Mr. THOMPSON. From day to day. The difference existing between the different grades in our spot market on the sixth day prior to delivery governs the settlement of the contract.

The reason we say the sixth day is that the notice is given at a certain time that five days thereafter the cotton will be tendered, and the day that notice is given is counted, and five full days thereafter, which makes six days, and the conditions existing at that time fix the conditions upon which that contract is to be settled.

The CHAIRMAN. May it not be possible that even such a contract as you describe may not be desirable? Are there not cases in which a spinner would desire a certain kind of cotton and he would not be satisfied with the delivery of another kind, even although the exact commercial difference was represented to him in the price?

Mr. THOMPSON. Yes, sir.

The CHAIRMAN. And is it possible, therefore, for a spinner desiring and requiring a certain kind of cotton to secure it by compelling the enforcement of one of these contracts on your exchange?

Mr. THOMPSON. The spinner can not get just exactly what he wants at all times on a contract. On a future contract that is sold around the ring he can, however, make a specific contract with cotton merchants, such as we have at home, for 1,000 bales of strict middling or 1,000 bales of middling, as the case may be. That is a specific contract.

The CHAIRMAN. Yes; but that is not what you refer to when you speak of future contracts?

Mr. THOMPSON. No. Well, he could not buy that. He would be glad to buy that, but he can not buy it around in the future market, because he would find nobody who would be willing to sell him such a contract as that. There would be a lurking peril in that contract that a man would not want to incur, because if he contracted to deliver 1,000 bales, or 100 bales, of strict middling cotton at a certain future day he would have no assurance, but at that time he might not be able to get the strict middling cotton, you see; so that the spinner can not get that kind of a contract; nobody will sell him that kind of a specific contract around the ring. That is properly the subject of a contract between the individuals. Now, when that contract is made between the individuals, then, I being one of the individuals, unless I have that cotton actually on hand, I go immediately to the future market and buy me a basis contract that protects me.

The CHAIRMAN. Then, as a matter of fact, whatever future contract the spinner may buy in the way of a hedge is substantially a speculation, because he would not dare to enforce the delivery of those contracts?

Mr. THOMPSON. Oh, yes; he would. If the contract is a correct contract he can do it if he wants to. For instance, take our contracts. If a spinner bought one of our contracts he could take the cotton on that contract, and if he found the cotton in the contract that he could use, and it was not all merchantable cotton, he would use that which he could use, and the balance of it he could retender or sell as he saw fit. We have a large business done in that way. Take an exporter, for instance, a man who sells cotton-a merchant who sells cotton to the other side or to the American mills. He has large connections. This is done to a large extent on our exchange to-day. He will buy

a future contract for March, we will say, or for May, When that time comes he takes delivery; he calls for the cotton. We had an instance of that just the other day. There were 6,500 bales of cotton called for the other day, and subsequently to that 4,000 bales. That was just before I left home. He will call for the cotton. Now, that cotton is given to him and he looks over the classification. He looks over that cotton and he finds, we will say, for instance, certain grades of cotton that will suit certain sections and certain other grades that will suit other sections. He takes those out and ships them out, and the cotton which perhaps he has no immediate use for he has recertificated and he carries it until he has use for it, or delivers it on contract to somebody.

The CHAIRMAN. In other words, it is essentially a speculation with him? I think you will understand the point I have in my mind, perhaps, if I use a wheat margin as an illustration. A gentleman repre senting the Toledo exchange was before the committee a few days ago. and he stated that under the future contracts in which they dealt upon that market only one grade of wheat was deliverable. Now, we can easily see how a miller could hedge by purchasing a future contract of that sort, because he would know absolutely that it was to his advantage to enforce delivery. In doing so he would secure a grade of wheat that he could take right to his mill and grind.

Mr. THOMPSON. Yes.

The CHAIRMAN. But suppose that a cotton spinner can use no cotton which is stained or tinged at all; he must have white cotton. Mr. THOMPSON. Yes.

The CHAIRMAN. He could not depend upon one of your future contracts to get that white cotton.

Mr. THOMPSON. Yes.

The CHAIRMAN. The best that he could do would be to assure himself that he would get certain cotton.

Mr. THOMPSON. Yes.

The CHAIRMAN. At a fixed price.

Mr. THOMPSON. Yes.

The CHAIRMAN. And he would have to make himself good, if there was a loss, by the sale of the cotton that he could not use.

Mr. THOMPSON. Yes.

The CHAIRMAN. It would involve him in a whole lot of other transactions, and would be in its essence a speculation on his part; is not that true?

Mr. THOMPSON. Yes, true; but I differ with you so far is its being a speculation is concerned. You understand, the spinner can do either one of two things. In the cotton business, if he needs cotton for future use and he can not buy the actual cotton at that particular time, then he can buy a future contract for that cotton, and he knows he is going to get some cotton, and cotton that is marketable; he knows that as a money proposition he is not going to lose anything. In a spot market you find people whose business it is to supply spinners with their particular requirements. Suppose that the spinner, instead of making a future contract, had made a specific contract with an exporter or with a merchant; that exporter and merchant would not make that specific contract unless he could go into the market and buy for future delivery a sufficient amount of cotton to protect him.

The CHAIRMAN. As a matter of fact, is not that the way the business is conducted very largely now? Do not the spinners go direct to the merchant and enter into a specific contract with him for the delivery, at such times as it may be needed, of cotton of a particular grade and rest upon that contract, making no hedge themselves, purchasing no hedge themselves, but leaving the merchant to protect himself in whatever way he can?

Mr. THOMPSON. Well, I can not say about that. My understanding is that the spinners use the market largely as a hedging proposition. But I do not sell cotton to spinners. That is not my particular line; so that I could not say how much they do hedge. But I am sure that they hedge, that they use it as a hedging market pending such time as they can make a contract for a specific grade, or such time as a specific grade is offered them.

Mr. LEVER. From your answers to the questions of the chairman I assume that the seller on that contract has the option as to the grades deliverable?

Mr. THOMPSON. Within limits.

Mr. LEVER. Within limits?

Mr. THOMPSON. Yes.

Mr. HAUGEN. Strictly within limits?

Mr. THOMPSON. Yes.

Mr. HAUGEN. May not a higher or better grade be delivered?
Mr. THOMPSON. No, sir.

Mr. HAUGEN. A higher grade, above?

Mr. THOMPSON. No, sir; the limits are fixed by the contract, from good ordinary middling to middling fair.

Mr. HAUGEN. If the seller offers a better grade than is in the specific contract, would objection be made to it?

Mr. THOMPSON. He could not enforce delivery. It might be that the individual would be willing to take it, but the contract that he has signed calls for cotton within the limits specified. There is very little cotton, though, above the high-grade limit of the contract.

Mr. HAUGEN. He probably would not object if it was of a better grade than he bargained for?

Mr. THOMPSON. No; but he would have to pay a correspondingly high price for it.

Mr. LEVER. Is not the effect of that contract which gives the seller the option as to the grades deliverable just this? To illustrate, a spinner wishes 1,000 bales of cotton for the use of his mill, and he buys a future contract for 1,000 bales of cotton deliverable in July, we will say. He knows when he is buying that contract that he may have delivered to him on that contract 500 bales of cotton that he may not be able to use in that particular mill. Would it not be the natural tendency for that man to bid a price low enough for that contract to justify him, or to pay the expense of handling the 500 bales of cotton which he can not use in his own mill?

Mr. THOMPSON. Yes, sir; that is true. That expense, however, is very small.

Mr. LEVER. It is very small?

Mr. THOMPSON. Yes.

Mr. LEVER. But to that extent the matter of hedging has a tendency to decrease the price of your contract?

Mr. THOMPSON. Oh, like anything else; of course, if he could call for a specific grade that he wanted, and without any inconvenience, he would bid a great deal more for the contract than he would if he was put to some little trouble and inconvenience.

Mr. LEVER. But he charges all the trouble, all the inconvenience. all the rehandling of the off grades that may be delivered to him, to the price he pays of the future contract.

Mr. THOMPSON. But he does not fix the price that he pays for the future contract. He has to pay the prevailing price, you understand. Mr. LEVER. That is very true, but I understood that the law of supply and demand regulated the basis contract.

Mr. THOMPSON. Yes.

Mr. LEVER. So that this being a general thing, the general tendency would be for these men to charge that up to that?

Mr. THOMPSON. It is just as you say. If the contract involves any possibility of additional expense to him, of course he is going to figure that in.

Mr. LEVER. Yes.

Mr. THOMPSON. Going a little further, however, the spinner would be very glad indeed to have a contract that put all of the burden upor the seller of cotton, so that he would not have to take any of the burden or expense himself; and if such a contract as that were made. a narrow contract that gave the spinner the privilege of calling for whatever he wanted, you would find nobody on earth who would sell him that contract, because the spinner would squeeze him, because he would not have what he wanted.

Mr. LEVER. But in that contract there is this possibility-that is not a possibility, but almost a certainty-that the spinner who desires to hedge on your market must bear this additional expense of carrying grades that he does not want?

Mr. THOMPSON. In our market the additional expense is exceedingly light, because in our system the spinner takes out what grades he wants, and for the balance which he does not want he carries his same certificate, or we issue to him a new certificate at a mere nominal cost of 25 cents a certificate.

Mr. LEVER. Is that true of other exchanges in this country?
Mr. THOMPSON. I do not know. I know it is true of ours.

Mr. BEALL. I understood you to say a moment ago that if, under a contract, the buyer had the option of determining just what cotton should be received by him, he could not find anybody to sell it to him. because if the opportunity came the buyer would squeeze the seller! Mr. THOMPSON. Yes.

Mr. BEALL. Now, let us reverse that. Take a contract in which the entire option rests with the seller, not only as to the grade of cotton, within the limits of the contract, that should be delivered. but also the period—within a certain month, say, of delivery. Mr. THOMPSON. Yes.

Mr. BEALL. Any time within the month of March the seller can deliver on a March contract. Under that contract he can deliver any grade of cotton that is embraced within that contract. Does

not the reverse condition, from what you stated a while ago, apply in that sort of a case, so that no man who really wants cotton can very well afford to go upon the cotton exchange and buy it with the expectation of having the actual cotton delivered to him?

Mr. THOMPSON. No, sir; because if he buys a contract of that sortif he takes that cotton-he knows that when he gets that cotton, and when he pays for it, the cotton then becomes his to do with as he pleases. He uses it if he can. If he can not, he sells it on the market on the same basis on which he got it; or if he can not sell it on the market, if there is a dullness of the market, he can deliver it back on contract at the same basis.

Mr. BEALL. So far as having any assurance of getting cotton that he can use is concerned, he can not very well afford to go upon the market-upon your exchange-and buy it, can he?

Mr. THOMPSON. If we delivered, on our exchange, cotton for which there was no use, which was not marketable, there would be that fear, and it would depress the value of the contract; but if you have a contract where the low grade, or where any particular cotton delivered on the contract is marketable, is merchantable cotton, is usually in demand for a purpose, then the man who takes that contract takes it without any lurking danger or peril. He knows what he is going to do. He takes the cotton, and if he finds that he can sell that cotton on the spot for what it costs him on that contract he does it. If he does not do that he does not lose anything, because he has got his certificate of the cotton exchange showing the grade of the cotton, and all he has to do is to sell the contract and deliver the cotton on the contract; and possibly the man that buys it next time has a place for it, and nobody has lost.

Mr. BEALL. Still, it is a fact that the spinner who wants cotton does not go to the cotton exchange to buy it?

Mr. THOMPSON. He goes to the cotton exchange to buy his hedge, until he is able to make a contract.

Mr. BEALL. But he does not go to the cotton exchange to buy the cotton for consumption?

Mr. THOMPSON. No.

Mr. BEALL. There must be some reason for that.

Mr. THOMPSON. Yes; he gets cotton on the contract that he does

not want.

Mr. BEALL. That is the point I was trying to emphasize.

Mr. THOMPSON. Yes.

Mr. BEALL. Now, do you keep any record of your cotton exchange as to the transactions there?

Mr. THOMPSON. Of the fluctuations, we do.

Mr. BEALL. Of the fluctuations, but not as to the volume of the business, or the sales?

Mr. THOMPSON. No, sir; we do not.

Mr. BEALL. Can you form any estimate as to what would be the volume of business on your exchange, under normal conditions?

Mr. THOMPSON. No, I can not; nobody, hardly, could do it, because in listing, or keeping a record of, the trades that are made there, you do not know whether those are original trades or whether they are retransfers of contracts. For instance, as an illustration of the sort of thing I mean, take a bank check. I have $100 in bank. I issue a check to you for $100. You take that check and you deposit it in your bank, or you may transfer my check. That check may go around through the hands of as many gentlemen as there are on this committee, and yet there has been only $100 that has ever been subject to that check, and that $100 may never have left the bank.