various markets. The facilities they offer, if not the policies of their operators, doubtless in general stimulate speculation. Some, perhaps, actively seek and encourage future trading, regardless of the source of the business. A few, on the other hand, positively discourage speculation by small outsiders. CHAPTER IV. SPECIAL FUTURE-TRADING TECHNIQUE. Section 1.-Regular hours, execution in the pit, and curb trading. No trade or contract for the future delivery of grain or provisions shall be made, or offered to be made, by any member or members of this association in the exchange room of the Board, nor in any of the public streets, courts, or passages in the immediate vicinity thereof, or in any hall or exchange hall or corridor in any building located or fronting on any such streets, courts, or passages, on any business day except from 9.30 o'clock a. m. to 1.15 o'clock p. m., or upon any Saturday except from 9.30 o'clock a. m. to 12 o'clock m., nor on any day or that part of any day on which the Board shall hold no business session; it being the object and intent of this rule that all such trading which may tend to the maintenance of a public market shall be confined within the hours above specified. The penalty for violation of this rule is suspension from the privileges of membership for such period as the board of directors deems. suitable. In 1886 there was provision for an afternoon session from 2 to 2.30 o'clock and the morning session closed at 1. The 1877 rules restrict future trading to the period between 9.30 and 3.30 (or 1 on Saturday), and fines were imposed for trading outside such hours. In 1869 the only provision of the rules on this subject is that the main exchange hall shall be set apart and devoted to the purpose of a general exchange from 11 to 1 o'clock, there being no penalty for trading outside these hours. The objection to trading outside of hours, therefore, though not new, is of more recent date than the importance of the Chicago futures market. REASONS FOR RESTRICTED HOURS.-The purpose of the rule quoted is primarily to promote the efficiency of the futures market as a price-making organ. If the hours of trading are too long, interest lags, traders leave the pit to attend to other matters, and the way is open to rigging and manipulation. By reason of concentration of the influences and competition of the factors and opinions bearing on prices of futures at a particular time and place, the resultant price may be considered to reflect more truly actual and prospective conditions and the general opinion of the trade. Longer hours would 169514°-20-10 145 make it impossible to dispose of the bookkeeping and settlements incident to the day's business. 1 A further shortening of the hours, however, might limit the availability of the market for hedging purposes, and, indeed, from this point of view there would be an advantage in longer hours, though most purchases and sales of grain in the country as well as at terminal markets are doubtless effected in the forenoon. When afternoon markets were tried, however, it was found they were not well attended and offered too great a temptation to manipulators. There is no similar need of restricting cash grain trading to regular business hours, and of course, no such restriction on this business; also futures may be exchanged for cash after trading hours. EXECUTION IN THE PIT REQUIRED.-The complement of the abovequoted regulation of hours of trading is found in the part of Rule IV, section 8, which reads: All orders received by any member of this association, firm, or corporation doing business upon the Board of Trade of the City of Chicago to buy or sell for future delivery any of the articles or commodities dealt in upon the floor of the exchange (except when in exchange for cash property) must be executed in the open market in the exchange hall during the hours of regular trading, and under no circumstances shall any member, firm, or corporation assume to have executed any of such orders, or any portion thereof, by taking the trades, or any portion of them, for their own account, either directly or indirectly, in their own name or that of an employee, broker, or other member · of the association. Any member convicted of violation of this rule by the board of directors shall be expelled. This provision appears for the first time in the rules for 1901. It is worthy of note that the penalty for violating this rule is unqualifiedly expulsion from the Board, which, at Chicago, involves the loss of the property value represented by the membership. The Board is here attacking a dangerous, or formerly dangerous, enemy—morally as well as commercially inimical-that is, the bucket shop, and not merely promoting the concentration and efficiency of future trading, though, doubtless, this also was in view in formulating the rule. CURB TRADING DEFINED AND DESCRIBED.-Curb trading is trading outside the prescribed hours or trading in which the contract is executed outside the pit. It is in violation of one or the other or both of the rules above quoted. In the past there has been plenty of curb In a memorandum prepared by the secretary of the Chicago Board of Trade and dated Dec. 18, 1914, the following statement occurs: "At one time this [curb] trading was continued until 10.30 a. m. in one of the corridors of one of our principal hotels. The necessity for stopping this practice was to permit the members of the Board, particularly the firms carrying on business of moment, to do the office work and finish it up at a point of complete cut-off, and to do this within reasonable hours. But for these hours of closure, during which business is prohibited, the length of business hours would be burdensome." trading at Chicago, when the rules were less stringent or less strictly enforced. There was a time when forenoon and afternoon sessions, supplemented by calls, were further extended by trading in adjacent hotel barrooms in the evening. Even when there was an established curb, the attendance was small, the market circumscribed, and the trading usually purely speculative. Manipulation was easy under such conditions, and not infrequently occurred, especially with reference to influencing opening prices the next day. Curb trading was not subject to the rules of the exchange and therefore lacked some of the safeguards of regular trading. Trading in privileges was at one time carried on entirely as a curb affair, but is now provided for in the rules. There is practically no curb trading at Chicago now. The only exception, if it is properly to be regarded as an exception, is the overlapping of trades at the close for one or two minutes, when the "boys"—that is, the pit scalpers— may have failed to complete the process of evening up before the bell rings. Such trades are not quoted or recognized.1 Minneapolis allows 15 minutes leeway for this and related purposes. Other exchanges have rules against curb trading similar to those of Chicago.2 AN EXCEPTION WHEN CASH AND FUTURE EXCHANGED.-The rules provide for an exception to the requirement of execution in the pit where cash grain is exchanged for a future. This is obviously not a typical transaction in futures, and would naturally take place outside the pit. Even in such a case, for accounting convenience in determining prices on such a transaction, the future may be sold in the pit at the 1 Circular No. 141 of the Minneapolis Chamber of Commerce, dated Dec. 20, 1909, reads as follows: “On Oct. 28, 1907, the following resolution was adopted by the board of directors : *Resolved, That what is known as 'curb trading,' taking place before and after the regular trading hours, is hereby prohibited. 66 Resolved, That 15 minutes after the time for regular closing hours be allowed to make such adjustments as are necessary between traders, and that the exchange room shall then be vacated. "The purpose of this resolution is to prevent the transaction of any new business or the execution of any new orders whatever after the closing bell taps, nothing being permitted thereafter except the making of adjustments. Members must adhere strictly to this resolution." But curb trading was prohibited by the Minneapolis exchange, at least as early as 1904. A further extension of the principle involved is contained in a resolution of the board of directors of Dec. 8, 1910, whereby all offers to buy or sell futures of cash grain in the exchange room before the opening of the market, price to be based upon the opening price or any other price, were forbidden. The Kansas City rule reads as follows: "The place of trading shall be the exchange hall, and all transactions by sample in carload lots, and all trades for future delivery, at other places, during the hours above mentioned, are hereby prohibited under a penalty of $10 for the first offense and $20 for each additional offense, which shall apply to both buyer and seller. Any trade made at any other time or place, or in any other manner than is herein prescribed, shall not be subject to margin or be recognized or enforced by any tribunal of this association." (Rule XXI, sec. 2.) market to the agreed purchaser, if the exchange of cash and future is effected at so much over the future instead of at stated prices. In this case the sale in the pit is more or less a formality, since the price thus made does not affect the profitableness of the transaction to either party. EFFECT OF THE RULE REQUIRING EXECUTION IN THE PIT.-The rule requiring execution in the pit is doubtless lived up to completely as regards all trades for customers. This is done even where it might be of advantage to customers that the trades of buyers and sellers through a particular commission house be matched against each other. Orders to buy and orders to sell, to be executed at the market, coming in at the same time or received before the opening will probably not be executed at identical prices, because of the difference, or the natural spread, between bid and asked prices. It used to be the practice of commission houses, before the tax made such procedure impracticable, to find a scalper who would accommodate them by buying and selling at the same price, the scalper haying a chance to make a profit only on the excess either way to the extent that the orders failed to match as to quantity; for example, having bought 40 and sold 50, he would have 10 open to buy in at a probable fractional profit. Formerly an arrangement could be made to both buy and sell at the bid price if the excess quantity were on the selling side, and similarly at the asked price if the excess quantity were on the buying side. The tax naturally puts an end to this possibility by destroying the chance of profit. The rules against crossing trades, however, are necessary to protect customers and the market against the bucketing of orders.1 TRANSFER TRADES.-The situation as regards the application of the rule that all trades shall be executed in the pit differs somewhat, or has differed, according to whether the trades in question are made for customers or are made for the account of the houses or of a pit scalper, who himself executes (and perhaps also clears) them. The "transfer" of even-price trades by scalpers is described in a later section, and also the similar office transfers between commission houses effected for the purpose of saving margins. All these transfers were, under the interpretation of the law effective December 1, 1917, by the Commissioner of Internal Revenue, trades subject to taxation, and all are now 1 The New York Stock Exchange handles the situation somewhat differently. Matching trades is allowed under a rule that safeguards the interests of the customers by requir ing a public offer of such securities before a broker may make a transaction with himself. The provision of sec. 9 of Art. XXIII of the constitution of the exchange reads as follows: "Where parties have orders to buy and orders to sell the same securities, said parties must offer said securities, if they be bonds at one-eighth of 1 per cent and if stocks at one-eighth of $1, higher than their bid before making transactions with themselves." |