 1895), affirmed, (1896); see Moffatt v. Kansas City of Trade, 250 Mo. 168, 157 S.W. 579 and Moffatt of v. Kansas Board 157 S.W. see 250 579 Trade, 168, (1896) City .
.
.
;
(19U). (1913).
The Law of of Commodity Exchanges Commodity Exchanges
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This decision decision may may be questionable the case been case might questionable and the might have been it been shown that decided otherwise otherwise had it the exchange rules did not that the exchange rules not permit delivery of adulterated adulterated coffee the decision the adjudicacoffee and that that the decision of of the delivery of permit adjudicators necessarily constituted a holding holding that that the the coffee was not constituted a tors necessarily not adulterated. coffee was adulterated. Contract Membership. The rights, rights, duties, of Contract of duties, and obligations of Membership. obligations of of aa commodity commodity exchange are to to be found in the charter, members of in the charter, by-laws, exchange are by-laws, and rules. rules. When a a new member is admitted, he he subscribes the by-laws is admitted, subscribes to to the by-laws and rules rules and agrees to be bound by by them, all others others subsequently them, and by agrees to by all subsequently passed. Accordingly, Accordingly, the the charter, by-laws, and rules rules are to "express are held to charter, by-laws, passed. "express the contract by which each each member has has consented to to be bound, bound, and which the contract by measures his his duties, duties, rights, rights, and privileges privileges as measures It seems as such. such. It clear seems most clear that this this constitution to constitution and the the by-laws by-laws derive binding force to me that derive a a binding force from the fact all the the fact that that they they are are signed signed by by all the members, members, and they are conclusive are conclusive they in of them the upon each of in respect of the regulations of the mode of transeach of the of of transregulations respect upon 37 action of his business, of his right to continue to be a member." 37 of and his business, of his right to continue to action a all members are And, since are thus thus bound together together by by contract, since all a single And, contract, a single if cause for has no cause for complaint, if any rule or regulation is enforced member has rule or is enforced complaint, any regulation against him. He entered upon upon the the contract voluntarily at the time of contract voluntarily at the of against him. his admission and "a member of of aa corporation may so hedge himself himself his so hedge corporation may in in by by agreement agreement as to yield yield the the protection protection which one seeks in the as to seeks in the ordiordinary affairs of life and enlarge the authority that may be used against life the affairs of that be used enlarge nary authority may against him ," 38 him.. . . :'38 is bound in the the same way by by-laws by-laws and rules The member is rules subsesubseway by quently adopted, with the following exception, however: cannot be the however: be with he following exception, quently adopted, deprived of property rights rights without without his his consent. consent. Thus an amendment, the of property amendment, the deprived effect of which would be to to impair existing contracts, would be invalid, be effect of contracts, invalid, impair existing destroying a gratuity for or destroying established for and an amendment diverting gratuity fund established diverting or 39 the benefit of widows of deceased would be held illegal. 89 of members held deceased the benefit of illegal. rule to validity of of any by-law or rule may subject to attack by the the attack by be The validity may subject any by-law it state, if it contravenes public policy or violates a positive law; or it may violates or it if contravenes law; state, positive may public policy be attacked attacked by by aa member whose rights rights are are infringed. of infringed. Non-members of the exchange, however, have have no standing to assail in court assail any rule or court to or the any rule standing in exchange, however, regulation. In a case involved a by-law that admittedly ina that was ina involved case which admittedly by-law regulation. 40 the court valid,40 voluntary association, incorporated said: "A voluntary the court said: association, whether incorporated valid, .
37 37
.
Belton v. Hatch, N.Y. 593, 593, 596; 596; 17 225, 226 Jackson v. New 109 N.Y. 17 N.E. N.E. 225, 226 (1888); Belton v. Hatch, 109 (1888) Jackson v. ;
Cotton Exchange, App. Div. Div. 329, 829, 19 N.Y.S. 2d Hyde York Cotton 19 N.Y.S. 2d 207 207 (1st York 249 App. 1940) (1st Dep't, Dep't, 1940); Hyde Exchange, 249 v. Woods, Woods, 94 94 ILS. U.s. 523 523 (1876) (1876); Picaud Picaud v. v. Waite, Waite, 218 N.E. 779 O'Brien 111. 138,75 779 (1905); 218 Ill. v. 138, 75 N.E. (1905) O'Brien v. South Exchange, 101 Neb. 729, Live Stock Stock Exchange, 101 Neb. 724 (1917). v. South Omaha Live 164; N.W. 724 729, 164; (1917) SB 38 People People v. v. New York York Cotton Cotton Exchange, Exchange, 88 Hun. 216, 220 (N.Y. 216, 220 (N.Y. 1876). 1876). 39 Compare Parish 39 v. New York Produce Produce Exchange, Exchange, 169 N.Y. 34, N.E. 977 61 N.E. 169 N.Y. 977 (1901) 34, 61 (1901) Compare Parish v. ;
;
;
.
with Franklin v. v. Dick, Dick, 262 262 App. App. Div. Div. 299, 299, 28 28 N.Y.S. N.Y.S. 2d, 2d, 426 426 (1st affirmed with Franklin (1st Dep't 1941) , affirmed Dep't 1941) without opinion, opinion, 287 N.Y. 656, N.E. 2d 282 (1941). 39 N.E. without 2d 282 287 N.Y. 656, 39 (1941) 40 American Live Stock Exchange, 40 Live Stock Stock Commission Co. Live Stock Ill. v. Chicago Co. v. 143 111. Chicago Live Exchange, 143 N.E. 274, 274,280 210,233; 280 (1892). 32 N.E. 210, 233; 32 (1892) ,
.
.
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
278
or not, has, within certain certain well-defined well-defined limits, power to to make and enforce or not, limits, power has, within are ordinarily the government of its members. Such by-laws by-laws are by-laws for its members. for the ordinarily government of by-laws matters between between the the association association and its with which its members alone, matters alone, and with its members, concern. If the association, members, strangers have no concern. If the of its or a majority association, or majority of strangers have public policy, policy, pass by-laws by-laws which which are unreasonable, or or public are unreasonable, or contrary to law or contrary to pass and attempt to enforce as against a dissenting or unwilling minority, a them or enforce as to and unwilling minority, against dissenting attempt courts in proper proper cases, to the the courts such minority may may undoubtedly, undoubtedly, in such minority cases, appeal appeal to their enforcement. for relief against enforcement. But mere strangers for relief strangers have ordinarily ordinarily against their are matters of no concern. right to to interfere. interfere. As to to them, them, such by-laws by-laws are matters of concern. no right They do not apply to and are not binding upon them." This rule applies are them/' rule not not apply to binding upon applies They though the may suffer suffer pecuniary pecuniary loss by virtue virtue of the by-law. by-law. even loss by of the the outsider outsider may even though "It is the court is In case involving involving the the Chicago court said: said: "It a case of Trade, In a Trade, the Chicago Board of a insisted the by holding holding out to to the public that that a broker broker the public of Trade, insisted the Board of Trade, by the and to is aa member, member, encourages invites the public to buy produce its invites is buy produce on its encourages public the through that member, and, when the public have acted on exchange have that acted member, and, exchange through public such invitation, by by the the expulsion expulsion of the board would of such member the such invitation, out of of contracts contracts which customers the expelled prevent the the carrying carrying out customers of of the expelled prevent in good member have have made in faith, and such customers would be remediremedicustomers faith, good affords less. . . . The existence existence of such contracts contracts affords no ground for interof such interless. ground for rules of If it the rules the Board of ference to prevent aa trial trial under the of Trade. If it ference of the to prevent could be be held held it did, then then aa member could always have outstanding conit did, concould always outstanding tracts prevent being being tried of the the rules rules of tried for for a violation violation of tracts and effectually of effectually prevent a member of of Trade. Trade. Aside Aside from this, this, customers of the the Board of of a the of the Board of of Trade, dealing with with him as such member, as such be conclusively Trade, dealing member, must be conclusively presumed to to have have dealt dealt with with him with with reference reference to to the rules of the the rules of the presumed Board, which which provide provide that that their their broker broker could be suspended or expelled could be or Board, suspended expelled for misconduct." 41 41 for misconduct." The Admission Admission of of Members. Exchanges Exchanges possess possess plenary powers over over plenary powers the of members. members. The method of admission is preof obtaining admission of the admission admission is obtaining prein detail detail in in the the by-laws, by-laws, and the the prescribed procedure must be scribed scribed in be prescribed procedure followed strictly by an applicant. Requirements for may be be followed for admission admission may strictly by applicant. Requirements arbitrary or unreasonable, but, so long as they are not contrary to public are so as not to unreasonable, but, arbitrary long they contrary public policy or in in contravention contravention of of positive positive law, they are by the are sustained sustained by the law, they policy courts. 42 By the greater apply far the courts. 42 of cases cases involving admission apply By far greater number of involving admission the transfer of memberships. memberships. Admission, Admission, when the the exchange to to the transfer of is organorganexchange is difficulties. In the first place, let us review briefly ized, presents no difficulties. the us review first let the ized, presents briefly the place, required for for admission. purchase procedure required admission. The applicant procedure (1) purchase applicant must (1) a person the person who is is aa member and (2) be elected to memthe seat of a seat of be elected must to (2) with either one of these requirebership by the exchange. Compliance the with of these either bership by exchange. Compliance require.
.
.
Green v. v. Chicago Chicago Board of of Trade, 51 N.E. N.E. 599,601 (1898). 111. 585,593-94; 174 Ill. 585, 593-94; 51 599, 601 (1898) Trade, 174 v. v. Kansas Kansas City City Board of of Trade, App. 1908), 111 S.W. S.W. 894 894 (Mo. reversed Trade, HI 1908), reversed (Mo. App. on other other grounds, grounds, 250 S.W. 579 (1913). 157 S.W.579 250 Mo. 168, 168, 157 (1913) 4i 41
.
*2Moffatt 42 Moffatt
.
The Law of Exchanges of Commodity Commodity Exchanges is of ments without without the the other avail. A person person who purchases a seat other is of no avail. seat purchases a obtains privileges of of the the exchange exchange until until his the case of his election; in the obtains no privileges case of election; in the election election of of an applicant has seat, similarly, his admission no who has his admission the seat, similarly, applicant a seat. to privileges privileges is is held held in abeyance until until he acquires in abeyance seat. Although the to acquires a Although the
purchase of a seat the purchaser purchaser the the right to apply for admission, seat gives of a admission, right to gives the apply for purchase it. "Under the it is no assurance that he will will obtain the charter by-laws obtain it. charter and by-laws assurance that as of the appellant only such persons as have been regularly elected to of the appellant only regularly elected to persons may receive receive certificates certificates of plaintiff membership of membership. therein may membership. The plaintiff membership therein in the the appellant . . . . To compel the never was elected elected to to membership membership in never appellant. compel the appellant, therefore, to issue a certificate of membership to the plaintiff, certificate of membership to the plaintiff, appellant, therefore, to issue act in or nominee, would be requiring requiring the to do an act in viothe appellant vioto its its nominee, or to appellant to in lation of of the provisions of and in effect be forcing its charter effect charter and by-laws, lation the provisions of its by-laws, forcing ... upon the the appellant . . A court of aa new and additional additional member upon court of appellant.. . a equity will not undertake to force upon a corporation of this character to undertake force this of character will not upon corporation equity aa member or the issuance membership certificate issuance of of an extra extra membership or compel certificate compel the it is to to pass the will will of those whose duty duty it is pass upon of against the of those against upon applications applications of 43 membership or to issue such certificates . . . . "43 ," to issue such certificates. or membership over original plenary power power that that exists exists over for The same plenary original applications applications for admission extends to applications for for reinstatement. reinstatement. to applications admission extends of the in disciplinThe Suspension and Expulsion. powers the exchange exchange in Expulsion. powers of disciplinSuspension or are ing its by suspension or expulsion are somewhat less broad than than less its members by suspension expulsion ing its powers over the admission of members. Nevertheless, Nevertheless, aa high high degree admission of its powers over the degree is possessed by the of control over the the conduct conduct of of members is exchanges, the of control over possessed by exchanges, and the exercise of of that that control within reasonable has been been susreasonable limits limits has control within the exercise suscourts toward discipline tained by the the courts. courts. The attitude attitude of of the discipline of this the courts tained by of this character is well well stated in the the leading leading case v. New York case of of Haebler v. character is stated in York Produce Exchange: Exchange: 44 44 "The purpose purpose of incorporation is of the the appellant's Produce is appellant's incorporation to elevate not the transaction of of business business for for gain, but to maintain elevate and maintain the transaction gain, but the business standard be accomplished of its its members. This can be the business standard of accomplished only only requiring to adopt follow just and equitable principles in in by and follow them to equitable principles by requiring adopt just all transactions and dealings. secure that all their that end the their commercial transactions the dealings. To secure their appellant has the right to insist that their dealings shall be conducted that shall to insist be has the conducted dealings right appellant upon principles principles of honesty, and fairness. Any dishonest or fairness. Any of integrity, dishonest or integrity, honesty, upon direct contravention of unfair transaction transaction by by aa member is in direct purpose is in of the unfair the purpose it of the the appellant'S organization, and it is authorized to cencenis and intent intent of authorized to appellant's organization, thus or expel a thus offends. If its members are sure, suspend, member who offends. If or its are sure, suspend, expel not required required in all their their commercial dealings business transactions transactions in all not dealings and business it is
.
.
.
.
.
48 Garrigues Co. Co. v. v. New York Produce Exchange, Exchange, 213 213 App. Div. 625, N.Y. 211 N.Y. 625, 627; 627; 211 App. Div. 43Garrigues Board also v. Supp. 13, 14 (1st Dep't 1925). See also Chicago of Trade v. Johnson, 264 U.S. See 14 U.S. 264 Johnson, Chicago (1st Dep't 1925) Supp. 13, U.S. American 1, Ct. 232 (1923); Hyde v. Woods, 94 U.S. 523 (1876); Live Stock v. Live 94 523 Ct. Stock 232 Woods, 1, 44 Sup. (1876) Hyde Sup. (1923) Commission Co. Co. v. v. Chicago Live Stock Exchange. 143 Ill. 210, 210, 32 N.E. 274 Stock Exchange, 143 111. 32 N.E. 274 (1892). Chicago Live (1892) 44 44149 N.Y. 414, 414, 44 N.E. 87 87 (1896). 44 N.E. H9 N.Y. (1896) .
;
;
,
,
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for which the to adhere adhere to to those those principles, principles, an essential essential purpose purpose for the appellant to appellant was organized organized will will be be subverted, its reputation the reputation reputation of its of its subverted, its was reputation and the its usefulness members for for honest honest dealing dealing lost, lost, and its usefulness and importance importance 45 greatly diminished, if not totally destroyed."45 On the if not the other other hand, "it hand, "it totally destroyed." greatly diminished, by no follows that a may be arbitrarily suspended or that a be member follows means no may arbitrarily suspended or by insufficient or the expelled upon insufficient grounds or through the caprice of its officers of its officers grounds through caprice expelled upon or other members, with with no proof proof of of conduct upon upon his was his part or other members, part which was 46 in contravention the charter charter or or by-laws by-laws of the corporation "46 of the of the in contravention of corporation.. . . .," less broad than powers exer· The reason reason that that powers powers of of discipline discipline are are less powers exeris the cised over admission is the general legal principle that the courts cised over admission not general legal principle that the courts do not 47 favor forfeitures. forfeituresY Hence, Hence, as as has has been noted, by-laws which are contrary favor are contrary noted, by-laws to law or public policy, policy, ultra ultra vires, unreasonable, or unceror public to or uncerindefinite, unreasonable, vires, indefinite, the by-law tain will will not not be be enforced; but, unless unless the by-law is is objectionable tain enforced; but, objectionable on courts will the sustain some one of these grounds, the courts will sustain the right of these the of exchanges grounds, exchanges right of or temporary to punish punish members either either by by permanent permanent or suspension of to temporary suspension of 48 48 privileges. privileges. or expulsion Consequently, discipline discipline by by suspension has been held held suspension or expulsion has Consequently, to proper in the following cases: failure to pay dues or assessments; breach of failure or in cases: breach of the assessments; following pay proper of false reports about the the affairs affairs contract; dishonest circulation of false reports dishonest conduct; conduct; circulation contract; of of the the exchange; the making or reporting of false or fictitious sales or of or false or fictitious or the sales reporting exchange; making purchases; practices inconsistent with just and equitable principles with inconsistent of just equitable principles of purchases; practices trade; with bucket bucket shops; or dealing commissions trade; operating charging commissions shops; charging dealing with operating or lower than than the the rates rates established by the refusal to submit to to the exchange; refusal to established by lower exchange; arbitration; fraud; obtaining goods under false pretenses; insolvency; and under false arbitration; fraud; obtaining goods pretenses; insolvency; 49 resorting to tribunals tribunals other than those those of the exchange. of the other than exchange. 49 resorting to in the Disciplinary Proceedings. Proceedings. The procedure procedure to the case case followed in to be followed Disciplinary in in detail the of or expulsion is provided in detail in the by-laws, and this is this or of suspension by-laws, provided expulsion suspension 60 50 procedure must be be strictly followed. The committees and boards boards of of strictly followed. procedure appeal which are empowered to determine questions involving suspento determine are which questions involving suspenempowered appeal sion or expulsion expulsion and report report to to the the board of recognized of governors are recognized sion or governors are as quasiquasi-judicial bodies. They therefore, not not subject by the courts as the courts are, therefore, They are, judicial bodies. subject by to for damages, damages, if their findings are erroneous. "We think if their are erroneous. think action for to an action findings a the board of directors of a corporation organized this s·tatute, under this of when the board of directors statute, corporation organized acting upon charges preferred against a member, is is a quasi-judicial member, against quasi-judicial acting upon charges preferred tribunal, and that that the the directors, directors, individually individually and collectively, collectively, when so so tribunal, a rule that a civil action for damages does not acting, are protected by the civil action for that the does not are rule damages acting, protected by .
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45 Id at at 92. 'DId. 428-29. 44 N.E. N.E. at 92. at 428-29, 46 at 91, 4aId. at 428.44 N.E. at 91. 92. 92. id. at 428, 44 N.E. 47 47 White v. v. Brownell, Brownell. 44 Abb. Abb. Pr. Pr. (N.S.) (N.S.) 162 162 (N.Y. (N.Y. 1868). 1868) 48 23 C.]., Exchanges, Sec. 16 n. 11. et seq., and 88 .S., id., id., Sec. Sec. 7. et 33 C.] 16 n. Sec. 7. 4823 11, seq., C.J.S., C.J., Exchanges, Sec. 7 4928 C.J., C.]., Exchanges, Exchanges, Sec. 38 C.J.S., 7 (3) cited. cases cited. id. Sec. Sec. 18: 4923 18; 33 (3) and numerous cases C.J.S., id. BO DO State v. Milwaukee Milwaukee Chamber of of Commerce, 3 N.W. 760 Wis. 670, State v. 47 Wis. 760 (1879). Commerce, 47 670, 3 (1879) .
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lie against against one whose acts, acts, however however erroneous erroneous they they may have been, been, were were may have in the of judicial judicial authority matter done in the exercise exercise of conferred, no matter clearly conferred, authority clearly 51 The implication by what motives such acts may have been prompted." 51 acts have motives such been may by prompted." implication latter part part of the decision is possibly possibly too instance, of the the latter of of the decision is too broad. broad. If, for instance, If, for it were shown not it not only only that that aa decree without proper proper cause, that decree was without but that cause, but the action inspired by by malicious malicious motives, both the exchange the action was inspired the motives, exchange and the members of the disciplining body may be severally 52 The of the the liable. 52 disciplining body may be severally liable. measure of damages to to a wronged wronged member is based upon upon the of damages measure is based the theory theory that the wrongful expulsion expulsion constitutes constitutes aa conversion: that the wrongful value of the conversion: "The value of the right of that certificate was the evidence of title, with interest from that was which certificate the evidence of title, with interest right of the time conversion to to the the time time of the of trial." trial." time of of conversion or procedure in in suspension or expulsion requires that that the The procedure the member suspension expulsion requires have due notice notice of of the the hearing hearing and an opportunity defend himself. himself. have to defend opportunity to documentary evidence may be produced, produced, and cross Witnesses Witnesses and documentary evidence may cross examiexamibut nation must be be allowed; the proceedings are conducted free from nation the are free conducted from allowed; proceedings at law. It will the rigidity of of actions actions at will be be remembered the technicalities technicalities and rigidity law. It that of legal counsel is also forbidden. This rule is that the the employment of counsel is also rule is forbidden. legal employment 63 valid. 58 valid. Right of of Appeal Appeal to to the the Courts. that Courts. We have previously Right previously examined that of phase of the state's control over exchanges has to do with actions the control over which state's has to actions exchanges phase 64 In this connection the question initiated by the the law-enforcement law-enforcement officers. initiated by officers. 54 this connection the question of a member's right right to to obtain obtain redress redress from the he conconof a the courts courts for for what he will on the part of the exchange will considered. siders acts the of be considered. siders wrongful acts the wrongful part exchange condition may may be be laid laid down as to an appeal as prerequisite One condition to the the prerequisite to appeal to courts. The member who would resort resort to the courts that he he to the courts. courts must show that has exhausted the remedies remedies which are by the the by-laws by-laws and all the exhausted all afforded by has are afforded rules of the the exchange. the settled settled law that that aa member of "It is is the rules of of such such an exchange. "It association as as the the Cotton Exchange, Exchange, against proceedings are instiassociation are instiagainst whom proceedings tuted its by-laws, by-laws, must first exhaust his his remedies remedies within within the the assofirst exhaust tuted under its association before before he may may invoke redress redress from the the courts ciation courts.. . . . The question question of the jurisdiction of of the the defendant exchange to try try the the charges against of the jurisdiction exchange to charges against the plaintiffs plaintiffs is is clearly one first be determined by the exchange which must first be the the clearly by exchange its appropriate appropriate committees. committees. The same rule to itself itself through rule applies through its applies to plaintiff's that the the court practically take take charge of the that court shall shall practically the charge of plaintiff's demand lie
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ei St. Paul Stock Exchange, 51 Melady Melady v. v. South St. Paul Live Stock Exchange, 142 171 N.W. 806, 142 Minn. 194, 194, 196; 196; 171 806, 807 (1919). 807 (1919). 52 18 111. G2 Olds. Olds. v. v. Chicago Chicago Open Open Board of of Trade, Ill. App. App. 465 (1886); Albers Albers v. 465 (1886) v. St. St. Trade, 18 Lurman v. Jarvie, 82 Louis Merchants' Exchange, Exchange, 138 138 Mo. 140, 39 S.W. S.W. 473 Louis Merchants' 473 (1896); v. Jarvie, 140, 39 82 (1896) App. Div. Div. 37, N.Y. Supp. 468 (1st (1st Dep't Dep't 1903), without opinion, N.Y. 81 N.Y. 178 N.Y. 37, 81 affirmed without 1903) affirmed Supp. 468 opinion, 178 App. 70 N.E. N.E. 1102 559, 1102 (1904). 559,70 (1904). 53 G3 Green Green v. v. Chicago of Trade, 63 111. Ill. App. 446 (1896), Ill. 585, 174 III. Trade, 63 585, affirmed, 174 Chicago Board of App. 446 (1896) affirmed, 51 N.E. 599 599 (1898). 51 N.E. (1898) s* See 54 if!ction in this chapter See ealliel' in this eailier section the State. State* chapter on Commodity Exchanges and the Commodity Exchanges ;
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it must be trial by by directing directing how it be conducted. again we are conducted. Here again are not not is purely anticicalled upon upon to to interfere interfere to to prevent prevent an injury called injury which is purely anticiin first patory ...• It is the duty of the exchange, in the first instance, to pass pass the of the It is the to ... instance, exchange, duty patory. all which upon his claims. 1£ he is given all to he is entitled, he will have he is If is to have he will entitled, given upon his claims. no grievance. If he be be denied denied rights rights which should been accorded should have been accorded If he no grievance. to to him, and injury follows, it will then be open to him to seek redress then to redress it will be seek to him, open injury follows, 65 in the courts." 1111 in the courts." The law, law, however, however, does does not not require require impossibilities or futilities. futilities. Conimpossibilities or because sequently, if resort to the exchange'S tribunals would be useless because the tribunals useless if resort to exchange's sequently, or other of open hostility hostility exhibited toward the member, or, if delays other the member, exhibited toward of open or, if delays or at appear that that the the member's rights rights will will not not be be protected acts it appear acts make it protected at the hands of of the the exchange having jurisdiction, jurisdiction, he need not not committee having the exchange committee 56 Furthermore, the suspended or wait before appealing appealing to to the the courts. courts.1i6 wait before Furthermore, the suspended or all means of expelled member is is not not required required to to exhaust reinstatement exhaust all of reinstatement expelled in the his before he he will will have have aa standing standing in the courts. have carried courts. He must have carried his before case to the the highest highest tribunal tribunal in in the the exchange before suspension or expulbefore or case to exchange suspension expulfor further further resort sion; but, once once action action has has been taken, taken, the the necessity necessity for resort to to sion; but, the commodity commodity exchange is at at an end. for reinstatement end. "An application reinstatement the application for exchange is in any not in way involve a review of the question determined on a review of the would not involve any way question his It would be his expulsion. be aa matter matter of of grace not aa reversal reversal of the of the grace and not expulsion. It 57 determination." determination/' 57 of the obtains aa standing the courts in the for review review of the courts for When aa member obtains standing in proceedings by by which which he he has has been been ousted, to limit to a definite there is is a definite limit ousted, there proceedings the It will review the entire the matters the court will inquire. matters into into which the review It will entire the court will inquire. record to to determine determine (I) whether the the proceedings proceedings have have followed the record followed the (1) whether requirements of of the the by-laws; by-laws; (2) (2) whether whether the notice and the member had notice requirements an opportunity to defend himself; (3) whether the by-law to whether the himself; (3) by-law which he opportunity contravened was valid; valid; and (4) whether the decision was honestly rendwhether the decision contravened was rend(4) honestly ered. 1£ the court court is is satisfied these points, points, it will not it will satisfied on these not substitute ered. If the its substitute its tribunals of as to opinion for the decision of the tribunals of the exchange either of the the for the decision either as to exchange opinion determination of matters of fact or as to the merits of the case. "It fact or as to the merits of the case. "It is determination of matters of is well that, when aa person person becomes becomes aa member of of an association well settled settled that, association provides a method for for adjusting and its its charter charter provides difficulties and settling adjusting difficulties settling conflicting demands, he assents to the the scheme adopted; the absence assents to in the absence demands, he and, in conflicting adopted; and, will not be be heard heard to to impeach of fraud fraud or or imposition of or gross gross injustice, injustice, he will imposition or impeach in the courts courts the the validity validity of the decision decision against him, and the in the of the the courts courts against him,
trial
55 55 Moyse Moyse v. v. New York York Cotton Exchange, 143 265, 268-69; 268-{j9; 128 N.Y. Supp. Div. 265, Cotton Exchange, 143 App. 128 N.Y. App. Div. Supp. Trade v. 111. App. 298 112, Dep't 1911) of Tradt' v. Riordan, Riordan, 94 Ill. 114-15 (1st 112, 114-15 1911) ; Board of App. 298 (1900). (1st Dep't (1900) se Quentell v. 116 Exchange, 56 Misc. 150, N.Y. Supp. 106 N.Y. 56 Misc. 150, 106 228 (Sup. Quentell v. New York Cotton Exchange, Supp. 228 (Sup. Ct. 1907); Leech v. Harris, 2 Brewst. 571 (Pa. 1870). v. Brewst. 571 Ct. 2 Harris, (Pa. 1870) 1907) 117 Lamborn v. v. New York Cotton Cotton Exchange, Exchange, 203 App. Div. N.Y. Supp. 57Lamborn Div. 565, 203 App. 197 N.Y. 565, 571; 571; 197 Supp. 57,62 57, 62 (1st (1st Dep't Dep't 1922). 1922) .
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58 of the cannot the merits merits of the controversy." cannot examine the If it it appears, however, controversy." 58 If appears, however, that that the proceedings were irregular, irregular, unfair, within the jurisdiction the proceedings not within the jurisdiction unfair, not of the the exchange of tribunal, or totally unsupported by evidence, the court court tribunal, totally unsupported by evidence, the exchange 59 59 will Courts differ intervene. as to will intervene. Courts differ as to their their right to go further and and compel right to go further compel it has reinstatement. On the the one hand, hand, it has been been held that aa person person who reinstatement. held that of an exchange becomes a member of agrees to to be bound by by all its by-laws by-laws all of of its exchange agrees and rules, valid or or not; not; and, he cannot invoke the the cannot invoke rules, whether valid and, consequently, consequently, he aid aid of the courts courts to to regain regain a membership membership he he has has lost enforcement of of the lost by enforcement of by 60 of authority, such aa by-law by-law or rule. 60 The weight weight of however, is probably or rule. to authority, however, is probably to 61 the If the by-law by-law is is invalid, invalid, the will be be entitled to If the the member will the contrary.S1 entitled to contrary. in recovering aid of invoke the the aid the court court in recovering his The aid is exinvoke of the his privileges. aid is exprivileges. 62 of incorporated case of tended, in the the case incorporated exchanges, by aa writ writ of of mandamus. 62 tended, in exchanges, by This is is aa peremptory peremptory order, by the the exchange to the court, order, made by court, directing exchange to directing the the suspended or member If restore the or expelled to his privileges. If the matter restore his the matter to expelled privileges. suspended has been taken taken into into court court before before suspension suspension or the court court or expulsion has been expulsion and the intervenes, it will will do so so by by injunction forbidding the threatened action threatened action the intervenes, it injunction forbidding or leading to to the the threatened threatened action. a continuation of steps or a action. continuation of steps leading of aa Membership. Membership. The exact nature of Nature of exact legal of a a seat seat on an legal nature difficult to exchange is somewhat diffic~1t to define. A member of an exchange, in is define. of exchange, in exchange in the common with with his his associates, associates, has has an equity the property property of of the the exchange; equity in exchange; but he he is a body body which has a wide latitude powers over of a but a member of has a is a latitude of over of powers him and to to which he he gained gained admission admission not by purchase, but by not alone alone by but purchase, by purchase and election. been the has been the subject of conelection. The question conquestion which has subject of purchase flicting decisions by the courts is this: Is membership a license to the courts is this: Is a mere license to decisions by flicting membership of or it a enjoy the privileges of the exchange, or is it a property right? The questhe the is exchange, property right? privileges quesenjoy tion is is often in connection with such matters as taxation, inheriin connection with such matters inherias tion often important taxation, important tance, bankruptcy, and creditors' creditors' rights. rights. It the purpose purpose here to It is is not the here to tance, bankruptcy, a on which the examine exhaustively a question the courts are not unanimous. courts are not exhaustively question that a a seat the one one hand, hand, California California courts courts have have held held that pera perseat is On the is only only a 63 on the 64 have the other other hand, hand, the Minnesota 64 have held sonal privilege;63 the courts of Minnesota held courts of sonal privilege; that an exchange is personal personal property. property. A brief brief review review of the authori. seat is authoriof the that exchange seat 65 65 ties be quoted from Illinois Review. Illinois Law Review. ties may be may quoted in an exchange call a membership "Nearly membership in Hyde all courts courts call exchange 'property': "Nearly all 'property': Hyde 68 National 148 App. 58 National League of Commission Merchants v. Hornung, 148 App. Div. Div. 855, v. Hornung, 355, 360; 360; League of 132 N.Y. Supp. 871, 875 (4th Dep't 1911) . 875 132 N.Y. (4th Dep't 1911) Supp. 871, 69 Albers 59 Albers v. v. St. Louis Merchants' Merchants' Exchange, Exchange, 39 App. 583 39 Mo. App. 583 (1890). St. Louis (1890) eo 60 Greer, Greer, Mills Mills & Co. Co. v. v. Stoller, Fed. 11 (C.C.W.D. 77 Fed. Stoller, 77 1896) (C.C.W.D. Mo. 1896). ei See v. Chicago 61 American Live Co. v. Stock Exchange, Stock Commission Co. Live Stock See American 143 Chicago Live Stock Exchange, 143 Ill. 210, 32 N.E. N.E. 274 (1892). 111. 274 (1892) 210, 32 62 Haebler 62 Haebler v. v. New York York Produce Exchange, Exchange, 149 N.E. 87 149 N.Y. 414, 87 (1896). 414, 44 N.E. (1896) es Pac. 1034 (1894). 63 San v. Anderson, Anderson, 103 69, 36 103 Ca!. Cal. 69, 36 Pac. Francisco v. San Francisco (1894) 64 145 N.W. 108 (1914). 64 State v. McPhail, 398, 145 State v. 124 Minn. 398, McPhail, 124 (1914) es 65 19 (1925). ILL. L. L. REv. 19 ILL. REV. 469 (1925) .
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v. (1876), 94 U.S. V.S. 523, 523, 24 L. Ed. Ed. 264. 264. They in 24 L. v. Woods, however, in differ, however, Woods, (1876), They differ, their definition definition of the interest interest represented. represented. Some call it a mere personal call it of the their personal v. Baltimore Stock or license: Zell v. Baltimore Stock Exchange (1906), privilege Zell 102 Md. license: or Exchange (1906) 102 privilege it State v. 489, 62 Atl. 808. Others call it property without qualification: v. call without Others 808. Atl. 62 489, property qualification: State McPhail (1914), 398, 145 108. But most courts courts say 145 N.W. 108. 124 Minn. 398, McPhail say (1914), 124 in some of its its aspects, it not that, though aa membership membership is is property property in it is not is that, though aspects, such in the the concrete broad sense sense of of the the term: tcrm: Weaver v. Fisher (1884), v. Fisher concrete and broad such in (1884) an is asset in 110 Ill. 146. By the the great great weight weight of of authority asset in bankbank. seat is 146. By 110 111. authority a seat In re Page (1901 D.C.), 107 Fed. 89. It may be assigned or pledged ruptcy: It re 89. or In Fed. 107 assigned may pledged Page (1901 D.C.) ruptcy: 181 Mass. v. Abbott (1902), Mass. 531, by the holder: Nashua Savings Savings Bank v. the holder: 531, by (1902), 181 In re 63 N.E. 1058. It is is subject to inheritance inheritance or transfer taxes: re HellHelltaxes: or transfer 63 N.E. 1058. It subject to it has been man's Estate (1903) (1903), 174 N.Y. 254, 6 N.E. N.E. 809. Nevertheless, it 809. Nevertheless, man's Estate 174 N.Y. 254, 6 of its held that that aa membership membership in in an exchange, its intangi intangi· uniformly held exchange, because of uniformly bility, is is not not subject to levy execution: Thompson v. Adams (1879), (1879) levy and execution: bility, Thompson v. subject to 93 Pa. Pa. St. the majority majority of of the the courts have held held that that such membermember· courts have St. 55. 55. But the 93 creditors' be made subject to the the claims claims of through creditors' ship can of creditors creditors through can be subject to ship to execution: execution: Eliot bills. or or their their equivalent equivalent proceedings proceedings supplementary Eliot bills, supplementary to Rittenband v. Merchants' Exchange Exchange (1883), 14 Mo. A. 234; Rittenband v. Baggett v. Merchants' 14 v. A. 234; Baggett (1883) (1877 N.Y.), 44 Abb. N.C. N.C. 67; 67; Habenicht v. Lissack (1889), v. Lissack Cal. 351, 78 Ca!. 351, (1877 N.Y.) (1889) 78 20 Pac. Pac. 874." 20 874." If exchange were were to to be be dissolved, dissolved, its after satisfying If an exchange its assets assets remaining remaining after satisfying creditors would belong belong pro pro rata rata to to its its members. members. It It would secm this seem from this creditors that a seat is something more than a license. HA membership has a use a license. "A membership has a use that a seat is something buying and selling or market value. value. It It is is bought bought and value and aa buying value selling or sold There is is aa lien lien upon upon it balances due members . . It It it for for balances members.. .... sold..••• . and passes by by will will or by insolvency insolvency or or descent descent It is or bankruptcy true is true by passes bankruptcy.. . . . It that there are certain restrictions in the ownership and use of a in the of a certain restrictions memberuse that there are ownership may increase its value, probably in the case of ship. or decrease decrease its in the increase or case of value, probably ship. These may aa board of trade membership greatly enhance it. They do not prevent it. of trade membership greatly not prevent They its being property." property." 66 66 its being Bankruptcy of of aa Member. Since Act is Since the the Bankruptcy is uniformly Bankruptcy Bankruptcy Act uniformly the federal federal courts, the line to the the nature administered by the line of of decisions decisions as as to administered by nature courts, the of a membership is uniform. The nature of a seat may much nature of a uniform. is more seat of a may come membership in bankruptcy into question in in the the following following fashion: fashion: A trustee bankruptcy becomes becomes trustee in into question If a seat with title to all all the the property property of the bankrupt. is proppropvested with of the seat is title to vested bankrupt. If him erty, it passes to the trustee and is by with other assets to is applied by to trustee other it the assets to applied erty, passes ,
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ee 66 State v. McPhaiI, 401, 145 from 109 (1914); 145 N.W. 108, State v. 124 Minn. 398, 398, 401, 108, 109 McPhail, 124 (1914); quoted quoted from with approval Rogers v. v. Hennepin Hennepin County, U.S. 184, in Rogers with 36 Sup. Ct. 265, 240 U.S. 184, 189; 189; 36 267 265, 267 County, 240 approval in Sup. Ct. ex rel. (1916). See the more recent recent case of New York ex rei. Whitney Graves, 299 299 case of also the v. Graves, See also Whitney v. (1916) in which the Ct. 237, U.s. 366, 366, 372; 372; 57 57 Sup. 237, 238-39 238-39 (1937). the Court, U.S. of a a Court, speaking (1937), in Sup. Ct. speaking of with Stock Exchange seat, observed: "Here we are with an intangible right of a are dealing Stock Exchange of a seat, observed: dealing intangible right .
peculiar nature. nature. peculiar
of property It valuable right It embraces embraces ••• ... aa valuable survive right of property which . . •. may may survive
resignation, expulsion, expulsion. or or death. death. resignation,
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liquidate claims of of creditors. creditors. The weight holds that that an the claims of authority an weight of authority holds liquidate the exchange seat is property, property, title title to to which will In the seat is will vest vest in in the trustee. In the trustee. the exchange case of of Page Page v. Edmunds 67 a member of Philadelphia Stock Exchange v. Edmunds* of the the Philadelphia case Stock Exchange in bankruptcy had become bankrupt bankrupt and the the trustee trustee in to a claim claim to asserted a bankruptcy asserted his seat After sale sale of his of the the seat the exchange. seat on the seat and liquidation claims of claims exchange. After liquidation of the exchange, exchange, the the surplus be paid over for the of the due members of would be for the over surplus paid creditors. benefit of of general creditors. bankrupt contended that the seat benefit The that the seat general bankrupt on the not property, property, pointing pointing out the fact it cannot the exchange out the fact that that it exchange was not be transferred transferred so as to to confer any privileges privileges on aa purchaser purchaser until until the the so as confer any be is purchaser is elected to membership. The court held: "But that conse· elected to court held: that consepurchaser membership. in our our judgment judgment affects affects the the value value of but quence in a stock a seat in a of a seat in stock board, board, but quence not its its existence as property. property. The contingencies may defeat or existence as defeat or which contingencies may in affect title or will be reflected in its price, and if, notaffect its its title be reflected or its its enjoyment its notwill if, enjoyment price, to $8000, withstanding them, aa seat seat has has aa vendable vendable value value of of from $5000 $8000, $5000 to withstanding them, it would seem that it that the the law should should have have some process process to it for the to reach reach it for the benefit of of creditors. creditors. And the the Bankruptcy Bankruptcy Act Act supplies the process. benefit The the process. supplies trustee of of a bankrupt's bankrupt's estate the bankrupt's assignee, and we only estate is is the trustee only assignee, bankrupt's repeat the statute, say that the trustee is vested with whatever the when we that vested the is whatever trustee statute, repeat say 68 bankrupt can can convey." convey." ~8 the bankrupt the as property, The trustee, trustee, being being vested vested with with title title to to the the seat seat as accordproperty, can accordbankrupt to transfer the certificate either to the trustee ingly compel the to transfer the the certificate to the either trustee ingly compel bankrupt or the trustee's or to to the The rights of a trustee have been more clearly trustee's assignee. trustee assignee. rights of clearly defined the law more explicitly settled by a recent case decided by defined and the recent settled a case decided by by explicitly v. Court. In Chicago of Trade v. Johnson tne United States Board States Supreme Court. tne Johnson, 69 of Supreme Chicago the contention of the bankrupt was that the seat was only a that the seat the contention of the bankrupt in chose in only a chose action, which the trustee could not reduce to that is, the trustee not reduce which manual to is, something action, that something possession, hence hence it was not not subject subject to to summary jurisdiction. The opinion it was summary jurisdiction. possession, opinion in of the the Court, Court, given given by by Chief Justice Taft, of said in part: Chief Justice Taft, said part: "Membership "Membership on in action, the Board of of Trade is is different a mere chose chose in a simple different from a like a the action, like simple claim or another and only to enjoyed its be claim to or debt debt asserted another asserted against after its only against enjoyed after or enforcement. enforcement. It satisfaction It is is a a continuously satisfaction or continuously enjoyed enjoyed 'incorporeal 'incorporeal of right' Hyde v. Woods . ••• of Trade is the member's trustee, Board is the The v. member's Woods. trustee, right' Hyde for his while it it maintains maintains and holds holds all all its its facilities facilities for his use As use and enjoyment. while enjoyment. As in possession to be in long he has has these, these, he may may properly properly be said said to of them. as he possession of long as That creditor creditor members may may assert assert aa mere restraint restraint of of alienation alienation to to enforce enforce their not oust oust the the member's possession possession or or personal personal enjoyclaims does does not their claims enjoythe membership ment. By operation of the the bankruptcy bankruptcy law, passes, subsubment. By law, the membership passes, operation of for his of the Exchange, to the trustee, for his disposition of it. ject to rules to the of it. The the rules of to trustee, Exchange, disposition ject trustee does not become aa member, member, but he does come into into control of the control of does not the trustee 1
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er 187 V.S. Ct. 200 61187 596,23 200 (1903). U.S. 596, 23 Sup. (1903) Sup. et. 68 Id. at at 605,23 et. at at 203. 203. 68/d. 605, 23 Sup. Sup. Ct. 69 Ct. 232 264 V.S. 44 Sup. U.S. 1, 232 (1924). 69264 1, 44 Sup. et. (1924). .
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bankrupt's right right to to dispose dispose of of the the membership membership and, the aid the aid of of the and, with the bankrupt's his to do everything bankruptcy court, court, can require require the the bankrupt everything on his bankrupt to bankruptcy part necessary necessary under the the rules rules of of the the Board to to exercise this right. right. The exercise this part a in attached the membership is property, in a way attached to the person of the bankrupt is to of the way bankrupt person membership property, and disposable disposable only by his his will. will. It It follows him, therefore, therefore, into into the the bankbankfollows him, only by ruptcy court, which is given full equitable jurisdiction over his conduct full his is over which given equitable jurisdiction ruptcy court, it comes into in of his his estate, and, therefore, therefore, it into the the custody of that that in respect estate, and, custody of respect of 70 court to be administered administered by by it it as as part part of his estate." estate." 70 of his to be court From the the foregoing foregoing it it is that the the trustee trustee may may compel is evident evident that either compel either the sale the seat by the the bankrupt bankrupt or transfer, subject subject to to the the rules rules or its of the seat by its transfer, the sale of of the exchange. exchange. of the it will In connection with with bankruptcy, bankruptcy, it will be recalled that that the the exchange be recalled In connection exchange of a failed for for sale of a failed member and for the sale of by-laws provide for suspension the of suspension by-laws provide his seat claims other members have against the bankrupt. his seat to which have the to satisfy claims other satisfy against bankrupt. here is is whether whether such by-laws The legal constitute exchange by-laws constitute legal question exchange question here as preferred preferred creditors, the preference of some creditors as against members as of as creditors creditors, the against preference of the the Bankruptcy others being contrary contrary to to the the provisions provisions of Bankruptcy Act. Act. The leadothers being lead71 a ing case this question is that of Hyde v. WOOdS.71 Holding that a seat on this that v. that case is of Woods. seat Holding Hyde ing question a propas a is property, property, the the court it as propon an exchange court nevertheless nevertheless recognizes recognizes it exchange is it erty "encumbered with conditions, purchased, without which it without when with conditions, purchased, erty 72 Consequently, a that could not be obtained." 12 by-law providing that claims claims a could not be obtained/' by-law providing Consequently, of a of member creditors are to to be be paid paid out the proceeds proceeds of the sale a of the sale of of the out of of creditors are the property property seat was "entered seat which was incident of of the "entered into into and became an incident it when it was created remains aa part part of it into hands soever of it into whose hands soever it it was created and remains may As the the creators this right right-this property-took nothing from took nothing this property creators of of this come. As may come. any man's creditors they created it, no wrong was done to to any any creditors when created man's it, they wrong any 73 creditor by by the the imposition imposition of this condition." to limit limit condition/' 73 The agreement creditor of this agreement to or bind bind aa membership membership thus thus constitutes constitutes no preference within the purwithin or the preference purit is the Bankruptcy Bankruptcy Act. Act. "It that it the policy view of "It is said that is against the is said of view of the against policy of the bankrupt law, law, against public policy, policy, to permit aa man to to make in in to permit the bankrupt against public this or any other other manner aa standing or perpetual appropriation of his or this or any his of standing perpetual appropriation of his his general is to to this point property to prejudice of it is this point the prejudice to the creditors; and it general creditors; property that the the numerous authorities however, counsel are are cited. that authorities of of counsel cited. They all, however, They all, has done this this with with property property which was was his his relate to to cases cases where aa man has relate own-property on which he himself imposed the direction, or the incumthe himself imposed own property direction, or the where aa man takes takes brance which impeded impeded creditors. creditors. It is quite different brance It is different where quite or otherwise, is subject to that direction or property, by purchase is which to or that direction or otherwise, subject property, by purchase of act of his disposition receives it. It is his which imposes imposes the is no act it. It the disposition when he receives TO Chicago Board of of Trade v. Ct. 232, 70 v. Johnson, Johnson, 264 264 V.S. 44 Sup. 232,234-35 U.S. 1,12; 234-35 (1924). 1, 12; 44 Chicago Sup. Ct. (1924). 7194 D.S. 523 7194U.S. 523 (1876). (1876). *2 f2 7d. Id. at at 525. 525, f8Ibid. i*lbid.
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It was imposed It imposed by by those those who had aa right right to to do it to make it it and to it 74 an accompaniment accompaniment of title they gave to it." 74 of any title which to it." any they gave of an exchange exchange may may have have claims bankrupt member Members of claims against a bankrupt against a its floor matters not in arising transactions on its floor or or from matters not connected connected in arising from transactions the any way with the exchange. This gives rise to the question whether all with rise to the all whether any way exchange. gives question are to claims to be be satisfied satisfied from the the proceeds proceeds of of claims of of members are the sale of the sale of a or a bankrupt's bankrupt's seat, those claims trading on the claims which arise the arise from trading seat, or only only those exchange. The recent sustaining the validity of the by-laws already recent law the of the exchange. sustaining validity by-laws already referred is that that members dealing referred to to is the floor floor of of the the exchange dealing on the exchange must in view the "have in the security arises from the the fact that beyond the fact that security which arises beyond the credit personal credit of every is the security furnished by his member· of member the is furnished memberhis personal every by security T5 This recent law clearly does not apply to ship in the the association." association." 15 This recent ship in clearly does not apply to other other than exchange exchange transactions, transactions, and apparently there is reason is no sound reason apparently there for giving for giving priority priority to to the the private private claims the claims of claims of claims of of members over over the in v. Bernheim general creditors. reasoning of the court in the case of v. The of the the case of creditors. court general reasoning 76 76 Keppler is is in in point. point. The matters matters under review review in were analanalin that that case case were Keppler ogous, although the exact question above was not raised. The the exact mentioned raised. was not above ogous, although question said: "The claims court claims of of members that that are to be satisfied proceeds court said: are to satisfied out of proceeds out of of the of aa decedent's decedent's s^at se.at are not all whatever nature of all claims nature the sale sale of are . . . not of whatever claims of and description. To give full effect to the construction contended for full effect to for by the construction by give description. the defendant would be be to to include in tort from matters enthe claims arising in matters eninclude claims tort arising unrelated to to the business of of the the Exchange, through tirely unrelated claims derived derived through the business tirely Exchange, claims assignments third persons happened to have demands against a who from third to have assignments against a persons happened member; in fact, any all rights whatsoever which one may have in and all have whatsoever which member; fact, any may rights against another, another, irrespective the time time and mode of their creation of the creation or or of their against irrespective of acquisition, dependent solely on the circumstance that both should and the that both circumstance dependent solely acquisition, be members of the Exchange Exchange when one of 7'1 be of the dies." 77 of them dies." It has been been held, held, however, however, that that loans loans of business character It has of a a business character made the to another, another, although not pursuant to dealings to from one member to not although dealings on the pursuant exchange, fall within the purview of such a by-law. In other words, it fall of a within the other words, it by-law. exchange, purview does embrace merely merely loans loans between members for the account for the not embrace account of of does not 78 It clients. 18 It is is aa question question whether whether this this principle will be extended further will be further clients. principle so as as to to include include claims claims which are are not related related to transactions on the to transactions the so exchange or are not in some way related to the business of in the not related to of membusiness or which are way exchange bers on the bers the exchange. exchange. In addition addition to to the the value value of the bankrupt's bankrupt's seat, balances of the seat, he may may have balances
burden. burden.
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Hyde v. Woods, 94 V.S. 523, 526 U.S. 523, 526 (1876). Woods, 94 Hyde v. (1876) 126 THE LAW 126 (1913). (1913). 16 34 Mise. 321, 69 N.Y. Supp. also Matter of of Seymour, Ct. 1901). See also 69 N.Y. 803 (Sup. Misc. 321, 7634 1901). See (Sup. Ct. Supp. 803 Seymour, &: Co., Co., 37 Mise. 264, 264, 75 N.Y. Supp. Cochran vv Adams, Adams, Johnson & Ct. 1902); 75 N.Y. 37 Misc. 312 (Sup. 1902) (Sup. Ct. Supp. 312 Johnson 180 289, 36 Atl. 854 (1897). St. 289, Pa. St. 854 (1897) 180 Pa. 36 Atl. 77 Bemheim 11 v. Keppler, Keppler, 34 Mise. 321, 321,323; Bernheim v. 34 Misc. Ct. 1901). 803, 804-05 (Sup. 323; 69 N.Y. Supp. Supp. 803, (Sup. Ct. 1901) 78 in re 18In Fisk & &: Robinson, Robinson, 185 Fed. 974 (D.C.N.Y. 1911) re Fisk 185 Fed. 974 (D.C.N.Y. 1911) . 74 14
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75 75 LEGG, LEGG, THE LAW OF COMMERCIAL EXCHANGES,
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is whether due at the clearing house. house. A question whether these arises is these the clearing due him at question which arises claims of of creditor balances are are applicable to the the claims creditor members, balances members, or whether applicable to they belong to the trustee in bankruptcy for the benefit of the general general in for the benefit of the to the trustee bankruptcy they belong the law this point is not clearly defined, the decisions creditors. is decisions law this The on creditors. clearly defined, point being few and opinion being divided. The transactions rise to to the transactions giving the divided. few giving rise being being opinion balances at at the the clearing house having taken place on the exchange, the house the taken balances exchange, the clearing having place held that that aa by-law, by-law, giving a preference against federal courts courts have have held a federal clearing giving preference against clearing house balances balances is is valid valid and enforceable. probably federal rule rule would probably enforceable. This federal house 79 To the earlier New York case to the be controlling. case containing be containing implications implications to controlling. An earlier the contrary can be distinguished in that the debt arose prior to the insolvent's in insolvent's that the to arose prior contrary can be distinguished 80 membership. so membership. In the distribution of the estate estate of of aa deceased member, a seat likeis likethe distribution of the deceased member, seat is the deceased as property. property. After After the the claims claims of wise treated of members against treated as wise against the the sale are satisfied the proceeds proceeds of the seat, balance of the sale of of the the balance member are satisfied from the seat, the is administered administered by by his his personal personal representative. representative. is a process is a Attachment and Execution. Execution. Attachment is process by by which aa Attachment in cases creditor may levy levy directly directly upon upon property property of the debtor, permitted of the creditor may cases permitted debtor, in 81 81 until decided. has by law, thereby be protected until his case is decided. has his case There be is and thereby protected by law, seat. In some of an exchange recent case been no recent case involving been exchange seat. involving attachment of old cases it it was was held held that that aa seat seat was not not subject to attachment, the to the courts courts old cases attachment, subject to that is more of the theory that membership is a license or chose in leaning to the or in of license chose theory membership leaning 82 82 action than than aa property property right. right. The trend trend of judicial opinion in recent of judicial action recent opinion in years it to accept without question this doctrine as it impossible to makes this doctrine as impossible years accept question the law of of today. the law today. the process process by by which aa creditor judgment which Execution is is the creditor enforces a judgment enforces a he weight of of authority authority has has been been adverse the right right obtained. The weight has obtained. he has adverse to to the in of aa creditor creditor to to levy upon an exchange seat in the ordinary process seat the of of levy upon exchange ordinary process of execution. jurisdictions this this has far as has been extended so execution. In some jurisdictions so far as to to deny deny 83 But the weight 83 the any remedy because of the intangible nature of the seat. because of of the seat. the intangible any remedy weight of authority authority is is that, that, although although the the seat may not be subject levy by by seat may of not be to levy subject to may be be reached reached by by a creditor creditor in ways: by by aa creditor's execution, it may in two ways: creditor's execution, it in supplementary or by by the the appointment appointment of of aa receiver receiver in proceedings. bill, or bill, supplementary proceedings. "We think think the the right right of of the the judgment judgment debtor a seat debtor to in the to a seat in the Cotton ExCotton Exit had value value was proved change was property. property. That it is conceded; conceded; proved and is change T9 in 79 In re re Gregory, Fed. 629 629 (C.C.A. (C.C.A. 2d 1909); cf. Fidelity-Phila. 174 Fed. v. Fidelity-Phila. cf. Middleton v. Gregory, 174 1909) Trust F. 2d 2d 851 851 (C.C.A. 3d 1929). 35 F. Trust Co., Co., 35 1929) (C.C.A. so Cohen v. 80 v. Budd, Budd, 52 Misc. 217, N.Y. Supp. Ct. 1906), 103 N.Y. 45 (Sup. 52 Misc. 117 217, 103 affirmed, 117 Supp. 45 1906), affirmed, (Sup. Ct. App. N.Y. Supp. Dep't 1907). Div. 922, 1133 (1st 102 N.Y. 922, 102 (1st Dep't Supp. 1133 1907). App. Div. si 7 C.J.S., Attachment, 817 1. C.J.S., Attachment, 1. 82 Pancoast 82 Pancoast v. v. Houston, Houston, 55 Week. Notes Notes Cas. Evans v. 32 Leg. Leg. Cas. 36 36 (1877); v. Wister, Wister, 32 (1877) Int. 354. 354. Int. 83 Sec. 58 ss 23 23 C.J., C.J., Executions, Executions, Sec. 58 n. n. 12; 33 C.J.S., C.J.S., id., 26 n. n. 33. Sec. 26 33. But compare 12; 33 Press id., Sec. compare Press &: Co. v. v. Fahy, 262, 145 N.E. 103 affirming 231 Ill. App. App. 193 111. 262, 103 (1924), 313 Ill. 145 N.E. & Co. 231 111. 193 (1923). Fahy, 313 (1924) affirming (1923) ;
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and that that it could be be transferred transferred to to aa certain purchasers under it could certain class class of of purchasers under conditions is also established. Although of prescribed rules rules and conditions is also established. . . . Although of a a prescribed character peculiar, its its use use restricted, range of p~rchasers character somewhat peculiar, its range of purchasers restricted, its narrowed, and its ownership clogged clogged with conditions, nevertheits ownership it was neverthenarrowed, conditions, it less a valuable valuable right, right, capable transfer and correctly to be be less a of transfer decided to capable of correctly decided 84 84 Accordingly the seat passed to a receiver appointed property." seat the to a receiver in Accordingly property." passed appointed in supplementary proceedings. The title of the receiver is analogous title of the receiver is analogous to to supplementary proceedings. the title title of of the the trustee the trustee in in bankruptcy. bankruptcy. He obtains of memobtains no privileges of privileges the exchange, bership on the but he he may may sell the seat transfer sell the its transfer seat and compel exchange, but bership compel its by the judgment debtor. debtor. by the judgment transferability of Transfer, Pledge, and Assignment. Assignment. The transferability of an exchange Transfer, Pledge, exchange to membership, subject to the by-laws governing the admission of the of new admission the by-laws governing membership, subject 85 85 members, has already been considered. considered. A seat seat may be assigned or members, has already been may be assigned or a as for pledged as security for a debt. Such an assignment or pledge or debt. would security pledged assignment pledge or pledgee lien enforceable confer upon assignee assignee or pledgee aa lien the proceeds proceeds confer upon enforceable against against the seat after of the sale sale of after the the satisfaction of the of the the seat satisfaction of of claims claims due to to members. 86 It would not It not confer confer any right upon assignee or pledgee to sell the seat. or to seat. S6 sell the any right upon assignee pledgee 37 the In Matter Matter of Appeals had occasion to New York Court of of Appeals occasion to of Gruner 81 the consider of aa seat s~at on the the New York Stock Exchange and, the attributes consider the attributes of Stock Exchange and, what is is more relevant relevant here, here, the the rights rights of both of the seat of an assignee of seat the assignee itself and of of the proceeds realized realized from its sale. The court observed that itself the proceeds its sale. court observed that the "although the assignment (of the seat itself) purported the trust the seat to give trust "although itself) purported to assignment (of give the company power to sell the seat with or without notice to the assignor, with to to sell seat or without the notice the assignor, company power a court of a court that power power could not be exercised exercised except by the the interposition could not that interposition of except by of equity by decree in personam personam compelling compelling the the co-operation the decree in of the of co-operation of equity by in the . . . since there is provision in the constitution or rules of assignor rules of since there is or no constitution assignor provision the exchange which makes co-operation of the the committee on admissions admissions the exchange which co-operation of a non-member. non-member. . . . When we come to of available to the the question available as as to to a question of the proceeds of of the the sale, sale, aa different is presented. member is presented. Each different question the proceeds question of the exchange exchange has has aa right right to to the the proceeds proceeds of the sale sale of of the of the of his his seat, seat, and that right right may may be be assigned ...• The interest passed to the trust interest which that to the trust assigned. passed was company here by reason of the assignment the right to receive the of the the reason to here receive the assignment by right company 88 proceeds when they they became available. pledgee or available. , . ,"S8 ." The pledgee or assignee assignee proceeds .
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s* Powell 84 v. Waldron, Waldron, 89 N.Y. 328, 328, 331 cited in see cases Powell v. cases cited in 23 331 (1882), 89 N.Y. 23 C.]., (1882), and see C.J., 58 n. n. 13, in 33 33 C.].S., id., Sec. 26 n. n. 34. Language in in the the text text from Executions, Sec. 26 34. Language Sec. 58 13, and in Executions, Sec. C.J.S., id., in Matter of Gruner, the Powell Powell case, case, supra, supra, was quoted with approval approval in Matter of Gruner, 295 295 N.Y. N.Y. 510, the 510, quoted with 68 N.E. 2d 514, 517 (1946). 516; N.E. 68 517 2d 514, 516; (1946) 85 85 See section in this chapter Admission of Keyer v. v. Memphis in this of Members, earlier section See earlier Members, and Keyer Memphis chapter on Admission 186 S.W. 414, 186 S.W. 593 593 (1916). Cotton Exchange, 135 135 Tenn. 414, Cotton Exchange, (1916). 86 141 N.Y. 86 Ketcham v. v. Provost, Provost, 156 App. Div. Div. 477, 477, 141 Dep't 1913), N.Y. Sflpp. 156 App. 437 (1st Stipp. 437 (1st Dep't 1913) 109 N.E. affirmed 215 N.Y. N.Y. 631, 631, 109 N.E. 1080 (1915). without opinion, (1915) affirmed without opinion, 215 ST 81 295 295 N.Y. N.Y. 510, 510, 68 68 N.E. N.E. 2d 2d 514 514 (1946). (1946) 88 id. Id. at N.E. 2d at 517-18. 517-18. at 517-18,68 2d at 517-18, 68 N.E. .
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is furthermore furthermore subject to the the by-laws by-laws and rules the exchange rules of of the relating exchange relating subject to to and relating relating to 89 remedies on appeal. 89 remedies appeal. the case of aa voluntary voluntary assignment In the for the the benefit benefit of of creditors, case of creditors, howassignment for in bankthe position position of the assignee is similar to that of the trustee in ever, the similar that of the trustee of the is to ever, assignee 90 Title to the seat passes to the assignee. The matter is ruptcy.DO is not impornot matter Title to the seat the to passes ruptcy. imporassignee. tant because such such an assignment is made a ground of bankruptcy, tant because is a of ground bankruptcy, and assignment the proceeding is is likely to supervene. supervene. latter proceeding the latter likely to Taxation. question whether whether an exchange is property property has has Taxation. The question seat is exchange seat have in before the courts in cases involving taxation. Cases taxation. Cases come squarely before courts cases the involving squarely arisen involving the right right of the ·taxing to levy levy on exchange arisen of the exchange involving the taxing authority authority to as an memberships as personal property. If the seat were specifically as memberships specifically named as personal property. If the seat object of of taxation, local tax tax arise; and, taxation, no question and, interpreting object question would arise; interpreting local has suffiin different of judicial been laws in ways, the the current current of judicial opinion has not suffinot laws different ways, opinion ciently clear clear to to enable a general rule to to be formulated. general rule ciently that an exchange The United States has decided that States Supreme exchange memSupreme Court has in the bership may may be taxed. taxed. "Of course, course, there there is is nothing nothing in the Federal Federal Conbership stitution prevents the the memberships memberships here involved from being stitution which prevents being in the taxed, the question they in fact taxable under the fact whether were taxable and the taxed, they question of local statutes of the a matter matter of local law with with which we are State was a are not conconthe State statutes of It was the the province province of the state state court to to determine what the the terms terms cerned. of the cerned. It of the taxing statute authorized . . . . " 91 In another case the Supreme authorized. ." the statute case of the Supreme taxing Court held held that that whether whether a seat seat owned by resident of of one state state on an Court by a resident taxable the exchange in another state taxable under the laws of the former was was of the state laws in another exchange 92 In New York ex reI. 92 to be decided by its courts. Whitney aa question courts. rel. v. decided its by Whitney v. question to 93 the Supreme held that that the the dominant Graves in 1937, GravesJ decided in 1937, the Supreme Court held attribute of of aa seat by a resident resident of the New of Massachusetts on the seat owned by attribute that is, York Stock Exchange-that is, the the privilege privilege of buying and selling securiof buying Stock Exchange selling securithe the floor of the Exchange-brought the non-resident ties the non-resident of member floor the on ties Exchange brought within the taxing taxing power power of of New York. York. within the of the These decisions decisions simply simply affirm affirm the the jurisdiction jurisdiction of the state to state courts courts to determine interests are are taxable taxable under local local statutes. statutes. In two states, determine what interests states, 94 and Ohio,95 Minnesota94 the courts courts have held held squarely that an exchange Minnesota Ohio, 96 the squarely that exchange is
to presentation presentation of of claims claims within within time time limits prescribed limits prescribed to
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89 Shannon v. v. Cheney, Cheney, 156 Cal. 567, Gartner v. v. Pittsburgh 105 Pac. Pac. 588 156 Cal. 588 (1909); 567, 105 (1909) Pittsburgh Stock Exchange, 247 247 Pa. Pa. St. St. 482, 482, 93 93 Atl. Atl. 759 759 (1915). Stock Exchange, (1915) 90 McClain v. v. Pittsburgh Stock Exchange, Exchange, 219 Atl. 1031 Pa. St. St. 435, 1031 (1908). 219 Pa. 435, 68 Atl. Pittsburgh Stock (1908) ei U.S. 184, 91 Rogers v. Hennepin County, 240 240 V.S. 265, 267 Ct. 265, 267 (1916); 184, 189; 189; 36 Sup. Sup. Ct. Hennepin County, Rogers v. (1916) U.S. Ct. compare ex rei. Whitney v. Graves, 299 V.S. 366, 57 Sup. Ct. 237 (1937). v. 57 ex rel. York 299 New 237 366, Graves, Whitney Sup. (1937) compare 92 Citizens Ct. 15 Citizens Nat'l Nat'} Bank v. v. Durr, Durr, 257 257 V.S. 42 Sup. U.S. 99, 15 (1921). 99, 42 Sup. Ct. (1921) es 299 V.S. 93299 57 Sup. Ct. 237 237 (1937). U.S. 366, 366, 57 (1937) Sup. Ct. a* 94 State v. McPhail, 145 N.W. 108 108 (1914). 124 Minn. 398, State v. 398, 145 McPhail, 124 (1914). 95 St. 251, 95 Anderson v. v. Durr, 251, 126 sub nom. 100 Ohio St. 57 (1919). 126 N.E. 57 nom. Durr, 100 affirmed sub (1919), affirmed Ct. 15 U.S. 99, 15 (1921). Citizens v. Durr, Durr, 257 99, 42 42 Sup. 257 V.S. Citizens Natl Bank v. (1921) Sup. Ct. ;
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membership personal property property within within the the meaning meaning of laws and, is personal of tax tax laws and, membership is consequently, to levy. levy. The Ohio decision held that that an decision further further held subject to consequently, subject exchange membership, membership, being being property property of nature, had its of an intangible its intangible nature, exchange at situs (or (or legal location) at the place of residence. The decision the situs member's of residence. decision legal location) place in Ohio on a affirmed the right right to to impose tax in the New York York affirmed the a seat seat on the impose a tax by aa resident resident of Stock Exchange, owned by of Ohio. Stock Exchange, intangible nature nature of the property property in has influin an exchange of the seat has influThe intangible exchange seat in deciding jurisdictions in seats are enced courts courts of of other that exchange other jurisdictions are deciding that exchange seats not property. It It is is pointed pointed out out that that a membership membership is with is "clogged with not property. "clogged conditions" to transferability transferability and that the member's interests that the as to interests and conditions" as in character. character. California, privileges are are not not absolute unrestricted in Maryabsolute and unrestricted California, Maryprivileges 96 join in in holding memberships not taxable as pernot land, and New York96 as taxable land, holding memberships join pera of definition but, because of a broader definition of the term "prop' sonal property; because broader of the sonal property; but, "proptax in erty" used in the inheritance tax law in York, the courts of that in inheritance law New the the used courts of that York, erty" 91 seat is is subject state held that that a seat subject to to inheritance tax. 97 inheritance tax. state have have held The fact that in in all all cases, cases, involving have turned turned decisions have fact that taxation, decisions involving taxation, of the the language upon construction interpretation of of the the statute statute construction and interpretation language of upon a this derive to derive a general rule from this group of decisions, makes it it impossible to rule of decisions, general group impossible clear-cut and explicit. although individual individual findings findings, have been clear-cut sumalthough explicit. In sumthe has exchange membership has the attributes of property in bankmary, an attributes of in bankexchange membership mary, property ruptcy proceedings and in in suits suits brought brought by resembles proppropit resembles creditors; it by creditors; ruptcy proceedings erty in the fact that it may be transferred, assigned, or pledged. Under it be transferred, assigned, or pledged. may erty in the fact that taxing statutes it has held property or action, chiefly it or a statutes has been held a chose in action, chose in in property taxing chiefly in 98 9s of the accordance with with the the language of the statute under construction. statute construction. accordance language 'The Exchange's Control of Its Quotations. of a a stock The Exchange's stock of Its Quotations. The right right of exchange or commodity exchange to exercise a full measure of control to a full exercise or measure of control commodity exchange exchange persons shall what over its shall receive its quotations-to decide receive them and what over quotationsto decide what persons persons shall not and to to revoke revoke the the privilege, of in the shall not the opinion privilege, when in opinion of persons a abused has source of the it is being abused-has been a source of extensive litigation. extensive it is the exchange exchange being litigation. The method of of collecting collecting and transmitting transmitting continuous has continuous quotations quotations has been described contract with with the the distributing limits elsewhere. The contract described elsewhere. been distributing agency agency limits the companies' right to transmit quotations. The exchange to transmit the telegraph quotations. telegraph companies' right exchange right to to approve or disapprove particular recipient. reserves the the right reserves any particular approve or disapprove any recipient. The many efforts have been made to to break break the the control control of efforts which have of exchanges many exchanges their quotation quotation service service emphasize the value of this phase the over their the value of this over of the emphasize phase of organized market's activities. access to legitimate quotations, activities. Without access to market's legitimate quotations, organized so 103 Cal. Gal. 69, 96 San Francisco Francisco v. v. Anderson, Anderson, 103 Pac. 1034 1034 (1894); 36 Pac. Baltimore City v. 69, 36 (1894); Baltimore City v. v. Feitner, Johnson, 96 Md. 737, 737, 54 Atl. Atl. 646 (1903); People v. Feitner, 167 N.Y. 1, N.E. 265 265 167 N.Y. 60 N.E. 1, 60 (1903) People Johnson, 96 (1901) (1901) . 97 Matter 91 Matter of N.Y. 254, 254, 66 66 N.E. N.E. 934 of HelIman, 934 (1903). 174 N.Y. Hellman, 174 (1903) SB And see 146 (1884), 98 see Weaver v. v. Fisher, Ill. 146 treated the the interest as interest as Fisher, 110 111. (1884), which treated subject to aa resulting resulting trust. trust. subject to ;
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for its the bucket shop exist, for its prices prices must correspond with the the prices prices the bucket shop cannot exist, correspond with made on the exchanges. the exchanges. in point The earliest earliest question point of time to whether of time to be decided decided was whether question in is News the is intangible, yet the character of intangiquotations are property. are character of intangible, yet property. intangiquotations is bar to legal protection. Consequently, the decisions on this this bility bar to the decisions no is legal protection. Consequently, bility point are clear-that quotations are property and, as such, subject market as that are clear are and, such, quotations property subject point 99 to by the the exchange exchange on which they they originate. to control control by originate." are they But, while the are property, property, are they property the quotations But, while impressed property impressed quotations are in which there with aa public public use? use? The exchanges exchanges are are great great market places places in there with in various is great public interest, and their importance in the various commodity the their importance is great commodity public interest, this that because of this trades is is recognized. recognized. The contention contention advanced was that because of trades curtail to the distribupublic interest the exchange should not be allowed to curtail the distribunot be should the interest exchange public them. This conaccess to tion of quotations or to to deprive deprive persons persons from access to them. contion of quotations or that the the courts the quotatention was sustained in Illinois, held that courts held tention was sustained in Illinois, where the quotaaffected with a public of the the Chicago Chicago Board of of Trade were were affected interest tions of tions public interest of public and, consequently, to aa measure measure of public regulation, that and, regulation, and that consequently, subject subject to the courts courts "would forbid that aa monopoly monopoly should be be made of by forbid that of them by the refusing them to others are equally furnishing to some them to and to others who are refusing equally furnishing all for them be and governed by all reasonable rules and willing to pay for reasonable rules to by governed willing pay of regulations, and prevent the Board of Trade or the telegraph would the or the regulations, prevent telegraph in respect companies from unjustly unjustly discriminating discriminating in to the parties who the parties respect to companies 10 will be be allowed allowed to to receive receive them." them." 100 This view, view, however, is contrary will to however, is contrary to the opinion expressed expressed by by most most courts, courts, and in recent case the couns in a a more recent the opinion case the courts of Illinois affirmed affirmed the the right right of the Chicago Exchange to to refuse refuse of the Stock Exchange of Illinois Chicago Live Stock quotations to individual enterprises radio to use use them for desired to for radio to individual enterprises which desired quotations broadcasting and for advertising purposes. The decision further held that decision further held for that broadcasting advertising purposes. the by-law of the Board.of Trade prohibiting the broadcasting of quotathe by-law of the Board of prohibiting the broadcasting of quotain restraint not in restraint of presiding tions reasonable and not tions was reasonable of competition competition (the (the presiding the ground that the plaintiff, who as a of justice concurred as a the that the on member of concurred ground plaintiff, justice the exchange subscribed to the by-laws, right to raise the had had to the the subscribed to the no raise exchange by-laws, right 101 .101 question) question) question whether whether quotations with a public The question are affected affected with interest quotations are public interest 102 and their decisions have been conthe federal courts,102 has come before the federal their before decisions conhas courts, I the Illinois opinion quoted above. " . . . I am of the opinion trary to above. "... of the the Illinois to trary opinion quoted opinion that courts cannot by their their decrees assume the the initiative initiative in in declaring cannot by decrees assume that courts declaring use. There should first private property property to a public to be impressed should first impressed with a public use. private of growth or expansion growth or expansion of private business or of of exist that condition condition of exist that of a private business or ,
9 See 99 following notes. notes. in following See cases cases in
Exchange v. v. Board of of Trade. Stock Exchange The New York & Chicago 111. 153. 127 Ill. Trade, 127 153, Chicago Grain & Stock 164; N.E. 855,859 19 N.E. 855, 859 (1889). 164; 19 (1889) 101 Bowles 101 Bowles Live Live Stock Co. v. v. Chicago Chicago Live Live Stock Exchange. 243 243 111. Ill. App. Stock Exchange, Stock Co. 71 (1926). App. 7I (1926) 102 Chicago Board of & Stock 102 of Trade v. v. Christie Grain & .• 116 Christie Grain Stock Co 116 Fed. Fed. 944 944 (1902). Co., Chicago (1902) 100 100
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The Law of of Commodity Exchanges Commodity Exchanges
293 293
its relation relation to to the the public public service service or public public necessity necessity which justifies justifies the the a public assertion of public interest interest therein therein and the public of a the accompaniment assertion of public accompaniment of control, followed followed by by legislative legislative recognition recognition or or declaration of such declaration of such conconcontrol, dition."103 pursuance of the holding holding of the United Supreme dition." 103 In pursuance of the of the United States States Supreme that the the determination determination of whether or not aa business affected Court that of whether or not is affected business is with aa public public interest interest is a legislative function, Congress declared in the with is a in the declared function, legislative Congress in grains Futures Act that that exchanges exchanges trading trading in are affected with a a Grain Futures are affected with grains public interest. interest. Subsequently, the Federal Federal Trade Commission in in an order order Subsequently, the public Chamber forbade of Commerce to interfere with the of to interfere the with the Minneapolis forbade the Minneapolis furnished its quotations to the St. Paul Grain telegraph company furnished its to which the St. Paul quotations telegraph company Exchange to the the Equity Equity Co-operative Exchange. This ruling ruling was Co-operative Exchange. Exchange and to 104 the held by the the Circuit Circuit Court of of Appeals of the Eighth of invalid by Circuit. 104 held invalid Eighth Circuit. Appeals Pointing out that that the arose between between competing the question the bodies, ,the competing bodies, Pointing out question arose or legally, court be aa strange legally, where "It would be said: "It court said: situation, logically logically or strange situation, to its one could be be compelled to furnish its own property to a competitor to furnish to compelled competitor to property be used used as as aa major major weapon weapon of its own destruction of its destruction.. . . . The Exchange be Exchange as its for destroying instrument for the Chamber. was formed by by the the Equity its instrument Equity as destroying the its formation. was the the expressed expressed purpose purpose of of its formation. Competition by no is by That was Competition is it is all reason is beyond means legally legally free free from proper proper restraint, restraint, and it beyond all to reason to require anyone furnish the the means of his own destruction of his destruction to to furnish to another another anyone to require who is bent upon upon accomplishing such destruction. think the order is bent We think destruction. order the accomplishing of the respecting the the furnishing of market quotations the Commission respecting of is of furnishing quotations is is not, not, under the the circumstances circumstances conclusively by invalid because because it it is invalid conclusively shown by this record, record, an unfair unfair method of of competition competition for the Chamber to to refuse refuse this for the to supply such quotations quotations to to these these parties parties covered by the to covered by the order."105 order." 105 The supply such the court court was that, decision of the that, although although legislation legislation may may possibly declare decision of possibly declare be affected with a public interest, this decision cannot be quotations to affected with a to be decision be this cannot interest, quotations public made by by another branch of of the the government. another branch government. effort to the courts to label label exchanges institutions An effort to cause cause the courts to as gambling exchanges as gambling institutions and to characterize exchange exchange trading trading as transactions-illegal as gambling to characterize gambling transactionsillegal beyond the the pale pale of the court's court's protection-was the case of of the and beyond in the case of protection was made in 106 Chicago of Trade v. The Christie v. Christie if Stock Stock Co.10e Christie Grain .;,. Co. Christie Chicago Board of Grain & surreptitiously obtaining the quotations was Stock Company 8c Stock the surreptitiously obtaining Company quotations of the Chicago Chicago Board of of Trade brought of Trade. The Board of action of the brought action to enjoin the defendant from obtaining obtaining and distributing its quotations. to distributing its quotations. enjoin the back with with aa counter-attack counter-attack that that the the Board of struck back of Trade defendant struck The defendant all bucket was the greatest greatest of of all bucket shops; shops; that that the the transactions transactions in in futures futures was the its
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is Id. 108 Id. at at 946. 946. See also earlier section in in this this chapter earlier section See also chapter on Commodity Commodity Exchanges Exchanges and the State. the State. 104 Chamber of 104 v. Federal Federal Trade Commission, 13 F. F. 2d 673 of Commerce v. 673 (C.C.A. 8th Commission, 13 (C.C.A. 8th 1926) • 1926) 105 id. 105 Id. at at 688. 688. 106 198 10e 236, 25 Ct. 637 (1905). U.S. 236, 198 U.I). 25 Sup. (1905) Sup. Ct. .
.
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
294 294.
were wagering agreements bets on price and, were mere wagering fluctuations; and, agreements and bets price fluctuations; entire machinery machinery of the Board of therefore, that, since since the the entire of the of Trade was therefore, that, its not entitled the protecpermeated with illegality, its quotations were not entitled to the protecto with illegality, quotations permeated the tion of the law. Holding that tr,ansactions on the of Trade were that transactions Board of tion of the law. Holding not the court ruled that that "the "the plaintiff's of quotations collection of court ruled not illegal, plaintiff's collection quotations illegal, the is entitled to the the protection protection of of the the law. trade secret. It stands law. It stands like like a a trade secret. The is entitled to it has has done, for doplaintiff has has the the right right to to keep keep the the work which it done, or paid for door paid plaintiff similar if they might, ing, to itself. fact that others might do similar work, if that fact others The itself. to work, might they might, ing, 107 The right to complete does not to steal steal the the plaintiff's. plaintiff's.107 authorize them to not authorize does right to complete still stronger by the the determination control of its own quotations determination of its control stronger by quotations was made still that, even the quotations concerned illegal transactions, they would if the even if transactions, that, illegal quotations they for "the nevertheless be be entitled entitled to to protection, protection, for are propprop"the statistics statistics of of crime are nevertheless if other a crimerty to the same extent as any crimcollected by extent as to the statistics, even if collected any other statistics, by a erty inal of the the data."108 data/' 108 inal who furnishes furnishes some of control their to assail the right right of of exchanges exchanges to to control their quotations A later assail the later effort effort to quotations control amounts to was founded on the the contention that such control to restraint contention that restraint was founded forth the case Moore v. New of trade. trade. This This argument brought forth in the case of v. was of of brought argument 109 because the York Exchange. lOg action was brought because the Odd Lot The action York Cotton Cotton Exchange. brought Cotton Exchange and its its members were denied ticker ticker installation installation and Cotton Exchange to cancel A the continuous decree sought from the courts to courts decree was cancel continuous quotations. sought quotations. the the contract the Western Union Telegraph Company and the the contract between the Telegraph Company a monopCotton Exchange Exchange and to to adjudge the exchange to be a New York Cotton adjudge the exchange to monopof oly in restraint of trade. The plaintiff contended that the exchange trade. in restraint that the plaintiff exchange had oly "a upon the receipt dissemination of cotton price quotaand the of "a monopoly dissemination cotton receipt monopoly upon quotaprice prices of cotton, both spot and tions, and of both cotton, tions, through through which quotations prices spot quotations for future delivery, are influenced, guided, and fixed in the exchanges are fixed in the for future influenced, guided, delivery, exchanges that the markets throughout throughout the the United States; the contract the and markets contract with with the States; that quotations only to such persons as Western Union [to distribute quotations such persons the Western as the only to [to distribute of in exchange approved] is in restraint of interstate trade and commerce is interstate trade restraint exchange approved] the purpose of monopolizing in cotton and was was entered entered into into for for the purpose of monopolizing and in cotton 110 restraining that commerce."110 But the the court there was was nothing nothing court held held there that commerce." restraining to except the contract with the telegraph company to show that the with the that the contract New the telegraph company except in Exchange was engaged in interstate commerce. "It is equally York Cotton Exchange interstate "It is engaged equally for the contract with with the the Western Union for of clear the distribution that the the contract distribution of clear that the quotations to such persons as the York exchange shall approve as such the New shall the to exchange persons quotations approve within the the reach reach of the Anti-Trust Anti-Trust Act. Act. Under that that contract, does not fall of the fall within does contract, 107 Board of 107 of the the City City of v. Christie Christie Grain of Chicago of Trade of Chicago v.
236, 25 Sup. Ct. 637, 637, 639 639 (1905) (1905). 236, 250; 250; 25 Sup. Ct. 108 id. 108 Id. at at 251, at 640. 640. Ct. at 25 Sup. 251, 25 Sup. Ct. 10 9 270 V.S. 593, 46 Ct. 367 Ct. 46 Sup. U.S. 593, 367 (1926). 109270 (1926) Sup. no Moore v. 110 v. New York Cotton Exchange, Exchange, 270 U.S. 593, 270 V.S. 593, (1926) (1926) .
& Co., 198 & Stock Stock Co., 198 V.S. U.S.
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6if~-03; 46 Sup. Ct. 367, 367, 368 368 6i#-03; Sup. Ct.
of Commodity Exchanges The Law of Commodity Exchanges
295 295
the exchange exchange at its own expense collects the delivers the quotations at its the expense collects quotations and delivers them to to the the telegraph telegraph company for distribution to such approved perdistribution to approved percompany for real distributor distributor is is the the exchange; the telegraph sons. is an sons. The real telegraph company company is exchange; the is made. In effect, the agency through the distribution is the exchange the distribution which effect, exchange agency through it the hands over over the the quotations, as it might any other message, to the telegraph as other to any message, might telegraph quotations, the receivers. receivers . . . . company for to be collected collected from the for transmission, transmission, charges charges to company In furnishing furnishing the the quotations to one and refusing to furnish to refusing to furnish them to quotations to exchange is but exercising the ordinary private another, the is but a private of a the exchange another, exercising the ordinary right right of far as or other property. .... . . So far the exchange is conas the convendor of of news or other property. exchange is further and protect protect cerned, the evident purpose of of the the contract to further contract was to evident purpose cerned, the terms are are entirely entirely appropriate and legitimate to that its business. business. The terms that to its legitimate appropriate of the interend. the making making and execution the contract interexecution of contract upon effect of of the end. The effect upon indirect and incidental. incidental. Neither in or commerce, if any, any, is is indirect Neither in state trade or state trade commerce, if it or restrain purpose nor effect does it directly or unreasonably restrain such comeffect does nor unreasonably directly purpose 111 merce or operate to to create create aa monopoly/' monopoly."111 or operate merce Summarizing these decisions decisions as as to to the the scope of exchange over control over exchange control Summarizing these scope of been well it has well established that (1) quotations are property, quotations, it has established that are (1) quotations quotations, property, exclusive control, over which (2) the exchange may exercise control, and (3) exercise exclusive over exchange may (2) the (3) this not in in restraint restra~nt of of competition competition nor in in violation violation of the this control control is is not of the is that that quotations anti-trust weight of of authority authority also are not anti-trust laws. laws. The weight also is not are quotations impressed with aa public public use use and that, that, barring barring their their classification classification as as impressed affected with aa public public use use by by Congress, Congress, quotations are the exclusive affected with are the exclusive quotations property of of the the exchange. exchange. property Thus the the law law seems to be clear clear on the where seems to the matter of of control; but where control; but does the the control control end? At what point, point, if in the transmission of price does if any, in the of transmission any, price such a broad publication as to end the control quotations has there been a such there broad has as to the control quotations publication quotations are they are of the the exchange? exchange? When quotations of are "published," are "dedicated "dedicated "published," they public," and exclusive exclusive control to the to the public/' control ceases. ceases. The all-important all-important question, question, of publication. Various schemes have been worked then, relates to the time relates the to time of have Various schemes then, publication. out to to copy copy posted posted quotations use of without permission permission of them without out quotations and make use of the the telegraph company, or the subscriber from whose the exchange, the or the of subscriber whose exchange, telegraph company, 112 it bulletin board they they were were taken. taken. In In aa case this question,112 it bulletin case involving this involving question, was contended contended that that "the posting of the quotations those who right"the posting of the was by those quotations by rightis a general publication and instantly as aa fully receive receive them is a general publication instantly operates fully operates as to or surrender or dedication to the public of the proprietary rights of the dedication of the surrender the public proprietary rights of the 113 appellee This contention the fact that contention overlooks overlooks the fact that exchange]." appellee [the [the exchange]."113 the boards boards on which the the quotations appeared were in brokerage offices, the were in quotations appeared brokerage offices, are not not public public places; places; and, and, recognizing recognizing the the importance this which are of this importance of the matter, the court pointed out that "the publication relied phase of the that out of the "the relied matter, pointed phase publication .
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in 111 Id. Id. at 46 Sup. 369-70. at 369-70. Ct. at at 605-{)6, 605-06, 46 Sup. Ct. Co. v. v. Board of Fed. 961 McDearmott Commission Co. of Trade, 146 Fed. 961 (C.C.A. 8th 1906). Trade, 146 (C.C.A. 8th 1906) us 118 Id. Id. at at 962. 962.
112 112
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296 296
Commodity Futures Trading Trading Commodity Exchanges Exchanges and Futures
of the upon consists consists altogether altogether in in the the posting posting of the quotations those who by those quotations by upon
reason of subscribe This is is done in in places places which, which, by by reason their of their them. This for them. subscribe for Its that of ownership use, are private. Its controlling purpose is that of stimuand is are stimuuse, controlling purpose private. ownership and facilitating trade with the subscriber, not of lating trade the of conferring with subscriber, and not conferring facilitating lating a permission aa benefit benefit upon upon the the public. public. It It implies, implies, of permission that in of course, that in course, a dealing with with the the subscriber his patrons patrons may may use the information subscriber his use the information which dealing the quotations contain, but not not that that they they may be copied taken away be the quotations contain, but may copied and taken away not used elsewhere. It does not knowledge or reproduced It make and used elsewhere. of them does or knowledge of reproduced or make them accessible accessible to to the public as right, or render general, or as of the public of right, or render general, it is is so further value. so restricted to be them of of no further value. In In short, short, it restricted as be consistent as to consistent of its with the retention retention by by the the appellee appellee [the its proprietary with the [the exchange] exchange] of proprietary and does not indicate an intent to surrender or dedicate them rights, intent to or indicate surrender does not dedicate and them rights, 114 to the the public." public." 114 to it is that there To constitute constitute publication publication it is necessary necessary either there be voluneither (1) volun(1) that or (2) that the circumstances of publication imply assent. tary assent, that of or the circumstances assent. assent, tary (2) publication imply it needs that there To constitute constitute publication publication it needs be be shown that there has has been aa volvolthat the circumstances or that the circumstances negate any intent not to untary assent thereto thereto or intent assent not to negate any untary in publication publication in in the the newspapers, newspapers, for do so-as for example. so as in example. 114 Id. 114. Id. at 964. at 964.
(
CHAPTER XV XV
CHAPTER
) J
The Legality Legality of of Clearing Clearing House Operations Operations
The purposes of the purposes of the clearing clearing house and its have deen dedeits operations operations have scribed in scribed in Chapter Chapter IX. The machinery machinery of associations is designed of clearing associations is clearing designed to provide to provide the the most expedient contracts either of settling either (1) expedient method of settling contracts by (1) by offset substitution or fact that offset and substitution or (2) (2) by by delivery. The fact that a large propordelivery. large proportion of of transactions transactions is settled by by offset offset and substitution has given given rise rise tion is settled substitution has to in which the the legality legality of of clearing clearing house house operations has been to cases cases in has operations brought into question. The line line of pursued has has been as into question. as folfolof argument brought argument pursued Wagering agreements agreements are are illegal; prices (the familiar lows: Wagering lows: bets on prices illegal; bets (the familiar bucket-shop operation) are illegal, unenforceable the parties, are unenforceable between the illegal, bucket-shop operation) parties, and in in contravention of the penal in some states penal law as well. Those who states in as well. of the have attempted to attack attack the the legality house operations have of clearing clearing house attempted to legality of operations have done so so by by attempted attempted analogy. analogy. When contracts are cleared contracts are cleared by offset and by offset substitution, the financial financial settlement settlement is by the price is made by of price the payment substitution, the payment of It is is in this that that likeness the operations of a bucket shop differences. in this to the differences. It likeness to of a operations shop has been sought, but wholly without success. The one feature of success. has feature of the the wholly sought, transaction a commodity commodity exchange exchange which cannot be be evaded or transaction on a overor overlooked is is the fact that that every every future future contract a binding to contract is is a the fact contract to looked binding contract deliver, enforceable at law by buyer and seller. Whether delivery at seller. both enforceable law deliver, buyer by delivery is made or or not not is beside the the point. point. "A man may goods or is beside sell goods or is lawfully sell may lawfully stocks for future delivery, even though though he has possession, in his future delivery, has none in his possession, stocks for if he really intends and agrees agrees to to deliver the appointed time. at the deliver them at if he really intends appointed time. valid contract, which is enforceable in Such aa transaction transaction constitutes constitutes aa valid is enforceable in contract, of such a the courts. But aa man may may not, not, under the the guise a contract, enter the courts. contract, enter guise of fall the rise of in into a naked speculation upon the rise or fall of prices in which there there into a prices speculation upon and is to be no delivery of property no payment except such as may be of as is to delivery property may be payment except necessary to provide for differences arising purely from market market fluctuafor differences fluctuato provide arising purely necessary is condemned alike tions. Such aa transaction transaction is wager, which is by is a mere wager, alike by tions. * statute public policy." 1 Substantially the same language has been the has and been statute language public policy." Substantially used by by the United States Court. 22 States Supreme the United used Supreme Court. 1 2 2
Weld v. v. Postal Postal Telegraph-Cable Co .• 199 N.Y. 88. N.E. 415, 415.420 199 N.Y. 92 N.E. 420 (1910). 88, 103; 103; 92 Telegraph-Cable Co., (1910). Ct. 845, Clews v. v. Jamieson, Jamieson. 182 U.S. 461, 461,489-90; 856 (1901). 21 Sup. 182 U.S. Clews 489-90; 21 845, 856 Sup. Ct. (1901) .
297 297
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
2g8 2g8
It is impossible impossible to to separate the functions functions and machinery the clearing of the clearing machinery of separate the to the contract association and the the binding binding legal application of the contract and to say of association say legal application seller both is legal. Buyer that and the other is and seller conthe other is illegal that the the one one is legal. Buyer illegal of the the exchange, tract with with reference reference to to the the by-laws by-laws and rules the one rules of tract exchange, the the other to make delivery. agreeing to take delivery other to to take delivery. The speculator speculator delivery and the agreeing in his own intent of taking may may buy, having in mind or he may his no intent of delivery; or taking delivery; may buy, having sell intention of making delivery. It is not his his unexpressed unexpressed mental of making sell with no intention is not delivery. It attitude which which determines or illegality; it is the fact that he he may the fact that determines legality or it is attitude may legality illegality; not offset his contract-when is be compelled compelled to to deliver-if does not deliverif he does offset his contract when he is be the he may may be be compelled compelled to to receive receive delivery is the the the seller, or he seller, or delivery when he is buyer. far-reaching opinion delivered by Justice Holmes of the A Mr. of delivered the far-reaching opinion by buyer. Justice in the United States Court in the case v. case of of Chicago United States Supreme of Trade v. Chicago Board of Supreme Court 3 Christie & Stock Stock Co.s put the the stamp transCo. put of legality Christie Grain if legality on clearing stamp of clearing transopinion contains lucid an exposition of the actions by offset. offset. The opinion contains so so lucid of the actions by exposition in it question that that excerpts excerpts from it are are given as follows: follows: detail, as given in some detail, question It is
less than of the It appears appears that that in in not not less than three-quarters three-quarters of the transactions transactions in in the grain It the grain over but is no of that there is pit there is physical handing over of any grain, that there is a settlement, there a settlement, any grain, physical handing pit so called, either by by the the direct direct method, method. so or by ringing up_ is known as as ringing either called, or by what is up. The direct simply in in setting off contracts to buy of a certain consists simply off contracts to wheat of direct method consists a certain setting buy amount at at aa certain time. against against contracts contracts to to sell like amount at certain time, sell a like at the the same in cash. of price paying the the difference difference of price in the business business day. time. at the the end of of the cash, at time, and paying day. The ring ring settlement settlement is is reached reached by by a comparison comparison of the clerks clerks of books among among the in the of buying and selling the pit. of transof the the members buying a series series of transselling in pit, and picking picking out a actions which begins ends with dealings which can set against each other with can be and ends set each which other actions dealings against begins if A by eliminating those between-as. if has sold to B five thousand bushels has sold to B five bushels of of by eliminating those between as, May wheat, wheat. and B has has sold the same amount to to C, to D, D. and D to A. G to sold the to A. C, and C May Substituting by novation, novation. A's A's sale sale can be set his purchase, purchase, on set against for B by against his Substituting D for simply paying the the difference in price. price. • . . difference in simply paying if a member had a suppose that that from the the beginning beginning as now. if con· as now, a conWe must suppose tract with another member to to buy buy aa certain certain amount of time at a tract with a certain of wheat at certain time and another to sell sell the the same amount at the same time. it would be unnecat the another to be deemed unnectime, it essary to exchange warehouse receipts. suppose that then as now, warehouse must to that then as We now, exchange essary receipts. suppose aa settlement by the the payment payment of analogy of differences, after the settlement would be made by the analogy differences, after of a clearing clearing house. house. This naturally naturally would take take place the contracts contracts of a less -that that the place no less were made in in good faith for actual delivery. since the result of actual delivery faith for since the actual of actual were result good delivery, delivery be to to leave leave the the parties parties just just where they they were before. has all the before. Set-off has would be all the Set-off 4 The ring settlement is a more of delivery_4 settlement is simply a complex case of the effect case of the effect of delivery. ring simply complex same kind. kind. . . . .
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s 198 U.S. 8198 U.S. 236, 236.246-48; 25 Sup. Ct. 637. 638-39 (1905). 637, 638-39 246-48; 25 Sup. Ct. (1905) 44 Italics Italics are important legal are author's. author's. No more important legal pronouncement pronouncement affecting affecting exchanges exchanges seven words words of Justice Holmes. Holmes. See. has ever been made than than these these seven of Justice has ever been section See, however. however, section .
in Chapter in Chapter
of Dealings Dealings between between Member and Customer. and XVI on Legality note 16 16 and Customer, note Legality of accompanying text. accompanying text.
Legality of of Clearing Clearing Legality
House Operations Operations
299 299
The. fact fact that that contracts contracts are this way way by the payment payment satisfied in in this The* are satisfied set-off and the by set-off degree from the the good faith of the parties, and, if no degree faith of the good parties, and, if
of differences in of differences detracts detracts in
the parties know when they they make such such contracts very likely likely to the parties contracts that are very that they to they are have aa chance to to satisfy satisfy them in in that that way way and intend to make use use of that intend to of it, it, that is perfectly consistent fact is fact with a serious business purpose purpose and an intent intent that that serious business perfectly consistent with mean what it the contract shall it says. shall the contract says.
Referring to hedging contracts, contracts, Justice Justice Holmes declared that to hedging declared that Referring a serious business." none the the less less a serious business."
"it is "it is
that contracts contracts settled Finally, referring to to the the fact fact that settled by offset and substisubstiFinally, referring by offset tution far tution far outnumber those those on which there and in fact is actual actual delivery in there is fact delivery call for grain than is received in in the the call for aa much greater of grain is actually greater amount of actually received Chicago market, Justice Holmes said: "The fact that they can be and said: fact that market, Chicago Justice they set off off sufficiently are set the possibility, possibility, which is wonderful is no more wonderful sufficiently explains explains the than the the enormous disproportion between the the country than of the the currency disproportion between currency of country and contracts for the contracts for the payment payment of of money, money, many of in like manner of in which like many in clearing set off are set off in clearing houses houses without without anyone are that they are not not anyone dreaming dreaming that they are paid, and for the rest of the same money suffices in succession, the for in of which the rest the the suffices succession, money paid, less being the more rapid rapid the the circulation less being needed the is.'* circulation is." The principles principles enunciated in the the Board of were enunciated in v. Christie Christie case case were of Trade v. later decision in aa later the United States Court. Chief followed in of the States Supreme followed decision 'of Court, Chief Supreme Justice in handing handing down the the Court's Court's opinion, petition said: "The petition Taft, in Justice Taft, opinion, said: charges that that the the Exchange machinery for Association are are machinery for charges Exchange and Clearing Clearing Association the promotion promotion of that, though its contracts for futures of gambling; its contracts the for on futures that, gambling; though their face are are for for actual they really are not intended or expected are their face actual delivery, not intended or delivery, they really expected either party party to to result result in in delivery; delivery; that that the the Exchange by either rules discourage Exchange rules by discourage actual delivery purchases are not delivery; that, in fact fact actual is sought, are not that, when in delivery is sought, purchases delivery; the Exchange, but elsewhere; that the Exchange thus puts in but that thus made on the the elsewhere; Exchange, Exchange puts in of the hands of of gamblers the means of of influencing the prices prices of the directly the gamblers the influencing directly sugar to be delivered and thereby of obstructing and restraining its free of be its free to delivered thereby obstructing restraining sugar flow in trade trade between between Cuba and the the United United States between the the States and between flow in 5 States-and, true that that spot "It is is true are not encouraged further:" 5 "It sales are States and, further:" encouraged and spot sales that less actual deliveries take place place in in this than in of than in some of deliveries take this Exchange less actual that Exchange the Exchanges for sales of other commodities, but actual deliveries are but actual of other deliveries are for sales the Exchanges commodities, in every contract and may be lawfully provided for in enforced by contract either for lawfully enforced may by either every provided party. The usefulness legality of sales for future delivery, and of for and of sales future of usefulness legality delivery, party. furnishing Exchange well-defined limitations and rules limitations under well-defined rules an where Exchange furnishing the business business can can be be carried carried on, have been fully this court court the on, have fully recognized recognized by by this 6 Stock 198 in Board of Trade v. Christie Grain & Stock Co., 198 V.S. 236, 246."6 v. & U.S. Christie in 246." 236, Co., of The stamp has been placed placed not only direct settlement settlement of legality only upon upon direct legality has stamp of e United 11 United States v. New York Coffee & Sugar Exchange, Inc., 263 V.S. Coffee & U.S. 611, 44 States v. 611, 617; Inc., 263 617; 44 Sugar Exchange, Sup Ct. 225,226 (1924). Ct. 226 225, (1924) Sup 6 Id. at 619,44 at 227. Ct. at 44 Sup. at 619, 227. Sup. Ct. .
.
Commodity Exchanges and Futures Trading and Futures Trading Commodity Exchanges
300 300
of clearing but also also upon upon the the modern method of conand ring settlement, but ring settlement, clearing contracts whereby whereby the the clearing clearing house house becomes becomes seller to the buyer and buyer buyer seller to the buyer tracts 7 The to the the seller, for one party party on every contract cleared. cleared. T to seller, substituting every contract substituting for contracts provide for for actual delivery, and "set-off the effect has all all the actual delivery, "set-off has effect of contracts provide of
delivery." delivery." contention has has sometimes been been advanced that, that, although The contention settlealthough settleby offset offset and substitution substitution is is legal legal among members, the the ment by exchange members, among exchange not be be binding binding upon upon customers members. This propopropoof members. method would not customers of sition involves the the broad broad question question of of the the extent to which which the the outsider sition involves extent to outsider is bound by by rules rules of of the the exchange and its associated clearing house, its associated a exchange clearing house, a subject deserving of extensive treatment. treatment. of more extensive subject deserving
is
Ct. 845 Daniel v. Chicago v. Jamieson, Jamieson, 182 U.S. 461, 461, 21 21 Sup. Sup. Ct. Daniel v. 845 (1901); 182 U.S. (1901) Chicago Board v. (C.C.A. 7th 1947); Crowley v. Commodity Exchange. F. 141 F. 7th 1947); Crowley Commodity Exchange, 141 (C.C.A. 2d 2d 1944). 182 (C.C.A. 2d 182 (C.C.A. 2d 1944) 7 T
Clews Clews
v.
;
of Trade. F. 2d 164 F. of 815 2d 815 Trade, 164
.
~
CHAPTER XVI XVI
~
CHAPTER
Parties The Exchange Exchange and Third Parties
Two propositions propOSitIOns are with regard regard to to the relationship between the relationship clear with are clear exchanges and non-members. First, the non-member has no standing non-members. has the First, standing exchanges Not being for his benefit. to attempt to to enforce any rules rules of of the the exchange for his benefit. to attempt enforce any being exchange a contract between the a member of the exchange, not a party party to to the the contract the of the is not exchange, he is of members.11 In the the second second place, place, by-laws by-laws and rules relating to matters of members. rules relating to matters internal affect third discipline and internal administration cannot directly affect third parties. administration directly discipline parties. touch with with exchange by-laws and rules The non-member comes into into touch rules only only exchange by-laws because, when be buys buys or the contract is made on his his behalf behalf by by or sells, contract is because, sells, the an exchange exchange member who is is subject to the by-laws and rules. to the rules. by-laws subject directly with with one another, prinExchange members, members, who deal deal directly act as as prinanother, act Exchange 22 The member who executes cipals. executes an order on the exchange for his order the for his exchange cipals. principal in the transaction so far as the member, from customer is the customer is the principal in the transaction so far as the member, buys or to whom he sells, sells, is is concerned. the principal principal or to whom he buys concerned. He is is also also the so the clearing clearing house house is Nevertheless, he he is is acting as as the is concerned. far as concerned. Nevertheless, so far acting as a agent for his customer. his position apparently has a dual nature; for his customer. Thus his has nature; agent position apparently hand, he is is looked looked to to as the principal, the other as the other hand on the the one hand, principal, and on the he is unquestionably an agent. agent. We are the general are concerned not with the is unquestionably general of it principles of the of agency, with those phases of it which are of law of but with those the are agency, phases principles pertinent to the relationship the member and his customer. his between customer. to the the relationship pertinent Accordingly is to to be noted noted at the outset that customs and usages of aa at the it is outset that usages of Accordingly it are well well known are are implied trade or well established or market which are established and well trade implied parts of in that that trade trade or unless express that market, contracts made in or on that of contracts market, unless express parts contract negate negate the the usage being the the provisions in in a contract custom. S3 This being usage or custom. provisions general rule, the the question question that that follows by-laws and rules rules of is whether by-laws follows is of general rule, an exchange, exchange, to to which its its members subscribe, subscribe, are such customs and usages usages of the the market as to bind customers customers of the broker-member. as to of the of 11 See section See section
in Chapter of Membership Membership in on Contract Contract of Chapter XIV. v. C. C. S. S. Bank, Bank. 122 N.E. 264. 122 N.Y. 135. 135, 142; 264, 266 (1890). 142; 25 N.E. (1890) a 3 WILLlSTON, ed. 88 CONTRACTS. Sections Sections 648-662 648-662 (Rev. ed. 1936) 2 WILLISTON, WILLlSTON, SALEs. SALES, WILLISTON, CONTRACTS, 1936) • and 2 (Rev. Sec. ed. 1924). Sec. 618 (2d 1924) (2d ed.
22 Jemison Jemison
v.
.
,
.
301 SO!
Commodity Exchanges Exchanges and Futures Futures Trading Trading Commodity
302 3O2
The general general rule rule on this this question question was stated stated in in Bibb v. v. Allen,* Alien,' as as folfollows: lows: It It
is settled settled by by the the weight weight of of authority authority that that where aa principal principal sends sends an order engaged in in an established established market or or trade, trade, for for a deal deal in in that that trade, trade, engaged he confers confers authority authority upon upon the the broker broker to to deal deal according according to to any any well-established well·established he usage in in such such market or or trade, trade, especially especially when such such usage usage is is known to to the the prinprinusage cipal, is fair in itself, does not change in in any any essential essential particular particular the the cipal, and is fair in itself, and does not change contract between between the the principal principal and agent, agent, or or involves involves no departure departure from the the contract instructions of of the the principal; principal: provided provided the the transaction transaction for for which the the broker instructions is employed employed is is legal legal in in its its character character and does does not not violate violate any any rule rule of of law, law, good good is morals, or or public public policy. policy. morals, is
to aa broker broker to
most interesting interesting illustration illustration of of the the application application of of this this principle principle The most was afforded afforded by by aa war-time war-time transaction transaction in in corn. corn. A customer of of aa member was of the the Chicago Chicago Board of of Trade bought bought corn corn for for future future delivery. delivery. ExtraorExtraorof dinary conditions conditions brought brought about about by by the the exigencies exigencies of of World War II forced forced dinary the prices prices of of corn corn up up to to $2.40 per bushel. bushel. The directors directors of of the the Board of of the $2.40 per Trade, acting acting within within the the powers powers conferred conferred upon upon them by by the the by-laws by-laws Trade, and rules, rules, suspended suspended corn corn trading trading and fixed fixed aa settlement settlement price price of of $1.65 $1.65 his per bushel for all contracts. The customer brought suit against his broker, suit customer all contracts. for bushel broker, brought against per assailing the validity validity of the settlement price and advancing of the the contensettlement price advancing the assailing the tion that he was entitled to the the market price price and could not be bound could not that he entitled to tion by the price established in accordance with the by-laws rules. the all rules. in accordance with the established by-laws and all by price The broker broker pointed pointed to to aa legend legend that that appears on all order blanks: "All all "All order blanks: appears orders article are are received sale of of any received and executed for the the purchase executed orders for any article purchase and sale with the the distinct understanding that is contemplated that actual distinct understanding actual delivery is delivery contemplated and in with and subject to the rules, regulations, to in accordance accordance with the customs rules, regulations, and customs subject of upon which the the order is to be executed and the is to the Exchange of the the requireExchange upon requireall amendments made thereto, ment of of Directors of its its Board of Directors and all thereto, and 5 that party giving so understands and agrees."5 order so the order that the the party agrees." giving the The customer of the the exchange customer pleaded rules ignorance of exchange by-laws by-laws and rules pleaded ignorance and contended that that he was not bound. But the the court court said: said: "Having "Having been notified Williams & members] notified by 8c Monroe [the Exchange that the conthe conby [the Exchange members] that in accordance therewith, tracts in question tracts in it was his his duty therewith, it question were made in duty to by-laws, and requirements ascertain what such rules, to ascertain rules, regulations, regulations, by-laws, requirements 4 149 V.S. 4149 13 Sup. Ct. 950, U.S. 481, the same effect 953 (1893). effect see see Crowley 489-90; 13 950, 953 481, 489-90; (1893) To the Sup. Ct. Crowley 141 F. v. Exchange, 141 F. 2d 182, 188 (CoC.A. 2d 1944) , wherein the court 188 v. Commodity 2d wherein 2d court made 182, the (G.C.A. 1944) Commodity Exchange, it (plaintiff aa similar viz.: "When it similar observation, orders to to its its carryobservation, viz.: (plaintiff non·member) non-member) gave gave orders carryfor the the execution of contracts execution of ing contracts on the the Exchange, it tacitly agreed Exchange, it ing member-brokers for tacitly agreed all of of the rules, to be bound by to customs of of the market." Also the market." Also see rules, regulations. see by all regulations, and customs v. New York Coffee Coffee & Sugar Garcia Garcia Sugars 7 N.YoS. N.Y.S. 2d 2d 532. 532, affirmed Corp. v. Sugars Corp. Sugar Exchange, Exchange, 7 affirmed v. New York Coffee & Sugar without opinion Coffee & 258 App. opinion sub nom. Rifkind v. Sugar Exchange. Exchange, 258 App. Div. 16 N.YoS. N.Y.S. 2d Div. 871, 1023 (1st 2d 1023 871, 16 Dep't 1939). (1st Dep't 1939) v. Thomson, 111. 521. Ii5 Thomson v. 315 Ill. 146 N.E. N.E. 451,454 521, 528-29; Thomson, 315 528-29; 146 451, 454 (1925). (1925) .
,
.
.
The Exchange Exchange and Third Parties Parties
303
if he did not not then then desire desire to be bound thereby, thereby, to were -and, to be to repudiate -and, if repudiate the the contracts. having done so, thereby as contracts. Not having is as as fully if he as if so, he is fully bound thereby full knowledge knowledge thereof." thereof."66 had full An express express agreement agreement between broker broker and customer might might relieve relieve the the latter from the latter the binding binding force force of any particular of any or rule. rule. Such an particular by-law by-law or agreement, however, subject the broker to disciplinary by would the broker to action by however, agreement, subject disciplinary action the the exchange. exchange. The whole question relating to this phase of the relationto this question relating phase of the relationmember and ship third party is well summarized in third between is well in a New ship party York case: case: 77 rule is is that, that, where aa customer gives broker to to be be The general order ,to to a broker general rule gives an order executed executed on aa board of of trade trade or exchange, exchange, he contemplates the to the conformity to contemplates conformity rules rules and customs customs that that prevail prevail there there (Wilhite v. Houston, Houston, 200 200 Fed. Rep. 390); Fed. Rep. (Wilhite v. 390) ; and, if he knows that that the the broker broker is is aa member of particular exchange is of a a particular and, if exchange and is bound by by its its rules rules adopted to facilitate facilitate business, pusiness, he he may may be be bound by by the the rules rules adopted to although not not fully fully informed concerning James, 137 v. James, Div. 137 App. although concerning them (Springs (Springs v. App. Div. HO; aff'd., 202 N.Y. N.Y. 603) 110; affU, 202 603) . But there is no direct direct evidence in in this there is this case that the the defendant knew plainplaincase that of any tiffs were members of any particular particular exchange that the the sale was to to be be made tiffs sale was exchange or that in any any particular particular market. market. A custom or or usage usage to to be be available party available against a party against a must be so so notorious notorious as as to to affect affect him with knowledge knowledge of it and raise raise the the presumppresumpof it tion that dealt with with reference reference to to it; it; or to have actual actual tion or he must be shown to that he dealt in that knowledge. fact that a person is engaged in trading through brokers is not The a is is fact brokers trading through engaged knowledge. person sufficient itself to to affect affect him with with knowledge knowledge of peculiar custom (Blake of itself v. of a sufficient of a peculiar (Blake v. Stump, 73 160). a principal does not know of a rule or custom of does Md. a not a rule Where of or of custom 73 160) Stump, principal of any or that that the the broker broker is a member of is not not bound is a an exchange exchange, he is exchange or any exchange, broker for his when by a rule or that the broker invokes for his protection he has has that the invokes or custom rule a protection by departed from the express instructions given . • . . Customs and usages which the instructions from usages given. express departed vary or or contradict contradict the the contract contract entered into, the legal relations into, or which change change the legal relations vary will to are of no effect not of the parties, or are contrary to law are of effect and will not be are which of the parties, contrary allowed to control the broker's express instructions •••• Therefore, unless the instructions. . unless the the broker's to control allowed Therefore, express defendant had actual knowledge of the custom or the knowledge that may the knowledge that may be actual knowledge of the defendant implied from information that his agent would trade in aa certain certain market where trade in information that his agent implied he would be bound by its rules, defendant was not bound by a custom which be he by a by its rules, works aa substantial material change change in his rights. in his v. Williar, 110 substantial and material works Williar, 110 rights. (Irwin (Irwin v. U.S.499.) U.S. 499.) .
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.
.
.
.
.
in position position to to consider the at the consider the the question are now in We are question mentioned at a is conclusion of the last chapter-whether a customer is by the last bound the of conclusion chapterwhether by the by the substitution employed the clearing clearance and substitution house. of clearance method of employed by clearing house. the in The question is "not in a given case, the assent, express a without whether is assent, case, given express question this change his rights or implied, implied, of the principal principal [customer], rights and of the or change of his [customer], this e Id. at at 455. 61d. N.E. at 455. at 531,146 531, 146 N.E. 7 7 Ford Ford v. v. Snook, 205 App. App. Div. Div. 194, N.Y. Supp. Dep't 1923) 199 N.Y. 633 (4th 197; 199 630, 683 194, 197; Snook, 205 Supp. 680, 1923) , (4th Dep't 148 N.E. N.E. 732 affirmed without opinion, opinion, 240 N.Y. 624, 624, 148 732 (1925). 240 N.Y. (1925) affirmed without ,
.
304
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
effected (for obligations can be be effected (for that that proposition but is not not doubtful}, proposition is obligations doubtfuty, but whether the fact fact of his transacting transacting business through aa member of the of his business through whether the of the other of the exchange, without other knowledge of the custom, it part of his without it makes custom, knowledge exchange, part of his 8 point was not not directly and the the contract with with the broker."8 The point the broker/' contract involved, and directly involved, in in the negative. The case of Bibb v. court's evidently decided the case court's opinion of Bibb v. negative. opinion evidently 9 however, previously cited, and others appear to overrule this Allen,9 others Allen, however, previously cited, appear to overrule this if the dictum, and the the rule rule may may be be expressed as follows: if the customer as follows: customer has has dictum, expressed of the the exchange or knows that his agent, actual knowledge knowledge of of the the rules rules of or actual that his exchange agent, the broker, broker, can only carry out the the order to purchase purchase or order to sell on an exchange the or sell only carry exchange is subject where the the broker broker is to rules rules and by-laws, by-laws, the rules and by-laws the rules subject to by-laws of the part of the customer's customer's contract he is bound by them. become a part contract and he is by them. of authorized of an exchange binding effect authorized acts acts of effect of The binding the customer customer exchange upon upon the of a member, member, even though though the the action action may not have been spelled in been of a have out in may spelled out is clearly the by-laws and rules, rules, is clearly supported supported by by the the decisions in Garcia the by-laws decisions in Garcia and v. New York Coffee Sugar Exchange and Crowley v. Commodity v. v. Coffee Sugar Exchange Crowley Commodity of members were Exchange, Inc., Inc., supra. these cases, customers of were affected affected cases, customers supra. In these Exchange, of their their contracts by the the closing closing out as a a result result of out of contracts as of emergency by emergency liquidations liquidations in the ordered by by the the exchange. exchange. Although Although nothing appeared ordered the exchange nothing appeared in exchange in either by-laws specifically the exchange exchange in to order order either instance instance to empowering the by-laws specifically empowering as against non-members by by contracts liquidated, liquidated, the the result result was sustained sustained as contracts against non-members to of the power of the exchange to take reasonable action virtue of of the take action the inherent inherent power reasonable virtue exchange in regulation of trading trading in in the the emergencies presented. in emergencies presented. regulation of Legality of Dealings between Customer. This question question Member and Legality of Dealings to evade responsibility balarises when the the customer customer is for balto evade is attempting arises responsibility for attempting ances due the the broker. broker. Sometimes the the customer has that his his has contended that ances due that, therefore, therefore, the unenforceable. Contransactions are are bets bets and that, is unenforceable. the debt debt is transactions tentions have have been been made that that exchanges exchanges are bucket shops the are bucket that the tentions shops and that transactions are gambling gambling ones. ones. These allegations transactions are readily allegations have been readily in decisions overcome according according to to the the lines lines of decisions prepreof reasoning followed in reasoning followed 10 10 viously cited. cited. viously A slightly slightly different different situation is presented presented when the the customer customer contends situation is contends that he the broker both understood that the transaction was not that understood the broker both transaction and the was not he that intended to bring bring about about any any actual actual delivery delivery or receipt of the commodity, or receipt of the intended to commodity, but that that aa settlement of differences differences was to to be made, made, based based on market market settlement of but 11 l l has this proposition proposition in the price fluctuations. fluctuations. A learned learned writer writer has stated stated this in the price following terms: terms: following
v. WilIiar, 499. 514; 4 Sup. Sup. Ct. Ct. 160. v. 110 V.S. U.S. 499, 514; 4 160, 168 (1884). Williar, 110 (1884) see also also Clews v. 9149 481. 13 Ct. 950 950 (1893); and see v. Jamieson, U.S. U.S. 481, 13 Sup. 182 V.S. 149 V.S. Jamieson, 182 (1893) Sup. Ct. 845 461.21 Sup. Ct. 845 (1901). Ct. 461,21 Sup. (1901). 10 Springs v. 10 james, 137 App. Div. Div. 110, N.Y. Supp. Supp. 1054 1054 (1st 137 App. 121 N.Y. 110, 121 (1st Dep't Dep't 1910), 1910), Springs v. James, 1131 affirmed 202 N.Y. 603, 96 N.E. 1131 (1911). N.Y. without opinion, 202 603, (1911). affirmed without opinion, 11 11 2 2 WILLISTON, WILLISTON. SALES, 664a (2d ed. 1924). Sec. 664a SALES, Sec. 1924) (2d ed. 8 Irwin sirwin
.
;
.
The Exchange Exchange and Third Parties Parties
505
The party party called in reality reality much more than than that. that. He does a broker is is in called a does not not his bring his customer in contact with a principal, but contracts on the Exchange in contact with a principal, but contracts the Exchange bring himself as principal. principal. He advances ordinarily the the himself as advances in in speculative transactions ordinarily speculative transactions part of the the capital needed to to finance finance them on the the Exchange. Exchange. He knows greater part greater capital needed frequently the customer's customer's resources resources are the latter that the are insufficient insufficient to to enable enable the latter to to frequently that in full pay in full either or within any probable time in the future the or within either immediately in future the time the pay any immediately probable full full cost cost of the stock or produce produce purchased purchased on his his account, to furnish the of the stock or furnish the or to account, or full of anything anything sold sold "short" his account. full amount of "short" for for his account. The ordinary ordinary method of the business will, therefore, therefore, involve of carrying business will, involve carrying on the the making the making of of new transactions transactions on the the Exchange Exchange of kind to to those of the the converse converse kind those first made, made, and aa settlement settlement of differences between broker first of differences broker and customer. customer. No is ordinarily made and none is agreement to to this this effect is needed, the Exchanges Exchanges effect is for, the needed, for, agreement ordinarily in constant in in constant operation, ·the customer always has it in his power to order order being 'the it his has customer being always power to operation, if by new transactions on the Exchange, and, if the the of his account the settlement of the settlement his account by the Exchange, and, transactions customer's margin margin becomes becomes insufficient, insufficient, the has power power to to close close customer's broker similarly the broker similarly has the account the account by by making making the the necessary necessary transactions transactions on the Exchange, and applying the Exchange, applying whatever the balance. whatever credit credit or securities of of the the 'customer he may may have towards balance. or securities towards the customer he This being being the the ordinary ordinary situation, two questions This arise: situation, two questions arise: the (1) May contract between between broker broker and customer be invalid, invalid, though the contract though the (1) May the contracts or entered into the Exchange Exchange for are contracts for the customer's account account are or sales sales entered into on the the customer's valid? valid? is the in the (2) Assuming that that the the first question is the affirmative, the first question is answered in affirmative, is (2) Assuming contract between broker broker and customer customer invalid circumstances as as are are invalid under such such circumstances contract between stated above? stated above? it stated that "a Turning now to to the the decisions decisions of of the the courts, find it stated that courts, we find Turning man may lawfully sell goods or stocks for future delivery, even though future stocks for even sell or delivery, though goods may lawfully he has none none in in his his possession, possession, if he really to deliver deliver if he intends and agrees he has agrees to really intends them at appointed time. time. Such aa transaction cona valid valid contransaction constitutes constitutes a at the the appointed them 12 tract which is enforceable .... "12 ." tract is enforceable. in determining The intent intent to or to to receive delivery is is thus thus vital vital in deliver or receive delivery to deliver determining whether or or not not the the transaction transaction is is legal. The by-laws of commodity whether by-laws of commodity legal. to or not leave this question question open to argument or dispute. The exchanges leave this argument dispute. exchanges do not open of exchange contract provides for delivery or acceptance of delivery for or contract delivery and acceptance delivery provides exchange in It the matter. is as neither broker nor customer has any choice in the matter. It is as certain certain choice neither broker nor customer has any a futures contract and as anything anything can be that that aa party party who buys sells a futures contract or sells can be as buys or does not offset offset it it by by aa contra transaction will receive the the commodity or will receive contra transaction does not commodity or left here. here. The confirmation be called upon to to deliver. is the the matter left deliver. Nor is called upon be notice that all orders slips notices in use by brokers usually give notice that all orders are in use brokers are and notices by usually give slips received executed in contemplation of actual delivery and that the in actual that of the and executed received delivery contemplation assails the customer understands and agrees. agrees. The customer who assails validthe validso understands customer so "It must of a transaction faces this of proof: "It be shown by burden of ity faces this a of transaction by him proof: ity article that it it was was not not intended intended to deliver the the article sold. sold. • • • In it that to deliver In attacks it who attacks .
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12 Weld Weld v. v. Postal Postal
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,
Telegraph·Cable Co., 199 N,Y. 88, N.E. 415, 199 N.Y. 92 N.E. 420 (1910). 103; 92 88, 103; 415, 420 (1910). Telegraph-Cable Co.,
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
06 3306
as a order invalidate aa contract contract as a wagering wagering one, intend order to to invalidate one, both parties parties must intend that, instead instead of the delivery of the the article, article, there there shall mere payment payment of the shall be be a a mere that, delivery of of the the difference between the the contract the market market price price . . . the the of difference between contract and the of proving proving that that it it is invalid as being aa mere cover for the settleis invalid burden of as being cover for the settleof 'differences' rests with with the the party party making making the the assertion."13 ment of 'differences* rests assertion/' 13 It makes no difference difference whether whether or transIt or not not the the broker broker expects that a a transexpects that "the mere fact that the client had bought action will offset, because action be will fact that the client offset, because "the bought with the the expectation, expectation, in case the the market market were were favorable, reselling in case of reselling with favorable, of the time of of delivery delivery should arrive, arrive, and that that the the broker broker knew this, this, before the before not render render the the transaction transaction illegal. The law does not prohibit a would not does not prohibit a illegal. man from entering entering into into aa contract purchase of be for the contract for the purchase of property to be property to delivered in the the future future or or from ordering an agent to enter into delivered to to him in enter to into ordering agent a contract, such though he may may expect certain contingencies such a contract, even though expect under certain contingencies to sell his rights maturity and to or suffer his loss. to rights before before maturity sell his to take take his his profit or suffer his loss. profit 14 Such aa transaction transaction is a legitimate legitimate business business speculation."14 is a speculation/' as to The same rules rules apply to the the legality or illegality of "short" "short" sales, sales, legality or illegality of apply as of "]Il dl-i I I;":." margin transactions. of these transactions is illegal, and transactions. None these is transactions "iHclfjnjj," margin illegal, of purchase if at at least contract of if the parties parties intends that aa bona fide fide contract purchase intends that least one of of the at or sale or is to to be be executed the exchange, exchange, and clearly the broker, sale is executed on the broker, at clearly the least, intends to does such a contract on the floor a contract the floor intends to make does make and least, always always of the exchange. the rules rules he he cannot of the otherwise. cannot do otherwise. exchange. Under the It be noted, noted, however, however, that, that, as to the the legality of futures futures contracts It should as to contracts should be legality of made with intention of by set-off and payment of settling them set-off of differwith the the intention differby settling payment of between the courts have distinguished those contracts in the ences, those contracts made in have the the courts ences, distinguished those made between between the the broker broker member and its pits and those its customers-the customers the pits 15 former being held held valid, valid, the the latter latter invalid. invalid. 15 In the the language language of of the the former being "It not Supreme Court of the United States, "It does not follow that, because does follow States, that, Supreme Court of the the between the the members of were valid, valid, those those the exchanges of the contracts between the contracts exchanges were entered into by by the the company . . . with Dickson and its customers were with Dickson its customers entered into company 10 valid also."16 valid also/' Broker and Customer. the relationship of the Customer. One more phase Broker relationship between phase of the reciprocal broker remains remains for for consideration. customer and broker consideration. This is is the customer reciprocal and duties of the parties in margin transactions. The subject is rights in transactions. duties of the parties margin subject is rights .
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is Clews Ct. 845,856-57 13 Clews v. v. Jamieson, U.S. 461, 461,489-90, 21 Sup. 182 U.S. 845, 855-57 (1901). 489-90, 21 (1901) Sup. Ct. Jamieson, 182 .
i* Nash14 Nash-Wright Co. v. v. Wright, Wright, 156 156 Wright Co.
Ill. App. App. 243, 243, 252 252 (1910). (1910) is Burke F. 2d 458, 15 Co. v. v. St. Paul-Mercury Indemnity Indemnity Co., Co., 94 458, 466 (C.C.A. 94 F. 8th St. Paul-Mercury Grain Co. Burke Grain (C.C.A. 8th Ct. 1938) , cert. denied, 303 V.S. 661, 58 Sup. Ct. 765 (1938), which distinguished Chicago U.S. 765 58 303 cert. 661, distinguished Chicago (1938) den(ed, Sup. 1938) Board of v. Christie Grain & Co., 198 U.S. 236, 236, 250; 25 Sup. Ct. 637, & Stock Stock Co., 198 U.S. 639 Christie Grain of Trade Trade v. Board 250; 25 637, 639 Sup. Ct. (1905), quoting with approval the following following language Justice Holmes: "We language of Mr. Justice approval the quoting with (1905) in them the speak only of the the contracts in the the pits, pits, because because in the members are are prinprin. contracts made in only of speak where as brokers The subsidiary rights of their employers the members buy as brokers cipals. their the of buy employers subsidiary rights cipals. think it it unnecessary unnecessary to to discuss." discuss." we think 16 Dickson v. Uhlmann Grain Co., Co., 288 288 U.S. U.S. 188, Ct. 362. 53 Sup. 364 (1933). Dickson v. 188, 193-94; 193-94; 53 362, 364 Sup. Ct. (1933). 111.
.
,
,
,
The Exchange Exchange and Third Parties Parties
307
broad, and the have been extensively involved have the questions These broad, extensively litigated. questions involved litigated. These cannot be be covered covered completely completely in in aa book of this type, type, but but some of cannot of this of the the leading principles may may be be stated. stated. leading principles rights and duties broker and customer as between broker duties as customer are are summarized The rights 7 in the v. Jaudon* in leading case of Markham v. JaudonY Although Although the case involved the leading case of involved the case a the Stock Exchange, Exchange, the the principles laid down by the a transaction the transaction on the laid by principles in measure court apply in large to commodity exchanges as well. Paraphrasto as court well. commodity exchanges large apply Paraphrasthat the ing language of of the the court, it appears appears that broker undertakes undertakes to to the language the broker court, it ing the acts he accepts an order to buy or sell margin: he order or sell do the the following acts to on when following accepts buy margin: (1) once to enter into the the contract contract on the for the the exchange sale the sale exchange for (1) At once to enter into or purchase of the commodity commodity according cusof the to instructions instructions from the or purchase the cusaccording to tomer. tomer. for the the customer so so long (2) carry the the contract contract for the benefit benefit of long as of the as (2) To carry the margin is is kept kept good, until notice notice is by either party that that or until is given the margin either party good, or given by the is to to be closed closed out. out. the transaction transaction is all money of the margin (3) To advance advance all money required required beyond margin required beyond the required of (3) the customer. customer. the (4) deliver such contract contract to to the the customer when required by him, him, required by (4) To deliver such and of upon receipt of the advances commissions accruing to the broker. the commissions to the advances broker. accruing upon receipt undertakes: On the the contract, of the the customer undertakes: other side the other side of contract, the (1) To pay the margin required. the margin required. (1) pay (2) To keep keep good such margin margin according to the of the the fluctuations fluctuations of the according to good such (2) market. market. take the contract executed on the (3) the exchange, exchange, whenever required required (3) To take the contract executed the difference by the broker, to pay the difference between the by to and the sums advanced by the broker, pay by himself and the paid by the broker. In addition, of course, the amount broker. the himself addition, of course, the paid by the bound customer is is always to pay the commissions. to the commissions. customer always pay requirement that that the the broker broker must carry long the transaction transaction so so long The requirement carry the until as the margin is kept good or until notice of closing the transaction has of notice the transaction has as the margin is kept good or closing of litigation. the subject litigation. When price are been given has been the been price movements are subject of given has rapid, changes may imperil margins within a comparatively violent and rapid, within a violent changes may imperil margins comparatively if he had unlimshort broker could could protect protect himself himself from loss, loss, if unlimtime. The broker short time. ited discretion as to to closing not do this at his this at his discretion as ited accounts, but he may may not closing out accounts, pleasure. .has of demanding from his customer additional first a duty of his customer "has first He additional duty demanding pleasure. 18 failed or refused margin, and not not until until the the customer has failed refused 18 to put put up up the the to margin, close the account. account. required may may the the broker broker proceed proceed to to close margin required margin but it is like is subject to rules This is is the rule, like most rules it the general This rule, general subject to exception. exception. have If broker and customer have agreed to dispense with notice, then then none to with customer If broker notice, agreed dispense is subject need be be given. rule . . . is to such other other or or different different need subject to general rule given. "The general .
.
,
IT 41 cited with approval 11 N.V. 235 approval in Richardson v. v. Shaw, 209 U.S. U.S. 365, 365, 28 41 N.Y. 235 (1869), 28 Shaw, 209 (1869) cited Sup. Ct. 512 (1908). Ct. 512 (1908) Sup. is Thompson v. 116 N.E. 387 (1917). 18 220 N.Y. N.V. 471, 471, 116 (1917) Baily, 220 Thompson v. Baily, ,
.
.
08 3308
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
agreement relating thereto thereto as as may may be be made by them. They may agree agree agreement relating They may by them. thereto. upon aa prescribed prescribed notice notice or or dispense notice relating with any relating thereto. upon any notice dispense with Such agreement agreement may may be be express, express, or may be be found in the surrounding in the or it it may surrounding 19 circumstances or or in the course course of of dealing the parties."19 in the circumstances of the parties." dealing of clear as as to to express This is is clear It leaves leaves unanswered, however, unanswered, however, express agreements. agreements. It the notice obtained statements or the effect effect of of notice confirmation slips obtained from statements or confirmation stating slips stating that the broker broker reserves reserves the the right right to to close notice, that the transactions without notice, close transactions when margins margins are are exhausted. exhausted. The mere notice, notice, however, however, is is not not conclusive conclusive of cusof an agreement. agreement. The cusafter the tomer may have knowledge of the notice until after the execution tomer until had have no the notice of may knowledge If this of his order. order. If this is the notice notice would obviously the customer, of his is so, so, the customer, obviously not bind the seeks to for no party party can can be bound by by aa condition the other seeks to impose condition which the for impose contract is might appear that, where such notices notices are after the It might are is made. It after the contract appear that, in use, in use, all the first first one would be subject to the the implied all contracts after the contracts after subject to implied agreement indicated by the notice. the continuous receipt of But the indicated mere the notice. by agreement receipt of notices not conclusive. the printed notices such notices is statements with the such notices is not conclusive. "The statements printed the plaintiff plaintiff after after each not thereon, received by by the did not each purchase sale, did thereon, received purchase and sale, a the conclusively establish a contract the plaintiff and defendants establish contract between defendants conclusively plaintiff in cotton, conin their marginal marginal dealings cotton, but they they were evidence to to be be conin their dealings in sidered in connection connection with with the the testimony testimony of plaintiff-the history of the the plaintiffthe of sidered in history of before the the transaction transaction between between the the parties parties before the summer vacationand vacation-and the the facts connected connected with with the the particular particular transactions of which the transactions out of the the facts plaintiff's alleged cause of the purpose of determining of action action arose, for the arose, for purpose of alleged cause determining plaintiff's 20 the intention of of the the parties parties in in connection connection with such marginal the intention marginal dealings."2o dealings." Whether or not the the right right to to close close out without notice transaction without notice out the the transaction or not Whether to the customer is a part of the contract between customer and broker to the customer is a part of the contract in every is aa question question of case. "That depends the intention fact in intention of of of fact is upon the depends upon every case. 21 the parties which which must be be gathered from all the circumstances."21 all the circumstances/' the parties gathered is required to In the the absence absence of of any any such agreement, the the broker is such agreement, In required to give give in which to notice to give give the the customer customer aa reasonable reasonable time in to furnish furnish notice and to 22 additional margin. 22 additional margin. The question question of time is is reasonable reasonable depends upon the the circumcircumof what time depends upon the location to the of the particular case. Thus, according location of the stances of each each particular case. Thus, stances of according to a held parties, an hour, a day, and a been held reasonable time; the have reasonable week a the an time; hour, day, parties, the state of condition of the margin account, the state of the market, and other factors other factors condition of the margin account, market, have influenced decisions decisions on this this point. have also also influenced point. I
Smith v. Craig, 211 N.Y. N.Y. 456, 456,461; N.E. 798, 105 N.E. 799 (1917). Smith v. 798, 799 461; 105 (1917) . Craig, 211 at 800 compare 20 Smith v. Craig, supra, note note 20 20 at at 464, 464, 105 N.E. at 105 N.E. Smith v. compare Craig, supra, 635 (C.C.A. terreich v. v. Gude, 109 F. F. 2d 635 terreich Glide, 109 1940) . (C.C.A. 2d 1940). 21 Thompson v. Baily, 220 116 N.E. N.E. 387, N.Y. 471, 471, 477; 477; 116 389 (1917). 387, 389 (1917). Baily, 220 N.Y. Thompson i 19
21
Land Oberoes· Oberoes-
v.
to factors factors affecting Markham v. v. Jaudon, Jaudon, 41 41 N.Y. N.Y. 235 235 (1869) (1869). As to "reasonable" affecting a "reasonable" time, see v. Schiff, 236 App. App. Div. Div. 598, 260 N.Y. N.Y. Supp. 274 (1st see Woodward v. 598, 260 Schiff, 236 time, (1st Dep't Dep't 1932) Supp. 274 1932) , affirmed without opinion, N.Y. 670, N.E. 786 (1933). 185 N.E. 261 N.Y. 670, 185 (1933) affirmed without opinion, 261 22
.
,
.
The Exchange Exchange and Third Parties Parties
309
It that on the the broker rests the burden of established that rests the It ·is -is quite clearly of quite clearly established proof that that he he made every to give notice of margin call to the effort to of a margin call to the give notice every effort proof customer. the customer customer does does not respond respond to request-for-margin notices notices If the to request-for-margin customer. If sent the ordinary way, the the broker broker should should inquire at his in the sent in or office his home or office ordinary way, inquire at for an up-to-the-minute up-to-the-minute address. however, the the broker broker has has made every address. If, for If, however, every reasonable effort to communicate the the demand for for additional effort to additional margin reasonable margin without result, or, the customer customer defaults if the defaults after after he has has actually received without result, or, if actually received 28 broker may may then then close out the notice, the the transaction. transaction. 28 close out the broker notice, 1£ the broker broker has has lawfully lawfully closed the transaction, transaction, he he is is entitled entitled to closed out the If the to sue the customer for damages or the other for losses losses sustained. sustained. On the other hand, for damages or for sue the hand, 24 if he wrongfully wrongfully closes the transaction, transaction, he is to the liable to customer. 24 closes out the is liable the customer. if In the the measure measure of of damages the price price realized realized besides the latter case case the In the latter is, besides damages is, the on the the sale, that price and the highest the difference difference between that sale, the highest market price of closing notice price in excess thereof within such reasonable time, after notice of in such after excess reasonable thereof within time, closing price to replace out been given given to to the the customer, as would have enabled him to replace has been out has customer, as in which to to replace the contract contract lost to him. him. Reasonable time in replace the the conconlost to the to the customer tract is is such will give the opportunity to consult counsel, time as as will tract such time counsel, give opportunity for the of deterto employ employ other other brokers, brokers, to to watch the the market for deterthe purpose to purpose of is to to be made, transaction is mining at at what price price the the replacing replacing transaction made, and to to mining raise the money money with with which to to finance finance it. it. raise the v. Jaudon, Jaudon, supra, supra, note note 23 23 for for authorities. authorities. Markham v. v. Beveridge, Content v. Banner, Banner, 184 N.Y. 121, Beveridge, 141 141 N.E. 913 913 (1906); 184 N.Y. Content v. 76 N.E. 121, 76 (1906); Minor v. N.Y. 399, 36 N.E. N.E. 404 (1894) (1894). N.Y. 399, 36 23 See 23 See
24
.
Table Table of of Cases Cases
St. Louis Merchants' Albers v. Albers v. St. Merchants' Exchange, Exchange, 138 Second 138 Mo. 140, 39 S.W. S.W. 473, 140, 39 473, Second 39 Mo. Appeal 39 A. 583 A. 583 Appeal Albers Commission Co. Albers Co. v. v. Spencer, 205 Mo. 105, 103 S.W. S.W. 523, 11 L.R.A. L.R.A. (N.S.) 105, 103 523, 11 Spencer, 205 (N.S.) 1003 1003 American Live Live Stock Commission Co. v. Chicago Live Stock Exchange, 143 Ill. Stock Commission Co. v. Stock Exchange, 143 111. Chicago Live St. Rep. 32 N.E. N.E. 274, 274, 36 36 Am. St. Rep. 385, 385, 18 L.R.A. 190 210, 18 L.R.A. 190 210, 32 100 Ohio St. Anderson v. v. Durr, Durr, 100 251, 126 St. 251, N.E. 57 126 N.E. 57 Baltimore v. Md. Atl. Baltimore City v. Johnston, 96 737, 54 At!. 646, 54 61 L.R.A. L.R.A. 568 568 737, 646, 61 City Johnston, Belton 109 N.Y. Belton v. v. Hatch, N.Y. 593, 593, 17 N.E. 225, 225, 44 Am. St. 495 St. Rep. 495 17 N.E. Hatch, 109 Rep. Bernheim v. v. Keppler, Keppler, 34 Misc. 321, 321,69 N.Y. Supp. 34 Misc. 69 N.Y. 803 Supp. 803 Bibb v. v. Allen, AlIen, 149 481, 13 Ct. 950 Bibb U.S. 481, 13 Sup. 950 149 V.S. Sup. Ct. of the the City of Chicago v. Christie Board of of Trade of v. of Christie Grain Grain & Stock Stock Co., 198 V.S. U.S. Co., 198 Chicago City 236, 25 Sup. Ct. 637 Ct. 25 637 236, Sup. the City City of of Chicago v. Riordan, Board of of Trade of of the 94 Ill. 111. A. A. 298 298 Riordan, 94 Chicago v. Bowles Live Live Stock Co. v. v. Chicago Chicago Live Live Stock Exchange, 243 Ill. A. Stock Co. Stock Exchange, Bowles A. 71 243 111. 71 Burke Grain Grain Co. Co. v. v. St. Mercury Indemnity Indemnity Co., F. (2nd) St. Paul Mercury 94 F. cert. Co., 94 458, cert. (2nd) 458, denied, 661, 58 U.S. 661, 58 Sup. 303 V.S. Ct. 765 765 denied, 303 Sup. Ct. v. Federal Federal Trade Commission, of Commerce v. Chamber of F. (2nd) 13 F. 673 Commission, 13 (2nd) 673 Chicago v. Johnson, Johnson, 264 264 V.S. I, 44 44 Sup. Ct. 232 of Trade v. U.S. 1, Ct. 232 Chicago Board of Sup. Chicago of Trade v. v. Olsen, Olsen, 262 262 V.S. 43 Sup. U.S. 1, Ct. 470 470 1, 43 Chicago Board of Sup. Ct. Citizens' National Bank v. v. Durr, Durr, 257 Ct. 15 U.S. 99, 15 257 V.S. Ct. 42 Sup. Citizens' National 99, 42 Sup. Clews v. Jamieson, 182 461, 21 21 Sup. Ct. 845 U.S. 461, Ct. 845 v. Jamieson, 182 V.S. Clews Sup. Cochran v. v. Adams, Adams, 180 Pa. St. 36 Atl. Ad. 854 180 Pa. St. 289, 854 Cochran 289, 36 Misc. 217, 103 N.Y. v. Budd, Budd, 52 52 Misc. 217, 103 N.Y. Supp. App. Div. Div. 922, Cohen v. 117 App. 45, affirmed, affirmed, 117 922, Supp. 45, 1133 102 N.Y. Supp. 1133 N.Y. 102 Supp. 36 N.E. Content v. v. Banner, Banner, 184 N.Y. 121, N.E. 404 404 184 N.Y. Content 121, 36 Crowley v. v. Commodity Commodity Exchange, Exchange, 141 F. (2nd) 141 F. 182 (2nd) 182 Crowley 164 F. F. (2nd) Daniel v. Chicago of Trade, 7th 1947) Daniel v. Trade, 164 815, (C.C.A. Chicago Board of (2nd) 815, (C.C.A. 7th 1947) DicklOn v. v. Uhlmann Vhlmann Grain Co., Co., 288 Ct. 362 U.S, 188, 288 V.S. 53 Sup. Ct. Dickion 362 188, 53 Sup. Eliot v. v. Merchants' Exchange, 14 A. 234 14 Mo. A. Merchants' Exchange, 234 Eliot Evans v. v. Chamber of of Commerce, 86 Minn. 448, 91 N.W. 8 8 Evans Commerce, 86 448, 91 354 Wi&ter, 32 Leg. Int. Int. (Pa.) 354 Evans v. Wister, 32 Leg. Evans v. (Pa.) Fisk & Robinson, Robinson, in re, 185 Fed. 974 974 in re, 185 Fed. Fisk
311
312
Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
Ford v. 205 App. App. Div. 240 N.y. N.V. 624, v. Snook, Div. 194, 199 N.Y. N.Y. Supp. 624, Snook, 205 affirmed, 240 194, 199 630, affirmed, Supp. 630, 148 N.E. 732 732 148 N.E. v. Dick, 262 App. App. Div. 299, 28 28 N.Y.S. N.Y.S. (2nd) 426 affirmed, affirmed, 287 287 N.Y. N.Y. Franklin v. Franklin Div. 299, Dick, 262 (2nd) 426 656, 39 39 N.E. N .E. (2nd) (2nd) 282 282 656, Garcia Sugars Corp. v. v. New York Coffee Coffee Se Exchange, 77 N.Y.S. N.Y.S. (2nd) Garcia 532 & Sugar Sugars Corp. (2nd) 532 Sugar Exchange, N.Y. Garrigues Co. v. Produce Exchange, 213 App. Div. 625, 211 N.Y. Co. v. York New Div. 213 211 Produce 625, Garrigues Exchange, App. Supp. 13 Supp. 13 Gartner v. v. Pittsburgh 247 Pa. Pa. 482, 482, 93 Stock Exchange, 93 Atl. Atl. 759 759 Pittsburgh Stock Exchange, 247 Green v. v. Chicago Chicago Board Board of of Trade, Trade, 63 Ill. A. A. 446, affirmed, 174 Ill. N.E. 111. 585, 51 N.E. 63 111. 174 affirmed, 585, 51 446, 49 L.R.A. 365 599, 49 L.R.A. 365 599, Greer, Mills Mills Se Co. v. v. Stoller, StolIer, 77 Fed. 11 8c Co. 77 Fed. Greer, in re, 174 Fed. 629 Gregory, in Fed. 629 re, 174 Gregory, Gruner, matter of, of, 295 295 N.Y. N.Y. 510, 510, 68 68 N.E. N.E. (2nd) 514 Gruner, matter (2nd) 514 Habenicht v. v. Lissack, 78 Cal. Ca!. 351, Pac. 874 Habenicht 20 Pac. 874 Lissack, 78 351, 20 Haebler v. v. New York Produce Exchange, Exchange, 149 N.Y. 414, 414, 44 44 N.E. N.E. 87 149 N.Y. 87 Hellman, matter matter of, N.Y. 254, 254, 66 66 N.E. N.E. 809 809 174 N.Y. Hellman, of, 174 v. Hawley, Hitch v. Hawley, 132 N.Y. 212, 30 N.E. N.E. 401 401 Hitch 132 N.Y. 212, 30 v. 94 L.Ed. Hyde v. Woods, 94 V.S. 523, 24 L.Ed. 264 U.S. 24 264 Woods, 523, Hyde Irwin 110 V.S. Irwin v. v. Williar, 499, 44 Sup. U.S. 499, Ct. 160 160 Williar, 110 Sup. Ot. v. Cotton Exchange, 249 App. N.Y.S. (2nd) Jackson New York Cotton v. Div. 329, 19 N.Y.S. 249 207 329, 19 Exchange, Jackson App. Div. (2nd) 207 N.E. N.Y. Jemison v. Citizens' Savings Bank, 122 N.Y. 135, 25 N.E. 264 v. Citizens' 25 122 264 135, Savings Bank, Jemison v. Provost, Provost, 156 App. App. Div. Div. 477, 477, 141 N.Y. Supp. 215 N.Y. N.Y. Ketcham v. 141 N.Y. affirmed, 215 437, affirmed, Supp. 437, 631, 109 N.E. 1080 631, 109 N.E. 1080 Keyer v. Memphis Memphis Cotton Exchange, Exchange, 135 414, 186 186 S.W. 135 Tenn. 414, S.W. 593 593 Keyer v. Kolff Paul Fuel Exchange, 48 48 Minn. 215, Kolff v. v. St. St. Paul Fuel Exchange, 50 N.W. 1036 1036 215, 50 v. New York Cotton Cotton Exchange, Exchange, 203 203 App. App. Div. Div. 565, N.Y. Supp. Lamborn v. 197 N.Y. 57 565, 197 Supp. 57 Land Oberoesterreich Oberoesterreich v. v. Gude, F. (2nd) (2nd) 635 109 F. 635 Gude, 109 Brewst. (Pa.) Leech v. Harris, 22 Brewst. (Pa.) 571 571 Leech v. Harris, Lurman, in re, re, 90 90 Hun 303, 35 N.Y. N.Y. Supp. N.Y. 588, N.E. 149 N.Y. affirmed, 149 956, affirmed, 588, 44 N.E. Lurman, in 303, 35 Supp. 956, 1125 1125 Lurmann v. v. Jarvie, Jarvie, 82 App. Div. Div. 37, 37, 81 81 N.Y. N.Y. Supp. 468, affirmed, N.Y. 559, 178 N.Y. 82 App. affirmed, 178 559, Supp. 468, 70 N.E. N.E. 1102 70 1102 v. Jaudon, N.Y. 235 235 Markham v. 41 N.Y. Jaudon, 41 Chamber of Commerce, McCarthy Bros. Co. v. of 497, 117 v. Co. 105 Minn. 497, 117 N.W. 923, Commerce, 105 923, McCarthy Bros. 21 L.R.A. L.R.A. (N.S.) 21 (N.S.) 589 v. Pittsburgh Pittsburgh Stock 219 Pa. 435, 68 McClain v. Stock Exchange, Pa. 435, 68 Atl. Atl. 1031 1031 Exchange, 219 of Trade, 146 Fed. v. Board of Fed. 961 Co. v. 961 McDearmott Commission Co. Trade, 146 111. A. 275 McHenry v. v. Chicago of Trade, Trade, 131 275 131 Ill. Chicago Board of McHenry Melady v. South St. Paul Live Stock Exchange, 142 Live Stock v. St. Minn. 194, 142 171 N.W. 806 806 194, 171 Exchange, Melady F. Middleton v. Fidelity-Philadelphia Trust Co., 35 F. (2nd) 851 35 Middle 851 ton v. Co., Fidelity-Philadelphia (2nd) Minor v. v. Beveridge, N.Y. 399, 399, 36 N.E. N.E. 404 141 N.Y. Beveridge, 141 Moffatt v. Kansas Kansas City City Board of of Trade, Trade, (K.C.C.A.) Ill S.W. Moffatt v. S.W. 894, 250 894, reversed, reversed, 250 (K.C.C.A.) III 157 S.W. 579 Mo. 168, 579 157 168, U.S. 593,46 Moore, etc. etc. v. v. New York Cotton Exchange, 270 V.S. Ct. 367 367 593, 46 Sup. Moore, Exchange, 270 Sup. Ct. Div. Moyse v. New York Cotton Exchange, 143 App. Div. 265, 128 N.Y. Supp. N.Y. 265, 128 112 Exchange, App. Moyse v. Supp. 112 156 111. Nash-Wright Co. Co. v. v. Wright, Wright, 156 Ill. A. A. 243 243 Nash-Wright
Table
of
Cases of Cases
313
Savings Bank v. v. Abbott, Abbott, 181 Mass. 531, Nashua Savings 181 Mass. 63 N.E. N.E. 1058 1058 531, 63 National League League of of Commission Merchants v. v. Hornung, Hornung, 148 Div. 355, National 148 App. 132 355, 132 App. Div. N.Y. N.Y. Supp. 871 871 Supp.
ex rel. rei. Whitney Whitney v. v. Graves, 299 V.S. Sup. Ct. 237 New York ex U.S. 366, Ct. 237 57 Sup. Graves, 299 366, 57 New York and Chicago Grain Stock Exchange v. Board of Trade, and Stock v. of 111. 153, 127 Ill. Trade, 127 153, Chicago Exchange 19 N.E. 855 19 N.E. 855 O'Brien v. v. South Omaha Live Live Stock Nebr.729, Stock Exchange, 101 Nebr. 164 N.W. 724 724 729, 164 Exchange, 101 v. Chicago Chicago Open of Trade, 18 Ill. A. 465 OIds v. Olds Board 18 of Trade, 111. A. 465 Open 111. 138,75 Pacaud v. v. Waite, 218 Ill. N.E. 779, 779, 22 L.R.A. L.R.A. (N.S.) 672 138, 75 N.E. Waite, 218 (N.S.) 672 Page, in in re, re, 107 Fed. 89 89 107 Fed. Page, Page v. v. Edmunds, Edmunds, 187 23 Sup. U.S. 596, 187 V.S. Ct. 200 200 596, 23 Page Sup. Ct. Pan coast v. v. Houston, 5 Week Notes Notes Cas. Pancoast Cas. 36 36 Houston, 5 Parish v. Parish v. New York Produce Produce Exchange, N.Y. 34, 34, 61 N.E. 977 169 N.Y. 61 N.E. 977 Exchange, 169 v. People v. Chicago Board of Trade, 80 Ill. 80 111. 134 of 134 Trade, Chicago People People v. Chicago Live Live Stock 48 N.E. N.E. 1062, v. Chicago 111. 556, St. Stock Exchange, 170 Ill. 62 Am. St. 556, 48 1062, 62 Exchange, 170 People 39 L.R.A. 373 Rep. 404, 39 L.R.A. 373 404, Rep. People v. v. Feitner, Feitner, 167 N.Y. 1,60 N.E. 265 265 167 N.Y. 1, 60 N.E. People v. New York People v. Cotton Exchange, 8 Hun (N.Y.) 216 Exchange, 8 People (N.Y.) 216 v. 111. 340, v. Steele, 231 Ill. 340, 83 N.E. 236 People 83 N.E. 231 236 Steele, People 101 F. Peto v. v. HowelI, F. (2nd) (2nd) 353 353 Peto Howell, 101 N.Y. Powell v. v. Waldron, 89 N.Y. 326,42 St. Rep. 301 Waldron, 323, 42 Am. St. Rep. 301 Press Co. v. 111. A. Press & Co. v. Fahy, 231 Ill. A. 193, affirmed, 313 Ill. 262, N.E. 103 111. 231 313 145 N.E. 103 193, affirmed, 262, 145 Fahy, York Quentell v. Cotton Exchange, 56 Mise. 150, 106 N.Y. Supp. 228 v. New Cotton 56 106 N.Y. Misc. 150, Exchange, Quentell Supp. 228 Richardson Richardson v. v. Shaw, 209 V.S. 365, 28 Sup. Ct. 512 U.S. Ct. 209 512 Shaw, 365, 28 Sup. Rifkind Rifkind v. v. New York Coffee Coffee & Sugar Exchange, 258 258 App. App. Div. N.Y.S. Div. 871, 16 N.Y.S. 871, 16 Sugar Exchange, (2nd) 1023 (2nd) 1023 Rittenband v. v. Baggett, Baggett, 44 Abb. N.C. N.C. (N.Y.) Rittenband 67 (N.Y.) 67 Rogers v. v. Hennepin Hennepin County, 240 V.S. 265 U.S. 184, 36 Sup. Ct. 265 184, 36 Rogers County, 240 Sup. Ct. San Francisco v. Anderson, Anderson, 103 42 Am. St. Pac. 1034 Cal. 69, Francisco v. 103 Cal. St. Rep. 98, 36 Pac. 1034 69, 42 Rep. 98, 36 matter & Co., matter of, 37 Mise. 264, 75 N.Y. Supp. 312 Seymour, Misc. N.Y. 37 75 312 of, Co., 264, Seymour, lohnson Johnson Supp. Cal. 567, Shannon v. v. Cheney, Cheney, 156 Pac. 588 156 Cal. 105 Pac. 567, 105 Smith v. v. Craig, N.Y. 456, 456, 105 N.E. 798 105 N.E. 798 211 N.Y. Craig, 211 Smith Flynn Flynn Commission Co., Co., in in re, re, 292 292 Fed. Fed. 465 465 v. lames, Springs v. 137 App. Div. HO, 121 N.Y. Supp. N.Y. 121 137 202 N.Y. 110, 1054, affirmed, affirmed, 202 App. James, Supp. 1054, Springs 603, N.E. 1131 1131 96 N.E. 603, 96 State v. Duluth Board of of Trade, Trade, 107 23 L.R.A. State v. 107 Minn. 506, L.R.A. (N.S.) 121 N.W. 395, 506, 121 395, 23 (N.S.) 1260 1260 State McPhail, 124 108 145 N.W. 108 v. McPhail, State v. 124 Minn. 398, 398, 145 Mo. A. State v. Merchants' 2 A. 96 Merchants' Exchange, 2 State v. Exchange, of Commerce, v. Milwaukee Chamber of 47 Wis. State State v. Wis. 670, 3 N.W. 760 760 Commerce, 47 670, 3 State Vnion Merchants' Exchange, Exchange, 22 Mo. App. App. 96 v. St. St. Louis Louis Union 96 State v. St. 55 Thompson v. Adams, Adams, 93 93 Pa. Pa. St. 55 Thompson v. N.Y. Thompson v. Bailey, 220 N.Y. 471, N.E. 387 387 471, 116 N.E. Thompson v. Bailey, 220 111. v. Thomson, Thomson, 293 584, 127 N.E. 882; Ill. 521, 293 Ill. 584, 127 N.E. second appeal, Thomson v. 315 111. 882; seCond 521, appeal, 315 451 146 N.E. 451 146 N.E. Turner v. v. Chicago Chicago Board of of Trade, Fed. 108, cert, denied, 244 Fed. 245 V.S. U.S. 667 Trade, 244 108, cert. 667 denied, 245
8g 114 4
Futures Trading Commodity Commodity Exchanges Exchanges and Futures Trading
v. Banton, U.S. 418, Ct. 426 Tyson 273 U.S. 47 Sup. 426 Banton, 273 418, 47 Sup. Ct. Tyson v. States v. v. New York Coffee Coffee and Sugar United States U.S. 611, 263 U.5. 611, 44 Sup. Sugar Exchange, Exchange, 263 Sup. Ct. 225 Ct.225 v. Patten, States v. United States U.S. 525, 33 Sup. 141 Ct. 141 226 U.S. Patten, 226 525, 33 Sup. Ct. States v. v. Tarpon United States Springs Sponge Exchange, F. (2nd) 142 F. 125 Tarpon Springs Sponge Exchange, 142 (2nd) 125 v. Fisher, 111. 146 146 Weaver v. 110 Ill. Fisher, 110 v. Postal Postal Telegraph Weld v. 199 N.Y. N.E. 415 415 N.Y. 88, 92 N.E. 88, 92 Telegraph Cable Company, Company, 199 v. BrownelI, Pr. White v. 4 Abb. Pr. N.S. (N.Y.) 162 N.S. Brownell, (N.Y.) 162 v. Houston, Wilhite v. Wilhite Fed. 390 390 200 Fed. Houston, 200 v. Schiff, N.Y. Supp. Woodward v. Div. 598, N.Y. 236 App. 274 affirmed, 260 N.Y. 261 N.Y. Schiff, 236 598, 260 affirmed, 261 App. Div. Supp. 274 185 N N.E. 670, .E. 786 786 670, 185 v. Baltimore Stock Zell v. Stock Exchange, Zell Atl. 808 808 102 Md. 489, 62 At!. 489, 62 Exchange, 102
Bibliography Bibliography
literature of Commodity Exchanges Exchanges is In preparapreparaof Commodity The literature is not extensive. extensive. In tion of of this this bibliography, bibliography, the the authors authors have tion have included included those those books books and official publications publications which they they have found of value either for official of especial either for especial value clear and analytical their clear analytical expositions expositions of their of different of the different phases the work phases of of of the exchanges or for the the valuable valuable statistical statistical data or for data contained therein. the exchanges therein.
Official
Publications Official Publications Report of of Corporations Wash· of the the Commissioner of the Cotton Exchanges. Exchanges. WashReport Corporations on the ington, 1909. ington, 1909. of the the Federal Report Federal Trade Commission on The Grain Volumes). Grain Trade (Seven Report of (Seven Volumes) Washington, 1920-1926. Washington, 1920-1926. No. lOO, Senate Document No. Cotton Trade, First Session, The Cotton 68th Congress, Trade, Senate 100, 68th Session, Congress, First Part 1. Part 1. Cotton Prices and Markets, A. B. B. Cox. Department of Agriculture, Bulletin of Agriculture, Cox. V.S. U.S. Department Bulletin Cotton Prices Markets, A. Washington, 1926. No. 1444, No. 1926. 1444, Washington, in Cotton Marketing, Services A. B. B. Cox. U. S. Department of BulleServices in Cox. U. of Agriculture, S. Department Marketing, A. Agriculture, Bulletin No. 1445, Washington, 1926. tin 1445, Washington, 1926. Fluctuations in in Wheat Futures, Futures, Senate Fluctuations 69th Congress, Senate Document 135, First 135, 69th Congress, First Session. Session. Report Exchange, submitted Royal Grain submitted to to the the Royal Report on The Winnipeg Winnipeg Grain Exchange, Inquiry by the Exchange, 1921. Commission the 1921. Exchange, by Inquiry Report Prices, Washington, Washington, 1920. the Federal of the Federal Trade Commission on Wheat Prices, 1920. Report of Smith. V.S. Factors Affecting Affecting the the Price Cotton, B. B. B. B. Smith. of Agriculof Cotton, U.S. Department Price of of Factors AgriculDepartment ture, Bulletin No. No. 50, Washington, 1928. 1928. 50, Washington, ture, Bulletin The Silver Department of T.I.B. 682, U.S. Department of Commerce, Bratter. V.S. Silver Market, Commerce, T.I.B. Market, H. M. Bratter. 682, Washington, 1930. 1930. Washington, Cotton Conditions. Hearings before before the the Sub-Committee of the Committee on of the Conditions. Hearings Cotton Agriculture, 71st Congress, 1930. U.S. Senate, Session, 1930. Senate, 71st Congress, Second Session, Agriculture, V.S. Agriculture, V.S. Hearings the Committee on Agriculture, U.S. Senate, Before the 74th Congress, Senate, 74th Hearings Before Congress, Second 1936. Second Session, Session, 1936. U.S. Department Trading Futures, G. G. W. Hoffman. U.S. Department of of Agriculture, in Cotton Cotton Futures, Agriculture, Trading in 1930. Washington, 1930. Bulletin No. No. 199, Bulletin 199, Washington, .
315 315
316
Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
U.S. DeReport ~he Administrator Administrator of of the the Commodity Exchange Authority. Authority. U.S. of the Commodity Exchange Report of partment of Agriculture, Washington, 1947. 1947. of Agriculture, Washington, partment of Canada, Report of the Royal Inquiry Commission. Dominion of Ottawa, of the Canada, Ottawa, Royal Grain Inquiry Report 1925. 1925. in Grain Futures. Report the Commission to to Inquire Inquire into Futures. Dominion into Trading of the Trading in Report of of Ottawa, 1931. 1931. of Canada, Canada, Ottawa, in into Trading Evidence and Proceedings the Commission to to Inquire Before the Evidence Trading in Inquire into Proceedings Before Grain Futures. The Grain Trade News, News, Winnipeg, Winnipeg, 1931. 1931. Grain Futures. Report of of the the Royal Royal Grain Grain Inquiry Commission. Dominion of of Canada, Canada, Ottawa, Ottawa, Inquiry Commission. Report 1938. 1938. Hearings Before the the Joint Joint Committee on the the Economic Report Report-80th 80th Congress, Congress, Hearings Before 10, 1948. 1948. First Nov. 21-Dec. First Session, Session, Nov. 21-Dec. 10,
Private Publications Publications Private in the C. Speculation the Stock Stock and Produce Exchanges Exchanges in States, by the United States, by H. C. Speculation on the Emery. Columbia University, University, New York, York, 1896. 1896. Emery. Columbia Produce Exchange Exchange Markets. Markets. American Academy Academy of Political and of Political American Produce Social XXXVIII, Philadelphia, Philadelphia, 1911. 1911. Social Science, Science, Volume XXXVIII, The Functions Functions of Legitimate Exchanges. Exchanges. Hartzell Hartzell Se 1910. 8c Lord, Lord, Chicago, of Legitimate Chicago, 1910. H. The Value Speculation, by H. Brace. Houghton Mifflin Co., Brace. Mifflin Value of Co., of Organized Houghton Organized Speculation, by Boston, 1913. 1913. Boston, The Cotton Manufacturing Manufacturing Industry Industry in in the the United States, States, by by M. T. Copeland. Copeland. University Press, Cambridge, 1912. Harvard University 1912. Press, Cambridge, The Law of of Commercial Exchanges, Exchanges, by by C. A. Legg. Voorhis Co., C. A. 1913. Baker, Voorhis Co., 1913. Legg. Baker, The Stock Exchanges, by by A. A. W. Atwood. Alexander Hamilton InStock and Produce Exchanges, Institute, 1927. stitute, 1927. Speculation and the the Chicago by J. E. Boyle. Trade, by of Trade, Speculation Chicago Board of Boyle. The MacMillan J. E. Co., York, 1921. 1921. Co., New York, Organized Produce Markets, Markets, by by J. J. G. G. Smith. Longmans, Green Se London, Smith. Longmans, & Co., Co., London, Organized Produce 1922. 1922. The Work of Stock Exchange. Exchange. Ronald Press, Press, New York, the Stock 1922. York, 1922. of the Risk and Risk Risk Bearings, Bearings, by by C. O. Hardy. Hardy. University of Chicago Press, Chicago, Risk C. O. of Chicago Press, University Chicago, 1923. 1923. The Marketing Marketing of of Farm Products, Products, by by L. L. D. D. H. Weld. Weld. The MacMillan Co., Co., New York, 1924. 1924. York, Marketing of Metals and Minerals, Minerals, Spurr Wormser. New York, 1925. York, 1925. of Metals Marketing Spurr and Wormser. E. J. The Wheat Pit, Pit, by by E. Dies. The Argyle Press, Chicago, 1925. Dies. 1925. Press, Argyle Chicago, J. Cotton and the the Cotton Market, Market, by by W. H. Hubbard. D. Appleton Se D. Appleton & Co., Co., New York, 1927. 1927. York, The Exchanges Exchanges of London, by S. W. Dowling. Dowling. Butterworth, Butterworth, London, 1928. London, 1928. of London, by S. Board History of the Chicago of Trade, by C. H. Taylor. the C. of Trade, by History of Chicago Taylor. Interrelationships of Supply and Price, Price, G. G. F. F. Warren and F. F. A. A. Pearson. Pearson. Cornell Cornell of Supply Interrelationships University Agricultural Experiment Station, Ithaca, 1928. University Agricultural Experiment Station, Ithaca, 1928. Study of of Cotton Hedging Hedging for for aa Grey Mill, Bulletin Bulletin No. No. 70, of A Study Bureau of 70, Bureau Grey Goods Mill, Business Research, Research, Harvard University University Press, Press, 1928. Business 1928.
Bibliography Bibliography of Commerce, Hedging Cotton, by Reavis Reavis Cox. The New York Journal 1929. Commerce, 1929. Cotton, by Journal of Hedging B. Futures Exchange Exchange Its Its Possibility Possibility -and Advisability, by A. B. Koenig. and Advisability, A Wool Futures by Koenig.
Philadelphia, 1930. Philadelphia, 1930. Organized Commodity Markets. "The Annals," Annals," The American Academy of Academy of Organized Commodity Markets. Political and Social Philadelphia, May, May, 1931. 1931. Social Science, Political Science, Philadelphia, Speculation, Short Selling, Selling, and the the Price Price of the Food Studies of of the of Wheat. Wheat Studies Speculation, Short Research Institute, Institute, Vol. Vol. VII, VII, No. 4, 4, Leland Stanford California, Research Stanford University, University, California, 1931. 1931. Futures Trading, by G. G. W. Hoffman. HofIman. University University of Pennsylvania Press, Press, PhilaPhilaof Pennsylvania Futures Trading, by delphia, 1932. 1932. delphia, Trading in Futures, Futures, Its Its Aims, Aims, Functions, Functions, and Legal Legal Treatment. International International Trading in Chamber of Commerce, Brochure No. No. 81, Paris, 1933. of Commerce, 1933. 81, Paris, The Marketing Marketing of by J. A. Todd. Sir &: Sons, Sir Isaac Isaac Pitman & Sons, Ltd., Ltd., London, London, Cotton, by of Cotton, J. A. 1934. 1934. Cotton Market, by by A. A. H. Garside. Garside. F. F. A. A. Stokes &: Co., York, 1935. to Market, Cotton Goes to Stokes & 1935. Co., New York, Garside. F. F. A. Stokes & Wool and the the Wool Trade, by A. A. H. Garside. A. Stokes &: Co., York, 1939. 1939. Co., New York, Trade, by S. Shepherd. State College Marketing Farm Products, Products, by by G. S. Ames, Press, Ames, Marketing College Press, Shepherd. Iowa State Iowa, 1946. 1946. Iowa,
Index
Actual see Physical Physical market Actual market, market, see n., 69 Adams, T. S., 69 S., n., Adams, Anderson, Company, 202 202 Anderson, Clayton Clayton and Company, Arbitrage, 72, 72, 106, 215ff. 106, 209, 209, 215ff. Arbitrage, 4 If. If. Arbitrageur, defined, denned, 4 Arbitrageur, Attachment, defined, defined, 288 288 Attachment, A twood , Albert Albert W., W., n., 167 Atwood, n., 167
Broomhall's Agency, infor· Broomhall's of inforas supplier Agency, as supplier of mation on markets, 105f. markets, 105f. Bucket shop, 292, 293, 293, 297 297 Bucket shop, 292, of Commodity provisions of Exchange Act Act provisions Commodity Exchange 262 regarding, 261, 262 regarding, 261, Bullock, j., n., n., 69 Charles J., 69 Bullock, Charles Bulls Bulls ("long" described. 74f. 74f. ("long" speculators). speculators), described, Buyer's call. 243ff. call, 243ff. Buyer's
Bankruptcy Act, 284ff. 284ff. Bankruptcy Act, short selling. Barter, defined, Capper, Senator, on short 78f. 3 Barter, defined, 3 selling, 78f. Capper, Senator, Capper-Volstead Act, 255 255 Basis contract, Basis 158 contract, 158 Capper- Volstead Act, N., n., n., 69 Carver, described, 135 135 Carver, T. N., described, Cash (Spot) market, see see Physical Physical market reasons for, for, 136 reasons 136 (Spot) market, see also Exchange contract Cate, Henry H., benefits of of futures futures trad· contract tradsee also Exchange H., on benefits Gate, Henry ing to millers, pro· Basis (Standard) (Standard) grade grade Basis millers, merchants, merchants, and proing to ducers, 48ff. defined,25 25 ducers, 48ff. defined, Caveat 43. 88 Caveat emptor, 88 characteristics of, of, 136f. characteristics 136f. emptor, 43, Caveat vendor, 43 43 Caveat vendor, see also also Grades see Chicago Exchange, the, the, 119 Mercantile Exchange, 119 Bears ("short" ("short" sellers), described, 74f. 74£. Bears Chicago Mercantile sellers), described, Christie Company, the, Christie Grain and Stock Beaulieu, Paul Leroy, 70 n. 70 Stock Company, the, Beaulieu, Paul Leroy, n., of trade, trade, defined, defined, 252 252 293 Board of 293 Fred Emerson, Emerson. n., Board of of Trade of of the the City of Chicago, Chicago, Clark, 69 Board Clark, Fred n., 69 City of Clark, 74, 119, the, ll, 146 69 Clark, John the, 119, 146 Bates, n., 11, 74, n., 69 John Bates, development of, of, 10, Clayton, L., on hedging, 202 144 10, 130f., 130f., 144 Clayton, William L., hedging, 202 development Clearing house (of statistics on prices, prices, 68f. 68f. statistics 33L (of exchanges), Clearing house exchanges), 33f. functions 297ff. speculation on, on, 79 functions of, 79 of, 164f., 164f., 168f., 168f., 182. 182, 297ff. speculation organization as publisher of of marketing marketing information, 169f. as publisher information, of, 169f. organization of, margin of, 170-76. 106 181 170-76, 181 margin requirements requirements of, official trading unit unit of, of, 140 and exchange exchange contracts, 140 official trading 170f. contracts, 170f. arbitration of of disputes, disputes, 148 148 financial resources of, of, 179-82 on arbitration financial resources 179-82 limitation of of price price fluctuations by, 157 the guaranty ISO£. fluctuations by, the limitation 157 fund, 179. 179, 180. guaranty fund, trading 159 deliveries by. 182-85 deliveries by, on, 159 182-85 trading months on, grain trade trade on, on, 210 limitation of limitation interest by. of interest 210 185L grain by, 185f. quotations by, by, 292, 292, 293f. 293f. advantages 186f. of, 186f. advantages of, quotations Boyle, James James E., speCUlation, 69, 69, 71f., 7If., 74 operations, 297-300 74 E., on speculation, of, 297-300 Boyle, operations, legality legality of, Brace, H. H., 67 67 and relationship relationship to to non-members, non-members, 303£. 303f. H., on speculation, Brace, H. speculation, Bright, G., on value value of of publication publication of E. G., of Coffee Exchange of the City City of York. of the Coffee Exchange of New York, Bright, E. prices, 104 104 see see New York Coffee Coffee and Sugar Exprices, Sugar Ex"! market, defined, defined, 73f. 73f. Broad market, change change Broker, floor floor 91. 119. Commodity Inc., the, Broker, the, 91, 119, Commodity Exchange, Exchange, Inc., work of, of, 161£. 161f. 145, 161 145, 161 defined. by-laws of, or squeeze. defined, 256 corner or 85fL of, on corner by-laws squeeze, 83iL 319 f
Index Index
320 320
Commodity Exchange, Exchange. Inc., Inc.• the the-Continued Continued Commodity futures trading trading by, by. 121 121 futures trading unit of. 140 unit 140 of, trading
Continued Commodity exchanges exchanges-Continued Commodity
143 defined, 143 defined,
'.
history of, of. 143f., 143f.• 164, 164, 197 197 history as as non-profit non-profit organizations, organizations. 145, 145. 267 267 **
on arbitration arbitration of of disputes, disputes. 149 149ff.,.• 151 151 Commodity Exchange Act. Act, Commodity Exchange and speculation, speculation. 85, 85. 185f. 185f. and margin requirements, requirements.177f., 179 and margin I77f., 179 provisions of, of. regarding regarding provisions contract markets, markets. 252-55 252-55 contract co-operative associations associations of of producers, producers. co-operative 255f. 255f. registration of of commission commission merchants merchants registration and floor floor brokers, brokers. 256f. 256f. and of margin margin moneys moneys of of custocustotreatment of treatment mers,257f. 257f. mers, trading. 258f. 258f. limitation on trading, limitation hedging. 258f. 258f. hedging, 25~2 unlawful practices, practices. 259-62 unlawful wash sale, sale. 261 261 wash bucket shop, shop. 261, 261.262 bucket 262 262 non-members of of exchanges, exchanges. 262 non-members criminal offenses, offenses. 264 264 criminal Commodity exchanges, exchanges. 27, 27. 28fL, 28ff.. 122f .• 122f., Commodity 126ff. 126ff. commodities not not adapted to operations commodities operations adapted to 145 .• 122. on. 122, 145 118f., llOf., 1I8f on, 12. 12, 110f., effect trading on, on. see see State tradState tradstate trading effect of of state ing ing as regulations of 29. 46L, 46f.• of speculation. as regulations speculation, 29, 162 162 services by. 29ff. 29ff. services performed performed by, standardization of contracts contracts and grades standardization of grades by. 137f. 47, 136. 136, 137£. 29, 47. by, 29. and relationship to 29. to clearing and relationship house, 29, clearing house. 30. 164-87 30, 33. 33, 164-87 see also house see also Clearing Clearing house insurance of deliveries contract deliveries by. insurance of by, on contract time. 33 30, 33 29, 30. time, 29. importance in relation to prices. relation to 29, of, in prices, 29. importance of. .• lOO. 41-46. 157f. 100, 106. 106, 157f. 48, 51. 99f., 51, 99f 41-46, 48. economic functions of. economic functions 29ff. of, 29ff. and .• 39f. farmers' co-operatives. 39f. and farmers' 35ff., co-operatives, 35ff influence 37ff. influence of. markets, 37ff. of, on markets, as continuous and broad as providing a continuous providing a market, 42f. market, 42f. as information of marketing sources of as sources marketing information (prices. 102volume, etc.). 46, 96ff., 96ff., 102etc.), 46. (prices, volume. 109. 158 109, 158 improvement of trade trade practices 47 by, 47 improvement of practices by, as of consumption. as stabilizers stabilizers of 47 ff. consumption, 47ff. and warehouse .• 141ff. 141 warehouse receipts. 94f., receipts, 94f role in U. S. productivity. role of. U. S. 97 of, in productivity, 97 as as world world markets. 97f. markets, 97f. quotations. dissemination of, 106of, by. by, 106quotations, dissemination 109,291-96 109, 291-96 purpose of traders traders in. 127f. in, 127f. purpose of ft",
objectives of, of, 145f. 145f. objectives seats seats on, on. 146f., 146f.• 289f. 289f. nature nature
of. 284-88 284-88
of,
147 government of, of. 147 government dues dues
of. 147 147
of,
secretary of, of. 147. 154. 158 158 147, 154, secretary committees committees
of. 147-55 147-55
of,
arbitration, 148-51 148-51 arbitration, 152 business conduct, conduct. 152 business supervisory. 152 152 supervisory, floor, 152, 160f. 152, 160f. quotations. 153 153 quotations, commissions. 153f., 153f.• 161 161 commissions, information information and statistics, statistics, 154 154 154 grading warehousing. 154 grading and warehousing, trading months on, on. 158f. 158f. trading trading. rules rules of, of. on floor. 160f. floor, 160f. trading, 174 call. call, 174 described. 159 159 described, transactions, described, described. 188-96 188-96 transactions, stock exchanges. and stock compared. 266ff. 266ff. exchanges, compared, legal nature of, 305f. 266-96, 305f. of, 266-96. legal nature how exchanges are terminated. 268f. terminated, 268f. exchanges are of the the state powers of 269-74. 281ff. state over. 28 Iff. over, 269-74, powers of regulating powers of trade over. 273f. over, 273f. powers regulating trade see also see also Commodity Commodity exchanges, by-laws exchanges, by-laws of of by-laws 274-78 of, 274-78 by-laws of. .• 283f. membership 283f. rules, 146, 146, 277ff 277ff., membership rules. discipline. 151f. 149, 151f. discipline, 149, taxation. 290f. taxation, 290f. quotations. 291-96 quotations, 291-96 relationship relationship between exchange exchange members and non-members (customers). bers (customers) 301-309 301-309 to margin with regard transactions, regard to margin transactions, 306-309 for comparison for markets, comparison with physical physical markets. see Physical see Physical market and commodity commodity exchange. exchange, compared compared also Commodity see also see Inc.; Commodity Exchange. Exchange, Inc.; Commodity Futures Act; Futures Commodity Exchange Exchange Act; trading; Hedge; market; trading; Hedge; Physical Physical market; Speculation, organized Speculation, organized see Physical Commodity market market, see Commodity market, Physical market Conant, C. A., 164 Conant, C. A., n., n., 164 see Commodity Contract market. market, see Commodity exchanges exchanges .• 170 Contract slips. 170 162f., slips, 162f Copeland. •• n., T., n., 69 Copeland, M. T on hedging. 211 hedging, 211 Corn Exchange 168 Bank, 168 Exchange Bank. Corn Trade News, 106 News, 106 floor,
,
Index Index Corner. Corner,
a. l!J7
a, 137
defiited. 82f. 82f. defined, Cotton Dealers' Dealers' Cotton
Association Association
of of
New
23 Orleans. the, the. 23 Orleans, Cotton Futures Futures Act, Act. the, the. 90, 90. 273 273 Cotton establishment of of grades grades under, under. 89 89 establishment Cox. Alonzo Alonzo B. B. Cox, warehouses in in cotton cotton trade, trade. 94f. 94f. on warehouses value of of publication publication of of market market prices, prices. on value 102 102 hedging. 201 201 on hedging, discounts on distant distant months, months. 221 22lf. f. on discounts hedging. 235f. 2Mf. Cox. Reavis, Reavis. on hedging, Cox, A. Dewing. A. Dewing,
S.•
n., 77
S., n.,
Ely. Richard Richard T., T .• Ely, Emery. H. H. C. C. Emery,
n., 70 70
n.,
speculation. 63, 63. 70 70 on speculation, exchange contract contract defined defined by, by. 132 132 exchange
commodity exchanges, exchanges. 143 on commodity 143 hedging. 202,211 202.211 on hedging, Equity Co-operative Co·operative Exchange, Exchange. the, the. 293 293 Equity Ex,change (Futures) (Futures) contract contract Exchange
as for short short selling, selling. 77-82 as medium for 77-82 of. 129-32 origin 129-32 of, origin and development development defined. 132f. 132f. defined, compared with with physical physical market market conconcompared tract. 133f. 133f. tract, form of. 134f. of, 134f. characteristics characteristics of. 135f. of, 135f. and speculation. 136 speculation, 136 and delivery months. 14Of. 140f. delivery months, and hedging, hedging. 209 209 Exchange market. see Commodity exmarket, see Commodity exExchange changes changes Exchange trading see Futures Futures trading Exchange trading. trading, see Execution. 288f. defined, 288f. Execution, defined. FairchiId. n. f 69 Fred Rogers, 69 Fairchild, Fred Rogers, n., Farm co-operatives co-operatives and and state state trading, 114-17 trading, 1I4-17 use use of of hedge 250 240, 250 hedge by. by, 240, Farnam, 69 F., n., Farnam, Henry n., 69 Henry F., Fetter, Frank A., 69 Fetter, Frank A., n., n., 69 Fisher, n., 69 69 Fisher, Irving, n., Irving, Floor Floor (Ring, 159f. described, 155, 155, 159f. Pit), described, (Ring, Pit), Flour of America, 48 Mills of Flour Mills America, 48 Futures Futures commission merchant, 256 merchant, defined, defined, 256 Futures see Exchange Futures contract, contract contract, see Exchange contract Futures see Commodity Futures market, market, see Commodity exchanges exchanges Futures Futures trading trading functions of organized functions of 51 in, 51 organized speculation speculation in, conditions conditions for, 125 for, 110-20, 110-20, 125 commodities commodities adapted llOf., 118f., to, HOf., 118f., adapted to, 122, 145 122, 145
8*1
Futures trading trading-Continued Continued Futures grading in, in, llOf., lIOf.• 119, Il9, 123 1211 grading commodities not not adapted adapted to, to, 119f. 119f. commodities that might might be be adapted adapted commodities that commodities 120-25 120-25
to,
to,
see also also Speculation, Speculation, organized organized see John C., C., on hedging, hedging, 246 246 Gardner, John Gardner, A. H., H .• 228, 228, 229 229 Garside, A. Garside, Grades. Grading, Grading, 25f., 25f., 29 29 Grades, advantages advantages
of, 87ff.
of, 87ff.
in in cotton cotton trade, trade, 89f. 89f. in in grain grain trade, trade, 90f. 90£. in in rubber rubber trade, trade, 91 91
sampling, methods in, in, 92ff. 92ft sampling, see see also also Basis Basis grade grade Grain Futures 273, 293 293 Futures Act, Act, 273, see see also also Commodity Commodity Exchange Exchange Act Act Grain Standards Standards Act, Act, establishment establishment of of 90 grades under, under, 90 grades Green Coffee Coffee Association Association of of New York 23 City, the, 23 City, the,
Hadley, Hadley, Arthur Twining, Twining, on speculation, speculation, 61, 69 61, 69 Hamilton, W. P., P., 140 140 Hamilton, Hammatt, Theodore D., D., 235 235 Hammatt, Hardy, Charles .• 133 Charles 0., 133 O., n n., Hardy, S. C., Harris, S. 217 Harris, C., on arbitrage, arbitrage, 217 Hedge, Hedging, Hedging, 43, 43. 47, 47, 137 137 Hedge, functions functions of, 32 of, 32 and speculation, 73, 218 54, 73,218 speculation, 54. defined,54,201,202,259 defined, 54, 201, 202, 259 risk and, risk 250 and, 199ff., 199ff., 213, 213, 250 and futures futures contract, 205f. contract, 201, 201, 205f. 201f. aa transaction, transaction, described, described, 201f, purpose .• 217f. 217f. of, 202ff 202ff., purpose of, classes of, classes 205 of, 205 use use of, 206f. manufacturers, 206f. of, by by manufacturers. delivery 209ff. on, 209ff. delivery on, in other by transactions in other commodities. commodities, by transactions 2lIf. 211f. in financing, as aid in as an aid 212f. financing, 212f. insurance through, credit credit insurance 213ff. through, 213ff. role role of of market and month in, 219 in, 219 basis basis effect effect of change 230-35 on, 230-35 in, on. change in, in in grain 250 trade, 237-40, 237-40, 241, 241, 250 grain trade. by 240f. by producers, producers, 24Of. in cotton trade. in cotton trade, 242-46, 242-46, 250 in in sugar 250 245-48, 250 trade, 245-48, sugar trade, in in coffee coffee trade, 250 trade, 248. 248, 250 in in rubber trade, 250 248f 250 trade, 248f., by 249 smelters, 249 copper smelters, by custom copper in in cottonseed cottonseed oil. 250 oil, 249, 249, 250 .,
Index Index Hedge, Hedging Hedging-Continued Con tinued Hedge, by aa fabricator, fabricator, 249f. 249f. by by a miner, 250 a 250 miner, by
New York Coffee Coffee and Sugar Sugar Exch.ange, Exchange,
legality of, 306 of, 306 legality Heunber, 69 Heunber, Grover G., G., n., n., 69 Hibbard, Benjamin H., H., n., n. 70 70 Hibbard, Benjamin Holmes, Justice Justice Oliver Oliver Wendell Holmes, on speculation, 62f. speculation, 62£. legali ty of clearing house house transactions transactions on legality of clearing 298 by offset, offset, 298 by hedging, 299 299 on hedging, Hubbard, W. H., n., 141 141 Hubbard, H., n. Huebner, 34, 69, 69, 81 S. S., 81 Huebner, S. S., 34, hedging, 197f. on hedging, 197f. f
y
Paul W., W., n., n., 70 70 Ivey, Ivey, Paul Otto, n., n., 70 Johlinger, Johlinger, Otto, Johnson, Fred, n., 69 Fred, n., Johnson, Kansas City the, Kansas Exchange, the, City Exchange, 241 ket, 241 ket, Kemmerer, Edwin Walter, Walter, Kemmerer,
as as grain grain
mar-
n., n., 70
"Law merchant," merchant," 8, 9, 23 23 8, 9, Liquidity, characteristics of, of, 86 Liquidity, characteristics London Metal Exchange, the, the, as as factor factor in in Metal Exchange, futures trading, trading, 121 futures 121 Long sale, 205 205 Long sale, Lyman, J. C., hedging, 238 238 C., on hedging, Lyman, J. Margin transactions Margin transactions legality of, of, 306-309 306-309 legality see also Clearing house see also Clearing McClintock, J. margin requirerequireO., on margin McClintock, J. 0., ments, 171£. 177f. ments, McCrea, Roswell Roswell C., n. 70 70 McCrea, C., n., Mehl, J. M., hedging, 201, 204f. 201, 204f. M., on hedging, Mehl, J. John C. C. F., Merrill, John 75 F., n., Merrill, n., 75 Mirick, E. E. H., hedging, 204 204 H., on hedging, Mirick, n., 70 Mitchell, Wesley Wesley C., C., n., 70 Mitchell,
the-Continued the Continued grading 139 93f., 139 grading by, by, 93f., publishing marketing information information by, by, of marketing publishing of 99 99 daily market report report of, 104f. of, 104f. daily uni tin, official official trading 140 in, 140 trading unit hedging in, in, 246, 248 246, 248 hedging and Sherman Anti-Trust Anti-Trust Law, 270£. Law, 270f. New York Cotton Exchange, the, the, 10, Cotton Exchange, 10, 123, 123, 146 146 buying and selling 75 on, 75 buying selling on, daily of, 103f. 103f. daily market report report of, and control control of of quotations, 158 107f., 158 quotations, 107f., organization 144 of, 132, 132, 144 organization of, grades by, 139 established by, 139 grades established trading unit of, 140 of, 140 trading unit deli very months mon ths on, 141 on, 141 delivery and commissions, 161 commissions, 153, 153, 161 trading ring ring of, 155 described, 155 of, described, trading and Sherman Anti-Trust Anti-Trust Law, 270 Law, 270 New York Hide Exchange, Exchange, the, 145 the, 145 Journal of New York Journal Commerce, on of Commerce, hedging, 202f., 202f., 236f. 236f. hedging, New York York Produce Produce Exchange, 119 10, 119 the, 10, Exchange, the, grades established by, 139 grades established by, 139 in, 140 official official trading unit in, 140 trading unit 144 development of, 144 development of, hedging 249 in, 249 hedging in, the New York Stock Exchange, the Stock Exchange, development 10 of, 10 development of, trading post post of, 155 of, described, described, 155 trading New York Times on speculation, 55f. speculation, 55£. of prices publication prices by, by, 223f. 223f. publication of Odd Lot Cotton Exchange, Exchange, the, 294 the, 294
t
National Coal Coal Control Act, Act, 125 125 National National Industrial Industrial Recovery Recovery Act, Act, 124, 125 National 124, 125 145 National Metal the, 145 National Metal Exchange, Exchange, the, interest of, of, in futures trading, trading, 121 in futures 121 interest National Silk Exchange, the, the, 145 145 Silk Exchange, National 119 Orleans Cotton Cotton Exchange, the, 119 New Orleans Exchange, the, official trading trading unit unit on, official on, 140 New York Cocoa Exchange, Exchange, the, the, 113, York Cocoa 113, 119 contract of, 134f. UHf. contract of, grades established under, 139 under, 139 grades established 140 official trading unit unit in, in, 140 official trading New York York Coffee Coffee and Sugar the, Exchange, the, Sugar Exchange, 10, 167 119, 167 10, 119,
Paper market, see see Commodity exchanges Commodity exchanges Paper market, Perlmann, Louis, Louis, n., n., 70 70 Perlmann, Physical (Commodity) Physical (Commodity) market development 27f. of, 9-12, 9-12, 27f. development of, trading llff. in, llff. trading methods in, organization 12f. of, 12f. organization of, HI, 20, 23 brokers in, brokers in, 13, 20, 23 commission agents in, 13f., 23 13f., 20, 20, 23 agents in, dealers, 20 18f., 20 dealers, 14, 14, 18f., as risk bearers, as risk 15-18 bearers, 15-18 and insurance insurance companies, companies, compared, compared, 18f. 18f. disadvantages without exexin operating disadvantages in operating without changes, 128f. 19f., 128f. changes, 19£., producers' 20ff. associations, 20ff. producers' associations, destructive features features constructive constructive and destructive of, 21ff. of, 21ff, dealers' associations dealers' associations
Index Index Continued Physic~ (Commodity) (Commodity) market market-Continued Physical arbitration of of disputes, 23 arbitration disputes, 23 standardization of of contracts contracts and standardization
grades, 23-26 23-26 grades, standard 88, contracts and grades in, 88, standard contracts grades in, 128 128 services lack of marketing marketing information information services lack of in, lOOf. in, 100f. purpose of traders in, in, 127 127 of traders purpose for comparison with commodity commodity exexfor comparison with see Physical changes, see Physical market and changes, commodity exchange, exchange, compared compared commodity see also Commodity exchanges exchanges see also Commodity Physical market and commodity exchange, commodity exchange, Physical compared. 12, 26, 271f., 33f., 43f., 47, 47, 43f., 33f., 27ff., 12, 26, compared, 51,75,89, 182, 196 138, 182, 127, 138, 51, 75, 89, 127, prices on, 69, 206, 206, 210, 210, 212f., 212f., 219-26, 219-26, on, 69, prices 227f. 227f. 135 contracts, 132, 133, contracts, 132, 133, 135 delivery, 144 144 delivery, arbitration of of grading grading disputes, 150f. arbitration disputes, 150£. hedging, 208 208 hedging, risk, 214f. 214f. risk, Prices in relation to to supply supply and demand, demand. in relation Prices 57f. 57f. Purchase (Sales) (Sales) contract, contract, 177 177 RiegaJ, Robert, n., 70 70 Robert, n., Riegal, Ring, a, described, 165-68 165-68 a, described, Ring, Rubber Exchange of New York, York, Inc., Inc., the, the, Exchange of 112, 145 112, 145 establishment of of grades grades by, by, 91 91 establishment Rubber Trade Association Association of York, of New York, the, 23 23 the, St. Exchange, the, the, 293 293 St. Paul Grain Exchange, "Scalper" (floor trader), trader), functions functions of, of, 75 75 "Scalper" (floor Schutte, on state trading, state C., Schutte, George trading, George C., 113 113 Searle Grain Co., Co., Ltd., Searle Grain 113 Ltd., 113 Second World War effect markets, 13 effect of, 13 of, on markets, production during, 221 production during, 221 Seligman, A., n. n., 70 E. R. R. A., 70 Seligman, E. Seller's call, 2431f. Seller's call, 243ff. Shepherd, G. S., hedging, 214 214 S., on hedging, Shepherd, G. Shere, Harry, on necessity necessity for futures for futures Shere, Harry, trading and on functions functions of of speculatrading speculation in in distribution distribution of grain, 51 51 of grain, tion Sherman Anti-Trust Anti-Trust Law and commodity commodity exchange, 270, 271 270, 271 exchange, Short sale, sale, 188, Short 205 188, 205 described, 77-82 77-82 described, legality of, of, 306 306 legality Skyberg, value of of grain F., on value grain Sky berg, Herman F., elevators, 37 37 elevators, t
3*3
Smith, J. G., Smith, J. G., 63, 63. 70 on hedging, hedging, 242 242 Solid market. see see Broad market Solid market, Speculation, organized Speculation, organized function of staples, in distribution distribution of function of, of, in staples, 51ff. 5 Iff. and exchanges, 53f. exchanges, 53f. compared hedge, 54 the hedge, 54 compared with the defined, 54 defined, 54 attacks attacks on, 75f. on, 55ff., 55ff., 75f. effect effect of, of, on supply supply and demand and on prices, 57f., 74 57f., 63-73, 63-73, 74 prices, defenses 58 defenses of, of, 58 and gambling, 82f. 58-61, 82f. gambling, distinguished, distinguished, 58-61, distributive function of, 61 distributive function of, 61 dependence hedge upon, 73, 76 of hedge 76 dependence of upon, 73, of broad, dependence broad, continuous, continuous, and dependence of liquid upon, 73-77 73-77 liquid market upon, sale of of risk risk in, sale in, 73, 77 73, 77 aa transaction, transaction, described, described, 188-94 188-94 and Commodity Exchange Act, 258 Act, 258 Commodity Exchange see also also Short see Short sale sale Spot Physical market see Physical market, see Spot market, Spreader. see Arbitrageur Spreader, see Arbitrageur Squeeze, 210 a, 137, 137, 210 Squeeze, a, defined, 83ff. defined, 83ff. State trading, 22 22 State trading, effect of, effect of, on commodity commodity exchanges exchanges and physical markets, markets, 13, 112-17 13, 15, 15, 112-17 physical Stevens, 224ff. Stevens, W. H. S., S., 224ff. Scorts, A., on value value of of exchange Scorts, William A., exchange markets to to cottonseed oil trade, cottonseed oil 39 trade, 39 Straddle position, 176, Straddle position, 186 176, 185, 185, 186 defined, 173 defined, 173 see also also Arbitrage Arbitrage see L., on state trading, 114--17 Strange, state trading, 114-17 Strange, H. G. L., Taft, Justice William Howard, Howard, 270f., 270f., Taft, Chief Justice 285,299 299 285, Tanners' Council of America, 122 of America, 122 Taussig, W., n., F. W., 70 n., 70 Taussig, F. Taylor, 40 Alonzo, 40 Taylor, Alonzo, Todd, 229f. Todd, John A., 229f. John A., Truman, Harry Harry S., S., on speculation, 55 speculation, 55 United States, as exporter of cotton cotton and States, as and exporter of
grains, 96f. grains, 96f. States Cotton Futures United States Act Futures Act publication of market reports reports under. under, publication 104 104 classification and inspection classification inspection under. under, 137 137, lYf. ' 138f. establishment e~tablishment of grades under, 139 139 grades under, United States Testing UOIted States Testing Company, Company, Inc., Inc., the, the, sampling by, 93 93 sampling by, Usher, Payson, n., n., 70 Usher, Abbot Payson, 70 R. Vaile, Vaile, R.
S., in grain, grain. 56£. S., on speculation 56f. speculation in
Index Index
324
Wash, aa Wash, described, 165-68 165-68 described, provisions of of Commodity Commodity provisions
concerning, 261 261 concerning, Weld, L. L. D. D. H., H., 137 137 Weld,
Exchange Act Act Exchange
on speculation, speculation, 62, 62, 70 70 on on value value of of publication publication of of market market on prices, 10lf.
prices, lOlf.
Wermert, George, George, n., n., 70 70 Wermert, Western Western Union Telegraph Telegraph Company, Company, concontract of, 107
tract of, 107
White, Edward D., D., on benefits benefits of of futures futures White, trading to to cotton cotton planter, planter, 61f. 6lf. trading
Woodruff, George George Woodruff, Young, Allyn Allyn A., A" Young,
P., vii
P., vii
n., 70 70
n.,
