1

entered regularly in the street book, where formerly the scalpers' even-price trades were, in most cases, offset without there being any such entries.

The tendency of the Board is to require that all trades and transfers, even those effected merely for the purpose of transfer or settlement, be executed in the pit and regularly booked. This applies even where a price has been agreed upon and such execution may be regarded as a formality. Privileges exercised are thus executed as future contracts, also transfers of futures between houses at an agreed price, though the price in such cases is naturally somewhat away from the market and the parties to the contract determined beforehand. This tendency has been strengthened by the desire of the Board to forestall possible disputes with the Government in connection with the tax on futures.

OFFERS REQUIRED TO BE OPEN AND IMPERSONAL.-There are several positions in the Chicago rules that look to the making of pit quotations the result of fair competition honestly registered. An offer can not be confined to any particular member, but must be closed with the first bidder, and, if an offer for a large quantity is not accepted instantly, trades in parts of the total amount must be accepted. Trades are made in the pit at prices agreed upon between the parties beforehand, not, however, in violation of the spirit of this rule but in order to put certain transactions through as mere office trades. Their nature and purpose is doubtless fully understood, and if at a price deviating from the market they are doubtless not quoted. The provisions referred to reduce the possibility of wash sales and the manipulation of quotations. Transactions are irregular if made, in effect at some other price than that quoted,

See Ch. V. sec. 3, for description of the nature and use of the street book.

2 "Any offer to buy or sell on a time contract any commodity dealt in under the rules of this association by a member of the association, when made openly in the exchange hall during the hours for regular trading, may be accepted by any other member of the association at the time such offer is made, and the contract shall be made with the member first accepting such offer for the whole quantity and if not so accepted instantly, such offer can not be restricted to acceptance of the entire quantity offered, nor can same be restricted to or specified for acceptance by any particular member; nor shall it be permissible to make pretended or fictitious offers to buy or sell commodities or to specify particular members in making such offers." (Rule XXII, sec. 10.)

The first half of this rule appears first in 1893. The latter half of this rule, beginning "for the whole quantity" was added in 1915 to cure abuses of the character specified. A resolution adopted by the board of directors of the Minneapolis Chamber of Feb. 8. 1910, reads as follows:

Offers to buy or sell large quantities of grain or seeds for future delivery, with the limitation requiring the buyer or seller to purchase or sell the entire amount offered, is not permissible and is hereby forbidden. All such bids or offers to buy or sell grain or seeds must be open for acceptance by any member, in lots of 5,000 bushels or multiples thereof. The spirit of this order is that pit trading shall be open and free, and that our market shall maintain the full breadth and fairness for all for which it is noted."

through some money consideration being added to or deducted from the price.1

Section 2.-The unit of trading and the job-lot market.

The standard unit for future trading in Chicago, and the only one for which quotations are recorded and published, is the 5,000bushel lot. Job lots of 1,000 bushels are also the subject of dealings in what practically amounts to a separate market. Only in wheat has the job-lot market been considerable in amount until within the past few years.

THE STANDARD LOT NOT A NATURAL UNIT.-The 5,000-bushel lot is rather arbitrary, perhaps necessarily so. The car lot (of about 1,250 to 1,400 bushels in the case of wheat), or an amount more nearly corresponding to the car lot, would be more in conformity with the unit of cash dealings and more serviceable for hedging. As measured in bushels, however, the car lot varies considerably according to the railroad equipment used, has increased greatly in the past generation, and is, of course, different for wheat, corn, and oats. Oats will run 2,500 bushels and corn toward 2,000 at present. Thirty years ago a car lot was about 500 bushels of wheat.

In general, other exchanges follow Chicago in the matter of the trading unit. But on the New York Exchange, 8,000 bushels-the canal-boat load-was the unit most generally used during the period when New York was important as a futures market, but future contracts in terms of 5,000-bushel units and of car lots-500 bushels of wheat-were also provided for. The Chicago rules also provide for the number of bushels per carload for the different grains in connection with sales for future delivery. But there does not appear to be future trading in car-lot units. At Minneapolis the trading is done under substantially the same conditions in both 1,000 and 5,000

2

1 "All transactions in future contracts for property shall be deemed irregular when on the basis of money considerations added to or deducted from the contract price; and such transactions shall be esteemed misconduct and punishable by suspension at the discretion of the president or board of directors." (Rule XVI, sec. 2.)

This provision appears first in the 1886 rules of the Chicago Board.

2" On and after May 1, 1917, in all sales of oats for future delivery, a carload shall be deemed to contain 1,800 bushels; of wheat, 1,100 bushels; corn, kaffir corn, milo maize, feterita, and rye, 1,200 bushels; barley, 1,250 bushels; flaxseed, 650 bushels; of timothy, hungarian, millet, and clover seed, 36,000 pounds." (Rule XXII, sec. 13.)

The rule is not new, but the number of bushels per carload has been changed from time to time. In 1886 it was specified as 24,000 pounds for each of the five principal cereals, the equivalent of only 400 bushels of wheat. The quantity of wheat was increased to 625 bushels in 1896; to 700 bushels in 1901; to 1,000 in 1905; to 1,100 in 1917.

The provision of the 1887 Rules (XXV, sec. 6) reads:

"In case sales are made for future delivery by carloads, the carload shall be deemed to contain 20,000 pounds." In 1881 the figure is changed, and the provision is extended to apply to transfer to eastern railroads. "In all sales of grain for future delivery or for transfer to eastern railroads by carloads, a carload shall be deemed to contain 24,000 pounds." (Rule XXVI, sec. 7.)

lots, and there appears to be a large volume in the smaller unit. But the commission rate is higher in proportion for the 1,000 lot. Minneapolis is mainly a wheat market. At Kansas City the unit is 5,000, with special arrangements for 1,000-lot trading to be mentioned later. Rules for future trading at Omaha provide for trading in a 1,000 unit, except in the case of oats, for which the trading is to be in 1,500-bushel units and multiples thereof. This figure was doubtless designed to approximate the car lot.

SEPARATION OF JOB-LOT AND BIG-LOT MARKETS AT CHICAGO.-The distinction between job lots and big lots on the Chicago Board of Trade is not merely a matter of combination of the former in the latter and of preference for trading in the larger quantity. Five job lots purchased can not be combined into one big lot on a sale, or vice versa, when trades are made in the pit, nor can any similar equation be applied between the two classes of trading. Open trades in jobs can only be closed out or settled in jobs. Usually, therefore, job-lot and big-lot street books are separately kept. On delivery, however, a translation is possible, i. e., five 1,000-bushel warehouse receipts can be delivered in satisfaction of a 5,000-bushel contract of purchase. But a customer having five job lots bought and one 5,000 lot sold can not have the first set applied against the other. He must take delivery on the bought 1,000-bushel contracts and deliver out the sold contract. The warehouse receipt can, however, be split to make it available for delivery on job lots. The job-lot and full-lot futures markets are nearly as separate as are the markets for two different grains. All the large commission houses keep separate street books for job lots.

1

Such separation of the job-lot from the 5,000-bushel lot market at Chicago doubtless simplifies and facilitates various bookkeeping processes and especially the clearing of trades settled. Whether it may not have an unfavorable influence on the efficiency of the joblot market that more than balances the saving referred to is a question that can not be answered on the basis of information at hand.

As a matter of custom, though there is no rule on the subject, joblot trading at Chicago is carried on in a special part of the pit, where the members with such trades to execute gather. This practice is evidence of the separateness of the job-lot market. Some wire houses have separate pit traders to handle job lots only.

1 Rule XXI, sec. 2.

This is the interpretation of the violation of rules committee, and the reason therefor is stated as follows: If the commission house should close five 1,000-bushel lots purchased against a 5,000-bushel regular contract sold, it would then be in a position where during the month of December the five single contracts might be delivered on several different dates, it being compelled thus to pay for, to insure, and carry each lot until the full complement of 5,000 bushels was received before delivery on the regular contract could be made. This procedure would entail expense and risk which the customer ought to assume.

SPREADING BETWEEN JOB-LOT AND FULL-LOT MARKETS.-Spreading between the two different markets for job lots and full lots is practiced the same as between separate options and exchanges. Or the job-lot scalper may be regarded as hedging in full lots his open trades in jobs. Such spreading, or equalizing, keeps the job-lot and the big-lot markets close together. The hedging use of the big-lot market to protect open trades in jobs will occur when a pit scalper is not able to close out his job-lot trades during the day-he may not find the market active enough to permit evening up at the close-and therefore sells against jobs purchased a corresponding quantity of big lots, or vice versa.

Such spreading is rather expensive, since it involves double commissions for clearings, unless the scalper clears his own trades, and (recently) a considerable amount in taxes. There are four or five traders who make a business of such spreading. Straight scalping in jobs is probably a minor factor in the market. The small amount of trading in job lots is attributed to the fact that there is not enough money in it for the pit traders.

INFERIOR EXECUTION IN JOB LOTS.-One may infer that the job-lot market of the Chicago Board of Trade is a rather unsatisfactory place to have orders executed. It is quite overshadowed by the biglot market, and an incidental matter. Therefore, the customer can not be sure of execution at a given price that is quoted for full lots, nor sure of the price at which an order at the market at a particular time ought to have been filled. Prices published for big lots are only a rough guide to job-lot prices, except possibly in the case of stop orders and other orders with a limit, and in this case the doubt may be merely transferred to the question as to whether there should, or should not, have been an execution at the price fixed. But it is stated that a job-lot stop order ought to be executed within a fraction of the published price, even in a wild market. An order at the market is less likely to be close to the big-lot price. Job lots will generally stay at a premium or at a discount of a half a cent day after day. But a specialist in job lots says that a trader is fairly sure of a trade at not more than a quarter of a cent against him. The commission, also, is a quarter of a cent against the customer. specialist referred to says the normal or necessary allowance for the difference between the two markets is a sixteenth. Sometimes, however, the job-lot market may be more favorable than that for big lots. The possibilities of the situation are the same as they would be for a trader on a small or inactive outside market that had no published quotations but with a spread from Chicago known to be narrow and not constant in either one or the other direction.

The

It may happen that a job-lot order will be filled to better advantage than a 5,000-lot order at the same time. The rate of commis

sion is, of course, larger, and against the job-lot trade in any case. Aside from this, abstractly considered, trades that are unfavorable to one of the parties must be correspondingly favorable to the other. This statement, however, is subject to qualification with reference to the outside trader, since the scalper is presumably the one who gets a favorable variation from the full-lot price, and thereby makes his living. The inferior character of the job-lot market as a place in which to have orders executed therefore amounts to a little more than mere uncertainty, since the price at which a trade is executed may in general be expected to be slightly less favorable than conditions in the big-lot market would justify for trades executed there. Pit traders who spread more or less between the two markets, however, are said to consider job lots an incidental matter and not to be particular whether they gain or lose by them. The per cent of the scalping element in the total trade in small lots is much less than in the case of large lots. The reference is to spreading between the two markets as well as to scalping. Scalpers are floor traders who seek fractional profits on a quick turn, being usually neither long nor short at the close of the market, and who, by being always ready to buy or sell at the smallest price concession, are said largely to make the continuous market.1

2

BEGINNING OF TRADING IN JOB LOTS.-Trading in job lots of 1,000 bushels on the Chicago Board appears to have been started in 1885. In the 1884 annual report the secretary mentions the need of making provision for dealing in smaller lots. In the 1885 annual report, such trading is referred to as an accomplished fact, and as "conducted to the satisfaction of those who desired it." But it does not appear that such trading in grain was of even limited practical importance except in wheat.

3

Trading on the Chicago Board in job lots of wheat has thus been a regular practice for a long period. The job-lot markets in corn. and oats were started only three or four years ago. The considerable difference in the value of 1,000 bushels of wheat and of the same quantity of oats accounts for the demand in the former case for the unit that is smaller in respect to quantity. The comparative importance of these markets in the five-year period prior to 1918 is shown in the statistical data of transactions in futures at Chicago appearing in a later volume. The opinion of a specialist in job lots is that there is a satisfactory market for trading even in corn and oats jobs, though so recently started. The opinion of members of the Chicago Open Board, on the other hand, is that the Chicago Board offers no satisfactory market for transactions in single thousands.

Pit scalping is dealt with in detail in Vol. VII.

2 P. 34.

& P. 43.