Mr. ANDRESEN. They have a provision in the act relating to the licensing of commission men operating in terminal yards. Mr. CALDWELL. I believe that is true.

Mr. ANDRESEN. And I have known of cases out in Minnesota and also in Illinois where the commission men have been suspended for violating some of the regulations of the Department of Agriculture; one that is very similar to what is proposed in this legislation.

Mr. CALDWELL. I think that is a fairly similar set-up, except that the statute, as I remember, does not go nearly as far as this in making regulations. In other words, in changing the law overnight by which those fellows operate. I might be wrong on that.

Mr. ANDRESEN. I know of a case where 14 were suspended at one time and many of them were not permitted to go back into business again.

Mr. CALDWELL. I am not familiar with that.

Mr. ANDRESEN. That is all.

The CHAIRMAN. Thank you, Mr. Caldwell.

Mr. CALDWELL. Thank you.

ADDITIONAL MEMORANDUM SUBMITTED ON BEHALF OF THE CHICAGO BOARD OF

TRADE

[By Louis G. Caldwell, attorney for Chicago Board of Trade]

The committee has already been supplied with a list of members of the Chicago Board of Trade suspended or expelled for reasons other than insolvency during the period January 1, 1928 to February 1, 1935. This list shows a total of 51 suspensions and expulsions.

During that period there have been seven cases in which both the Grain Futures Administration and the Chicago Board of Trade have participated.. Two of these clearly originated with the Grain Futures Administration; two are difficult to classify, and the others originated with the Chicago Board of Trade. In only one of these cases did the Board fail to take disciplinary action.1

The two cases which were uncontrovertibly brought to the attention of the Board by the Grain Futures Administration involved five persons and grew out of the same general state of facts. They are Frank H. Day and his son,. Frank M. Day, who were respectively expelled and suspended for two months on May 19, 1931; and G. W. Beaven, A. K. Ruxton, and Mose Singer who were respectively suspended for 6 months, 60 days, and 30 days on May 5, 1931.

The two matters which are difficult to classify grew out of the Massey case, already discussed in the testimony heard by the committee. They really originated with a complaint to the Chicago Board of Trade from an employee of the Department of Agriculture (not an employee of the Grain Futures Administration) in the southwest, who alleged misconduct in Massey's handling of a certain job-lots transaction for him. This is the case in which at first a 5-day suspension was imposed 'and then, on further investigation and rehearing in which it appeared that Massey had been guilty of similar misconduct in other instances, a suspension of 2 years was imposed on November 26, 1929. The other case was, in a sense, collateral to this, the Ready case. This was the one case in which the board of directors refused to take disciplinary action. Its reason was that the investigation that had previously taken place had, in its opinion, failed to disclose any basis for action. The Ready brothers were two of the three defendants against whom the Grain Futures Administration proceeded in the Massey case. We understand that before the ultimate disposition of the Massey case, on motion of counsel the

1 The meetings of the business conduct committee are confidential and no minutes are kept of its proceedings. It is impossible, therefore, to produce documentary evidence to the effect that there were no other cases brought to the attention of the business conduct committee by the Grain Futures Administration in which no disciplinary action was taken. We have, however, made a sufficient check with members and employees familiar with the affairs of the business conduct committee to feel justified in saying that the above statement is accurate, and, in any event, substantially correct.

Grain Futures Commission dismissed the proceedings as against one of the Ready brothers for want of evidence.

In the other three cases the Grain Futures Administration had nothing to do with uncovering the misconduct or initiating the disciplinary proceedings, and did not become involved in any way in them until after the Chicago Board of Trade had done so. One of these involved Frederick A. Fisher, who was expelled by the board on July 24, 1934. A second was L. E. McAtee,

who was expelled by the board on Janury 8, 1935.

The third is the Ettinger & Brand case. In this case the facts were uncovered by the Chicago Board of Trade. The Grain Futures Administration then brought proceedings against Ettinger & Brand, resulting in a decision by the commission barring the firm from trading privileges for 6 months. Promptly on being notified of this decision the board of directors on November 20, 1934, took corresponding action against the firm for the same period.

It is fair to state, therefore, that in six out of the seven instances in which the Grain Futures Administration played any part, the Chicago Board of Trade took disciplinary action.

We are informed that the Grain Futures Administration maintains a staff of 32 employees in its Chicago office.

STATEMENT OF EDWIN KUH, JR., REPRESENTING THE BOARD OF TRADE OF CHICAGO, CHICAGO, ILL.

Mr. KUн. My name is Edwin Kuh, Jr. I am a floor broker on the board of trade of the city of Chicago.

Mr. James J. Coughlin, who is also a floor broker on the Chicago Board of Trade and myself appear before you today to present the objections of the floor brokers of that exchange to the licensing provisions contained in H. R. 3009. I order to save time and avoid repetition we have divided the testimony which we desire to present. In the brief time at my disposal I wish to point out to you the reasons why there are floor brokers, what functions they perform, and the dangers involved in any attempt to straight-jacket them under a licensing system. Mr. Coughlin will point out to you the utter lack of necessity for imposing the license provisions in this bill and the advisability of maintaining the present disciplinary machinery of the exchanges.

What is a floor broker and what service does he perform? In brief, a floor broker is that person who executes the orders of commission houses in the "pit." He must be a member of the exchange on which he does business. To obtain such membership he must satisfy the authorities of the exchange as to his character and financial responsibility.

As to the orders which are executed by the floor brokers, they are of various types known as "limited","market ", "stop loss", "scale", and "spread" orders. The meaning of these terms is self-explanatory. Insofar as the "spread " orders are concerned, they are usually for the account of hedgers, i. e., millers, warehouse interests, exporters, who comprise the cash grain group. To give you an example of the work of a floor broker, let me refer to this latter group. It is essential for these interests, from time to time, to change their hedges from one delivery to another. This is done through the floor broker, who buys one future and sells another, usually at a stated price differential. This purchase or sale is made in the pit either by voice, the nod of the head, or signal by hand. This technique has been developed over a period of some 50 years and has resulted in a mechanism that is remarkable for its speed and efficiency. That

it is the only practicable method will be readily appreciated when one realizes that upward of 50,000,000 bushels of wheat are often bought and sold on the Chicago Board of Trade in a single day. The point I wish to make, however, is this. The system is based entirely on the honesty and integrity of the floor broker. All transactions are thus completed on faith. And as Mr. Coughlin will point out to you, it is policed by the brokers themselves, because everytime a violation of the rules occurs it results to the financial loss of some other broker.

Inasmuch as very large sums of money are usually involved, there must be among floor brokers a high standard of honor and business ethics. Otherwise, the mechanism of trading would destroy itself. Cases of breach of faith among brokers in trading are almost unknown. And for this reason we are at a total loss to understand why it is now sought to impose a license system upon us.

Under the present bill, not only is the Secretary of Agriculture given almost unlimited authority to make rules and regulations but no provision is made regarding the effective date of such regulations. Things which are legal and proper one day may be barred the next. We feel that if the power to legislate is to be given to the Secretary of Agriculture that we should at least have an opportunity to appear and be heard before measures of far-reaching consequence, which have the force and effect of a criminal law, are put into effect, and, further, that such measures should not become effective until the trade has had some opportunity to adapt itself to them.

Suppose this bill is enacted into law and a Secretary of Agriculture in the future issues a regulation prohibiting a floor broker to trade for his own account.

That is the point you brought up, Mr. Chairman.

Such a regulation would instantly make it virtually impossible for brokers to act. Being human, they are bound to make errors in the execution of orders, especially in a big, active, excited market. They may overbuy, oversell, get caught on the wrong end of a spread order, overlook an order, and so forth. The instant a broker makes such an error he is in the market for his own account, as he can hardly expect his client to assume his market position. Who would care to take out a broker's license if he knew that at the time of his first error in filling an order his license could be revoked and that he might subsequently be subject to fine and imprisonment? Even though a highly intelligent Secretary of Agriculture, such as we have now, would be most unlikely to issue a regulation forbidding brokers to trade for their own account, his successor might be a different type. We brokers protest strenuously against having our business and hence that of the entire marketing machinery put into the hands of one official through his power to issue rules and licenses.

Not only is the floor broker a necessary part in the present system of marketing commodities, but he performs a service of singular benefit to that system.

The fact that about 99 percent of floor brokers do trade for their own account is a tremendous factor in contributing to the liquidity of the market. Remove this trading element and you will find

instantly that when a buyer of grain in the country wishes to hedge it by a sale of futures, in the absence of a liquid market furnished by floor traders, he will receive a lower price than under the present system. On the other hand, the miller who when he sells flour buys in futures would have to bid up more before he found sellers. Hence, the producer would receive less, and the consumer pay more. This is the inevitable result of the reduction of liquidity in a market.

I am sure it is not the intention of this bill to destroy the existing machinery for the marketing of grain and other commodities, but such a result is more than possible if the clause for licensing brokers is retained in this bill. I thank you, Mr. Chairman.

The CHAIRMAN. Mr. Kuh, you do not deal with the public at all, do you?

Mr. KUн. No, sir.

The CHAIRMAN. You simply execute the orders for the commission men?

Mr. Kuн. That is right. That is, execute customers' orders; yes, sir.

The CHAIRMAN. Now, you sometimes have buying and selling orders at the same time?

Mr. KUH. Yes, sir.

The CHAIRMAN. That is, open orders, buy at the market and sell at the market?

Mr. KUн. Yes, sir.

The CHAIRMAN. If you have an unusually large order-I will not say you-if a broker has an unusually large order, it furnishes an opportunity at least for him to consider getting into the market on his own account.

Mr. KUн. That is true; but you will find dishonesty in any line of human activity, sir.

The CHAIRMAN. Do you not think, in protection to the public, that the man who is executing the orders on the floor you say the public is interested in, ought to be governed, or that there ought to be some method of dealing with the man who does not deal fairly and squarely?

Mr. KUн. There is, Mr. Chairman.

The CHAIRMAN. And who rides a horse going in the other direction, does not in good faith, execute his orders?

Mr. KUн. There is such a method, Mr. Chairman.

The CHAIRMAN. You recognize that the highest of good faith is required of the floor broker?

Mr. KUн. Yes, sir.

The CHAIRMAN. It is a peculiar trust, a relationship that requires as high a degree of integrity as that required of the attorney or the doctor or anyone else?

Mr. KUH. That is right. He is policed, too.

The CHAIRMAN. Well, he is policed, but he selects his own policeman, does he not?

Mr. KUн. Well, I would not say that. One of the best policeman is his competitor. If a competitor of mine, who wants to get an account away from me thought I was dishonest, he could very easily get me suspended or expelled, if I were dishonest.

The CHAIRMAN. Well, there is competition, of course, in all lines of business, good and bad. Just simply because there is competition does not necessarily mean everybody should be turned scotfree. There is competition in the practice of law, but we find it necessary to license lawyers, because, for the principal reason, it is a highly technical business and a business that requires the highest of good faith.

Mr. KUн. That is true.

The CHAIRMAN. Therefore, it is found necessary to license lawyers in order to see that the quack and the one who is dishonest, is not turned loose on an unsuspecting public.

Now, in the long run, it is to the interest of the profession itself to have that done. The same is true of doctors. They are in a

position where they can abuse the public. Ι

Mr. KUн. May I say, Mr. Chairman, may I say one thing?

The CHAIRMAN. Yes.

Mr. KUн. It is possible for a broker to be dishonest and cases have arisen where brokers were dishonest. They are caught very quickly. No commission house in its right mind would give an order to a broker whom they even suspected of dishonesty and dishonesty cannot long be covered on an exchange where hundreds of men are mingling together and whose work is being scrutinized all of the time. It is difficult to be dishonest. If we were a bunch of crooks, it would not be awfully hard for us to be found out.

The CHAIRMAN. I am not maintaining that, but I am talking about the ones who happen to be dishonest.

Mr. KUн. They are quickly caught, sir.

The CHAIRMAN. And, the exchanges, as well as the public, need protection.

It is interesting to note that the same line of arguments was made here against the licensing of the contract places, the licensing of the exchange, when the measure was up some 10 or 12 years ago. This is the same line of argument that was made against those things.

Since the broker, as you said awhile ago, is trading for his own account, and at the same time executing orders for others, does he not very frequently have interests in the market directly adverse to the interests of the commission houses, or the orders that they are executing?

Mr. KUн. That happens not infrequently, and the rules of our exchange are extremely stringent against a broker favoring himself against an order. For instance, supposing that I should get an order to buy a million bushels of wheat at the market, and I should, by being a piker, buy 10,000 bushels of wheat on my own account before I filled the order for the million? I could do that and I might get away with it. I might profit from that sort of thing, but probably the second time I would be caught and disciplined.

The CHAIRMAN. Do you claim that those instances are very rare? Mr. KUH. Yes, sir; I think it is extremely rare that a broker does that. A broker knows that he is in a position of trust and that his function is to do the best he can for the customer.

The CHAIRMAN. Well, now, that is just the point I was leading up to: Suppose you get an order to buy a million bushels. You are in the market for yourself anyway.