Commodity Exchanges Exchanges Commodity and and
Futures Trading Trading Futures
Commodity Commodity Exchanges Exchang...
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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
'(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. 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, .
.
.
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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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
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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
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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
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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
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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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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
154 154
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 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
,
...
,,.,,
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
--
- -.
--.-~-
~---.-
- - _. - --- .. _--
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
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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Commodity Exchanges and Futures Futures Trading Trading Commodity Exchanges
276
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
277
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) ,
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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.
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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
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*2Moffatt 42 Moffatt
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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
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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
fil
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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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The Law of Exchanges of Commodity Commodity Exchanges
291
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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Commodity Exchanges and Futures Futures Trading Commodity Exchanges Trading
292
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. .
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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. . . . .
.
.
.
.
.
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) .
,
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.
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
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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.
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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 .
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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, ,
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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
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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
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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.,