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In still another report from our Chicago accountant under date of October 24, 1929, he makes this statement:

My investigations have disclosed so many cases of unfair handling and execution of trades in job lots as to make it appear that this trading in job lots is looked upon by many of the floor brokers as a legitimate field for manipulation.

Now, we have here a file of notes in longhand covering cases which our accountants had noted at that time for further investigation in the event that the present Grain Futures Act was shown to cover these kinds of practices.

The list includes the names of 24 persons and firms where crosstrading or bucketing of orders were observed. These cases all involved Chicago traders. The notes are based on the observations of our accountants who were examining books and records of Chicago commission firms at that time. They are lacking in detail because the detailed records concerning the work of our accountants are kept in the Chicago office and what I have here is merely a list of firms and brokers where the bucketing of orders, cross-trading, and so forth, had been observed.

Mr. TOBEY. Now, Mr. Mehl, that is interesting, but it is all in 1929, apparently. What I want to ask you now is, based upon what you found from your examination, were those facts turned over, that evidence, and complaints made to the board of trade, the governing body, and what if anything was their action? Mr. MEHL. I think that is covered by what I propose to present.

In the spring of 1931, while the case before the commission was still pending, one of our accountants visited Kansas City and made an examination of the records of 15 of the most active clearing members of the Kansas City Board of Trade. The firms examined handled slightly more than 50 percent of the total futures transactions of the Kansas City Board of Trade during the month of April. In his report covering such examination, our auditor said in part:

Of the 15 firms visited, the records of 6 showed nothing of interest in the way of irregular-appearing transactions. The six all had rather light trading and will not be considered in the comments which follow.

During the month of April 1931, the remaining nine firms all engaged in some form of “ cross-trading” or “one-sided trade”, most of which appeared to be unnecessary and some of which was obviously done for the purpose of attaining results which could not have been achieved in the regular course of business.

Eighty transactions of this type were examined, involving futures contracts for 1,910,000 bushels of wheat, which is slightly more than 10 percent of the total futures business done by these nine firms during the month.

The report then describes two general types of trades, first, “a cross trade in which a firm acts as both principal and agent, or as agent for both buyer and seller, getting another firm to run the trade through their books as an accommodation, apparently to give it the appearance of having been executed in the pit," with another firm. The second type is described as “a trade in which only one firm is involved as broker.”

In this report there is listed the names of the nine commission firms where cross-trading and the bucketing of customers' orders were found.

With reference to the Kansas City cases, it appears that our accountant discussed the practices with some of the firms themselves and with officers of the exchange. There could be little purpose in

taking up individual cases officially with the exchange at Kansas City for the reason that it seems to be the contention of commission firms there that they cannot do business unless they do engage in these practices. They claim that the Kansas City market is too narrow to enable the execution of customers' orders in that market at all times, and that under such circumstances a Kansas City commission firm will execute a customer's order for Kansas City futures by taking it into its own account at what it considers a fair execution for the customer and then hedge its own position by an offsetting trade in the Chicago futures market.

I say that this is the contention of the Kansas City commission houses, because I have heard Mr. George Davis explain this situation on frequent occasions. I doubt whether even he is aware of the fact that as much as 10 percent of the trading is apparently of that character.

Now, even assuming that commission firms deal fairly with their customers and do not take advantage of the opportunity which is theirs, the practice of cross-trading, at best, is a deceit upon the customer. It is done only in order that the name of some firm other than the commission firm which handles the order shall be confirmed to the customer as being on the other end of the trade. The fact is that the commission firm acts as both principal and agent in these transactions and, through the device of cross-trading, hides this fact from its customers.

Mr. HOPE. Right there, let me interrupt you. Are those practices you mentioned in violation of the rules of the Kansas City Board of Trade?

Mr. MEHL. Well, I would rather have Mr. Davis answer that question, but I

The CHAIRMAN. I understood him to say it was. Mr. MEHL. I think they are. The CHAIRMAN. I know they say it is in Chicago. Mr. MEHL. I will put it this way. I think that technically at least they are violations of the exchange's rules. Is that right, Mr. Davis ?

Mr. GEORGE H. Davis. I would like to answer that, Mr. Chairman, when you see fit.

The CHAIRMAN. I would like to ask Mr. Mehl this question: We were handed these floor broker's cards. I cannot find anything on those that would give the clearing house any information as to where or when those practices are engaged in. How does the clearing house get that information?

Mr. MEHL. I have not seen those particular cards, but I do not believe that the clearing house gets information as to the parties from the trading cards.

The CHAIRMAN. Then, it appears that they could indulge in as much of that type of trading as they wanted to, so long as some one did not report them from the floor.

Mr. MEHL. Those trading cards are not turned over to the clearing house; they are turned over to the commission firms from whom the orders come.

The CHAIRMAN. What is turned over to the clearing house?

Mr. MEHL. One commission house simply confirms through the clearing house its trades with other commission firms. It is simply a report and a means of settlement by clearance.

The CHAIRMAN. Is the hour of the trade submitted on those reports ? Mr. MEHL. No, I believe not.

The CHAIRMAN. Well, how could they tell from those reports? How could the clearing house determine or find out if the man rushed in just before a trade, and took care of part of the trade by taking the option side ?

Mr. MEHL I do not believe it was Mr. Coughlin's intention to suggest that the clearing house, from the reports made to it, could know who the ultimate parties and who the brokers are in any of these trades. The clearing house deals only with the commission firms. The clearing house does not know either the ultimate customers or the floor brokers who execute the trades.

The CHAIRMAN. Well, as I understood it, he said the clearing house would see that those rules were enforced, and I was wondering how they got the information on which to enforce them, or what they based their information upon.

Mr. MEHL. Now, going back to the Chicago cases, some of these may have been discussed with exchange officials. I cannot say from our records here in Washington which, if any of them were so discussed. But, in the very first case, namely, the case known as dockets 2 and 3, the exchange officials did not seem very much interested. In that case a customer first complained direct to the Chicago Board of Trade concerning an execution which was reported to him at a price outside of the recorded price range. It happened to be a job lot; that is, in multiples of 1,000 bushels rather than in multiples of 5,000. The exchange first disposed of the complaint by a simple statement to the effect that job-lot orders were frequently executed at prices varying from the round-lot prices. The customer thereupon complained to the Grain Futures Administration. Our Chicago supervisor made an investigation and took the matter up with the Chicago Board of Trade. A committee was appointed by the board of trade to investigate, with the result that the broker was suspended for 2 days, or possibly it was 5 days. Later, when the department had decided to make a test case against three members, including this particular broker, the board of trade, after reopening the case, suspended the man for 2 years. Nothing was ever done about the other broker and the clearing member, although the facts as to these were fully developed in the hearing in dockets 2 and 3.

Mr. TOBEY. Mr. Mehl, that had to do with job lots?
Mr. MEHL. That is right.
Mr. TOBEY. Do you have some information there dealing with
round lots?

Mr. MEHL. Yes.
Mr. TOBEY. I wanted to know what you have on round lots.

Mr. MEHL. In the memoranda of the Chicago cases, there is a notation to the effect that round lots are involved.

Now, it is possible that the Grain Futures Administration should employ a staff large enough to check more closely the activities of

ppenthan in multiples statement to tarying from

members and report to the exchange any and all apparent violations either of board of trade rules or of State or Federal laws. I am afraid, however, this would not add greatly to our popularity with either the exchange officials or exchange members.

Mr. TOBEY. Is that essential ?

Mr. MEHL. Well, we try to get along. We feel that our work is more effective if we do...

Mr. TOBEY. Well now do you want to state here, to this gathering, for the record, that your department feels that no legislation should be enacted by the House of Representatives or Congress, that would not maintain popularity.

Mr. MEHL. No; we have gotten thoroughly reconciled to that situation.

Mr. Doxey. Is there any reason why the Government or an agency of the Government should not check up on that, if it is not corrected by the board of trade itself? What could you do, if you could not do that?

Mr. MEHL. In doing that sort of work, under our present grain futures act, we are put in the position of engaging in what the members and the trade regard as snooping and looking into things that are outside of the purposes of the act.

Mr. Doxey. What could you do in remedying the situation other than making an investigation and reporting to the board of trade? Mr. MEHL. That is all we can do.

The CHAIRMAN. I do not see how you could justify a lot of expense on that kind of an investigation.

Mr. Doxey. Now, if this bill is passed, can you do anything?
Mr. MEHL. Yes; this bill prohibits cross-trading and bucketing.

Mr. Doxey. Then you will have some reason to make the investigations. Mr. MEHL. Yes, sir.

Mr. Doxey. Because you can go a step further toward bringing about results, can you not?

Mr. MEHL. As a matter of fact, I think with the penalties under the law that those practices will disappear.

Mr. ANDRESEN. Does not the present law prohibit cross-trading and bucketing?

Mr. MEHL. The Grain Futures Act?
Mr. MEHL. No.
Mr. ANDRESEN. They can indulge in that now!

Mr. MEHL. Yes. As to the case mentioned, our theory was that it might be covered as a form of manipulation, but the judgment of the commission on the law was that it did not amount to a manipulation of grain prices-affecting grain prices broadly. It just affected certain orders and was not manipulation within the meaning of the Grain Futures Act.

Mr. ANDRESEN. As I understand you, then, the Grain Futures Administration has no jurisdiction over cross-trading and bucketing?

Mr. MEHL. That is correct.

Mr. COFFEE. Has not the code corrected that? · Mr. MEHL. The code does not deal with cross-trading or bucketing operations. It is devoted solely to establishing minimum margin re

quirements and establishing certain limits on daily price fluctuations, and so forth.

Mr. ANDRESEN. What do you do when you get a complaint; do you take every complaint up with the business-conduct committee of the board of trade, or do you just forget it?

Mr. MEHL. When we receive complaints from customers, claiming that firms have defrauded them or have taken advantage of them, it is our practice to take it up with the business-conduct committee; but I am frank to say, in response to Mr. Tobey's inquiry, we have not, for the reasons stated, placed before the exchanges all of these cases which I indicated we had for further investigation and which looked like cases of bucketing and cross-trading.

Mr. Tobey. Mr. Mehl, have you brought this evidence before this committee in previous years?

Mr. MEHL. I beg your pardon? Mr. TOBEY. Have you brought before this committee this evidence, in seeking this legislation, before?

Mr. MEHL. I think not.
Mr. TOBEY, I wonder why?

Mr. MEHL. I do not know. The question of cross-trading, bucketing of orders, and desirable legislation to correct it has been brought to the attention of Congress and the committees of Congress as far back as in 1928; but what I meant to say is that we have not attempted to tell in detail what our auditors have found in respect to

Cross-tradipWell, nave under

Mr. HOPE. Well, now let me ask you this right at that point: What authority do you have under the present laws to make these audits and investigations, by which you can secure the information which you are giving us now?

Mr. MEHL. Well, we have general authority to examine the books and records of the members of contract markets.

Mr. HOPE. Whenever you think something may be going on illegally? . Mr. MEHL. I beg your pardon.

Mr. Doxey. You do it under the provisions of the law which give you the right to examine the books and records to ascertain whether or not there is manipulation of prices going on; is that it ?

Mr. MEHL. Yes. Mr. TOBEY. A sort of a fishing expedition? Mr. MEHL. No; I would not call it a fishing expeditionMr. TOBEY. You just simply go out and see what you can find out? The CHAIRMAN. Had you finished, Mr. Hope? Mr. HOPE. Well, I am not sure whether Mr. Mehl answered my question. What I asked was, whether your right to go into the books and records comes from the provisions of the law which gives you the right to investigate transactions which might involve a manipulation of market prices?

Mr. MEHL. Yes.

Mr. HOPE. And, under that general provision, you can go into the books and records of any of the traders on the contract markets; is that right?

Mr. MEHL. Those who are members of the exchanges.
Mr. HOPE. Those who are members of the exchanges ?

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