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The CHAIRMAN. And it would seem that what has proven to be feasible on those boards might be practicable on the Chicago Board of Trade.
Mr. MERRILL. I can only assure you that if Congress could, by law or in any way, enable us to differentiate between the desirable and undesirable, we should be most happy to assist in every way that we might. That would be a very difficult thing to accomplish.
The CHAIRMAN. Of course you understand that Congress can not go into a State and legislate touching a matter which is wholly within the State.
Mr. MERRILL. No; that is right.
The CHAIRMAN. And yet it would seem that it might be possible for an organization to prohibit by rule or regulation a practice which nine-tenths of its members declare to be unwise, injudicious, and harmful.
Mr. MERRILL. I appreciate, Mr. Chairman, and of course you will realize, that is doing it, in that case, from an ethical standpoint, not from a legal standpoint. The Supreme Court has upheld the receiving of any of those orders, if we wish to do it. There is nothing illegal or unlawful about it. You will have to get the Supreme Court to change its attitude on that before it could be enforced, because a man with $100 who wants to buy 1,000 bushels of grain because he believes it is going up, has the same lawful right to buy that 1,000 bushels of grain as a man who has $100,000 and wants to buy more.
Îhe CHAIRMAN. Yet it would seem if the rules of the exchange are powerful enough to prohibit its members from competing with each other in the matter of prices between the hours of 1.30 and 9.30, they ought also to be powerful enough to prevent its members from inserting objectionable matter in their market letters.
Mr. MERRILL. I agree with you, fully. As I the other day rose to state, there is some talk of censoring the letters. Now, we are back to the letters. We were speaking before of the small' dealers. I agree with you heartily, and I think, under the provision even of our charter, that the board could do this. It is a matter that has been given informal consideration of late. The provision I speak of is this:
Said corporation is hereby authorized to establish such rules, regulations, and by-laws for the management of their business and the mode in which it shall be transacted as they may think proper.
Would you not think that that would cover the authority ?
The CHAIRMAN. It would seem as if that would convey very broad authority.
Mr. MERRILL. I think so.
The CHAIRMAN. Then you would not have any difficulty in reaching that evil; and, if I may be pardoned the suggestionMr. MERRILL. Very glad of your suggestion; do not be afraid.
The CHAIRMAN (continuing). It would appear that if by resolution you could eliminate that objectionable feature in your exchange you would go very far toward eliminating the criticism of your methods, generally; because nobody is complaining, through the country or on this committee or elsewhere, of the practice of hedging in a legitimate way. The complaint is that inducements are held out, that temptations are offered, to the lambs to come in from all over the country
and be sheared, and there seems to be too much ground for that complaint.
Mr. MERRILL. President White told you the other day about the vote; had 26 of our members voted the other way, and I think there are a good many of the others who have changed their minds since, we should have had such a rule; but following that, Mr. Chairman, a resolution was offered before our directors which provides that any attempt at forestalling or cornering or manipulating the market will hereafter be regarded by this directory as being a grave offense, and our rule relating to such offense shall be rigidly enforced. I offered that resolution myself, and it was unanimously adopted by the entire directory; so that any member of our board to-day who attempts manipulation or forestalling or cornering the market will be expelled.
The CHAIRMAN. I think there would be little against the board
Mr. MERRILL. The sentiment has grown very rapidly among our members. I want to say that in 1895 we had the most drastic corner rule drawn by the late Judge Beckwith, of our State, and it remained on the books for eleven years, until 1888. There were no corners, and the producing public made such a “holler," so to speak, if you will allow me that word, saying that we had killed the bull in the market; that the price was always down; that we had this corner rule, and if a member did anything that looked like cornering the market we would expel him and deal with him; and a campaign was waged among the patrons of the board—and these, mark you, were the people who produced the grain-and that rule was repealed after being on our books for thirteen years.
And now that consumption has overtaken production, and that incidents which formerly did not create a ripple, because of the great supply of grain impending and hanging over the market, are no longer at work, this great change in the conditions has come. I suppose you read in the paper a little while ago about the Albany miller cornering wheat in our market. Well, he had about 800,000 bushels bought, an infinitesimal amount compared with the great stock in our market, and it came up to the last day of this last September and the market was $1.091. I was one of the committee appointed by the directors to investigate that affair and see what there was in it and make a report, and we had numerous witnesses, all who were in any way interested in or related to that, before us and under oath, and one witness testified that he was given an order to purchase 5,000 bushels of wheat, and it was $1.091, and he bid $1.094 and he did not get it, and he bid $1.10 and he did not get it, and inside of two minutes, without a sale being made in the pit, it was $1.15, and after only two other sales it was $1.20. The name of this man has been so public in the papers that I need not hesitate to mention it. I refer to Mr. Waterman. He is a resident of Albany, N. Y., and not a member of our board. At that price, $1.20, he being in Chicago at the time, he authorized his broker to begin selling, and he supplied all the demands at $1.20. Next morning, the first day of October, he had all of the receipts for the No. 2 red winter wheat, which by reason of its scarcity has a premium of 12 to 15 cents on it now, picked out of the lots of · receipts that had been delivered to him, and sold it all to mills at $1.211.
The Chicago Board of Trade was not responsible for that occurrence. There was nobody particularly injured. That does not occur frequently; it is a rare occurrence. But in this rule that we came so near enacting was a clause which required the establishing of a true commercial value of any commodity which by reason of manipulation or any other cause had been so carried out of and beyond its real value; that is, carried up to a value that you might ...? fictitious. Although that did not prove to be fictitious with No. 2 red winter wheat, yet his No. 2 winter and No. 2 hard were not worth that. They were still below. The CHAIRMAN. If that class of our population which uses the Chicago Board of Trade in the same way and for the same purpose as the bucket shops are used should withdraw their business from Chicago, would it interfere in any way with the operations of your board *::: MERRILL. No; I do not think it is sufficiently large. I do not think we would know it; we would not appreciate it. It is only here and there that an individual does that. Mr. SIMs. I understood you to speak of its being desirable to get rid of what you call the “small dealer?” Mr. MERRILL. Yes, sir. Mr. SIMs. Now, if the business is a good one and it is an ethical business and a business that is a benefit to the whole country, why deprive any class of the privilege of using its rules? r. MERRILL. That is why #. it is only for ethical reasons and not legal reasons. Mr. SIMs. You could increase the amount of the contract and eliminate the little people, could you not? Mr. MERRILL. Yes; in fact, in wheat we do trade in 1,000-bushel lots. In other grains it is 5,000-bushel lots. Mr. SIMs. If they want to get rid of the little fellow, all they have to do is to make the rule so as to exclude him; that is, increase the minimum contract? Mr. MERRILL. They might do that. Mr. BURLEsoN. Or increase the margin? Mr. SIMs. That would affect the big man just the same. Mr. MERRILL. That was the Hughes report, that that is the objectionable part of speculation; that is the smail fry, as we will ...] it; and that commission recommended that the margin be increased so as to prevent the smaller men, the men of small means who can not afford to lose a dollar, perhaps, from trying to speculate. It is the weak that Justice Holmes speaks of, too. Mr. SIMs. That would indicate that the majority of small dealers lose in all your exchanges. Mr. MERRILL. Sooner or later. Mr. SIMs. And yet you insist that it is a natural market. Mr. MERRILL. Yes; a natural market. Mr. SIMs. You have used corn as an illustration, and I will also adopt it as an illustration. How many grades of corn are deliverable on your contracts? Mr. MERRILL. No. 2 only, but in the three colors—No. 2 yellow, No. 2 white, and No. 2 mixed. Mr. SIMs. Are they of the same market value? Mr. MERRILL. Yes; they are practically of the same market value, because the first two put together will make mixed. At times the white for the southern trade has a premium of 2 or 3 cents over the other. I have known it to be 5 cents because of its scarcity.
Mr. SIMs. Then under your market contract it is not permissible to deliver a lower grade of corn at an overvaluation of price?
Mr. MERRILL. No, sir; he can deliver No. 3 corn at 5 cents discount. I have never known it to be 5 cents.
Mr. Sims. Would you regard it as in harmony with the correct rules of commerce to permit the delivery of a lower grade of corn at an overvalued price ?
Mr. MERRILL. No, sir; in our business that would be the same as
if avir. Simece of corn ink it wa
Mr. My price of corn was permitted.
Mr. Sims. If that was permitted, what would be the effect on the market price of corn ?
Mr. MERRILL. I think it would depress it.
Mr. Sims. Do the prices of your future contracts maintain a parity with the prices of actual corn—the market prices of actual corn?
Mr. MERRILL. Oh, yes, sir.
Mr. SIMs. If this parity was not maintained, if there was a violent fluctuation in this margin, and your futures would sometimes go up at the same time that your price of corn goes down, or, vice versa, when the price of futures goes down the price of corn goes up
Mr. MERRILL. Yes.
Mr. SIMS (continuing). Would it be safe to buy a future contract for hedging purposes?
Mr. MERRILL. Yes, it would be safe; but that parity, you understand, might fluctuate, but it would fluctuate within small limits, comparatively.
Mr. Sims. Within small limits? In a way, the parity would remain uniform; if your futures went up, your corn would go up?
Mr. MERRILL. Yes.
Mr. Sims. Now, suppose that under the operations of the rules of your exchange it was possible to so bring it about that this margin was wiped out, that the parity was destroyed, would it then be a safe proposition to attempt to hedge ?
Mr. MERRILL. If I understand your question, that would mean that if May corn and spot corn, or cash corn, were same price would I think then it would be safe to hedge? Is that what you mean?
Mr. Sims. No; what I mean is this: If under the rules and operations of your exchange it is possible for the price of your futures to go down
Mr. MERRILL. Yes.
Mr. Sims (continuing). And at the same time the price of spot corn to go up
Mr. MERRILL. Yes.
Mr. SIMS (continuing). Would it not catch a man who attempted to hedge, and pull him at both ends, and would he not lose on his futures and on the corn? Mr. MERRILL. Yes; he would lose in that case. Mr. Sims. But you say that does not take place on your exchange? Mr. MERRILL. No, sir.
Mr. Sims. But if it did take place, would they not pull him at both ends?
Mr. MERRILL. Yes, sir; but when May comes, cash corn is May.
Mr. SIMs. Yes, I understand that. As the contract month comes around, the prices of the futures and spots gradually come together?
Mr. MERRILL. Yes.
Mr. SIMs. But if that was not the case, your hedge would not be worth much to you, would it ?
Mr. MERRILL. Yes, for it could not be otherwise.
Mr. Sims. You say it could not be otherwise. I do not know enough about it to take issue with you, and I am not going to take issue with you; but suppose on some other exchange that did not take place?
Mr. MERRILL. Yes.
Mr. MERRILL. Mr. Cushing used that expression. I did not use his word. However, I am ready to answer any questions.
Mr. SIMs. I thought it was you. I wrote it down. Is Patten a great wheat merchant or a great cotton merchant ?
Mr. MERRILL. He deals in wheat and all kinds of grain.
Mr. MERRILL. Not that I know of. I have seen his name connected with the buying of a lot of cotton in New York. Beyond that I do not know anything about it.
Mr. Sims. Do you regard the operations of a merchant who is willing to plunge upon the market for the purpose of depressing or inflating the price as advantageous to the trade ?
Mr. MERRILL. No, sir; they are very disadvantageous, very injurious.
Mr. Sims. If it were possible to effect a combination between plungers and go upon an exchange and manipulate, depress or inflate, the price of the product, would you regard that as hurtful or beneficial to the trade?
Mr. MERRILL. Hurtful.
Mr. BURLESON. You spoke about your contracts on your exchange having been filled in every particular, and you referred especially to the case of the board of trade against the Christie Grain Company ?
Mr. MERRILL. Yes.
Mr. BURLESON. As a matter of fact, in order that this committee may thoroughly understand what that case was, the case of the Chicago Board of Trade against the Christie Grain Company was a suit by the exchange against a man that you charged was a bucketshop keeper, or the keeper of a line of bucket shops, was it not?
Mr. MERRILL. Christie was; yes, sir. • Mr. BURLESON. And the subject-matter of that litigation was the market quotations and prices created by your exchange, was it not?
Mr. MERRILL. You mean that Christie