THE SOURCE OF JOB-LOT TRADING.-The demand for job lots at Chicago comes largely from small speculators but, also, from the country. The smaller lot is more serviceable for hedging the smaller lots handled in the country, and especially makes closer hedging possible. It is said that the Board favors job-lot tråding in order to permit small dealers to hedge their transactions. One or two car lots can be hedged in jobs immediately, while if the 5,000 market only is used the owner must wait for further accumulation, or overhedge, thus being subject to a speculative risk one way or the other. In a wild market, close hedging with the aid of job lots is naturally more important, since a day or two may bring a radical change in prices. Individual elevators can not use the 5,000 lot to the same advantage as could the old line elevator companies. Cooperative elevators are sometimes prevented by their by-laws from overhedging. Hence, the job-lot market has lately increased in importance. If the farmer wishes to hedge, he may, of course, in a few cases have occasion to use the large unit. The job-lot business, at least on the Chicago Board, is only to a small extent terminal-market business. On the other hand, for a large trader, job lots would be cumbersome. The 5,000 lot is in general more suitable and more convenient for terminal-market transactions.

JOB LOTS AT MINNEAPOLIS.-At Minneapolis job lots and 5,000 lots are separated and combined at will in settlements and in all phases of the trading. None of the rules and practices that separate the job-lot and 5,000-lot markets at Chicago apply there. Job-lot sales are freely combined into "fives" on purchase, and vice versa. The same statement applies for other exchanges, but there are peculiarities of practice at Kansas City. The higher commission rate is the only obstacle to job-lot trading at Minneapolis. Hence it is substantially correct to speak of Minneapolis as a futures market with a 1,000bushel unit.

JOB LOTS AT KANSAS CITY.-Kansas City has a different method of meeting the demand for job-lots in futures from either Chicago or Minneapolis. Two houses act as jobbers and are willing to accept trades in 1,000 lots at one-eighth of a cent per bushel over the big-lot market in the case of purchases and one-eighth of a cent under for sales. This means an extra cost to the odd-lot trader, but he is perhaps somewhat more sure of execution than at Chicago. By combining job orders the broker may be able to trade them out in big lots. But he will presumably be short or long odd amounts, at least for a brief period, and thus undergoes a special risk. The brokers in question do not guarantee to accept job-lot orders in this manner under all circumstances. Under some conditions they will require one-half cent discount or premium. The Kansas City method is the same as

that of the New York Stock Exchange in handling odd-lot orders for stocks.

THE CHICAGO OPEN BOARD.-There is a special 1,000-lot exchange in Chicago, situated across the street from the regular Board, and trading on the basis largely of quotations from the latter. This is known as the Chicago Open Board of Trade. Its position and function are discussed in a later chapter. (See p. 262.)

Section 3.-Margins as a commercial-credit institution.

THE CREDIT BASIS OF MODERN COMMERCE.-Credit is essential to modern commerce. A merchant seldom has capital enough to own clear of debt his entire stock of goods. It is more significant that, even if he had such abundant resources, he would probably, as a matter of business policy and judgment, keep a large part of his capital invested outside of his own enterprise. If he attempted to own free of debt all the merchandise he handled, a large part of his capital would at times be idle because of fluctuations in the quantity of stock on hand due to seasonal and other variations in production and consumption. With reference to such necessary fluctuations in stocks of merchandise and raw material, it is, from a general or social viewpoint, more economical that such stocks be carried with the aid of funds borrowed from banks through the use of commercial paper than that they be owned free of debt by the merchant. Liquid funds for investment in working capital are, therefore, largely obtained by borrowing, especially in purely mercantile business, and also, although to a less extent in relation to the capital invested, in manufacturing.

The more liquid the assets bought or owned on a credit basis, the greater the extent to which they will be bought and carried with borrowed money. The more easily the assets in question are controlled by the lender, the more readily he will lend within a narrow margin of their quickly realizable value. Securities purchased with a view to resale-in other words speculatively held-are, therefore, naturally held for the most part on a credit basis or on margin." The purchaser has only a marginal interest in their value. The demands of those who wish to trade in stocks naturally brings into being stock brokers ready to purchase securities for them on the basis of a small deposit or "margin," the broker financing the transaction almost entirely.

TRADING.

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DIFFERENCE BETWEEN THE MARGIN IN STOCK TRADING AND IN GRAIN -The purchase of a grain futures contract is of a nature, as regards its credit foundation, similar to the purchase of stocks on margin. Delivery, however, even as between brokers or commission houses, in the grain trade in futures comes at a later date than the transaction itself, whereas in the speculative purchase of stocks the security is delivered immediately to the broker, or, in the case of a

short sale of stocks, stocks are borrowed from other brokers for delivery. In this important respect the purchase and sale of futures is a freer form of speculative activity than the purchase and sale of stocks. The volume of trading in futures need not be restricted by the necessity of either selling only what one owns or borrowing for delivery what one sells without owning. The handling of a speculative account is simpler for the broker or commission merchant in the case of a grain future. Doubtless the gross profits from handling the ac count are correspondingly greater in the case of stocks.

There are some men in the grain trade who speak of "investment in futures." The phrase is not in general use, however, and does not seem to come very naturally to the lips of grain men. It is reasonable to suppose that the phrase "investment in futures" is an invention of those who wish to assimilate transactions in futures to the employment of funds in some comparatively stable use with a view to obtaining a regular income therefrom. Stock-market usage does not uphold such a notion of investment as makes it applicable to futures. The investor is one who pays for his purchases of securities, and takes them out of the market. The speculator leaves them with a broker on margin. If a corporation prides itself on the fact that its stock is in the hands of investors, and not speculatively held, it points to the small percentage of stock held in the names of brokers.

The general character of the margin as a credit institution and its legitimacy has been emphasized above.1 Doubtless, it is possible to make too much of the margin as distinguishing the speculator from the investor. The distinction is a rough and ready one. Doubtless some stocks held on margin at any time are investment purchases, but the consistent margin trader is not investing in stocks. And it should be noted that the trader in grain futures necessarily trades on a margin. It is not possible to obtain possession of the warehouse receipt until the delivery month, and to pay for it before that time would be waste of money, or of its possible interest earnings. The phrase "investment in futures" is a contradiction in terms.

The marginal credit character of the proprietary interest of the purchaser of a future is well expressed in describing the margin as a payment made "to bind the bargain." Technically, however, it is a deposit to insure against loss through nonperformance, instead of part payment on the price. The significance of the distinction between cash" and "future" prices, as referring to the postponement of the payment for, as well as of the transfer of, the property is discussed in an earlier section.2

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Compare also the Hughes Report: "Purchasing securities on margin is as legitimate a transaction as the purchase of any other property in which part payment is deferred.” State of New York, Report of Gov. Hughes's Committee on Speculation in Securities and Commodities (June 7, 1909), p. 5.

2 Ch. II, sec. 1.

POSSIBLE DETACHMENT OF INTEREST FROM ACTUAL GRAIN.-There naturally results from this system some detachment of interest from the actual grain, and correspondingly some tendency to pay attention rather to the special technical conditions of the futures market. This results mainly from the margin and credit basis of transactions. Overextension of commitments is made possible because of this credit basis of dealings. If some traders are overextended, their position, whether on the short or long side, is weak and invites reaction. The situation is, of course, the same on the stock exchange. Its nature is clearly indicated by the process familiarly known as "pyramiding." In this case paper profits on previous commitments are used as margins for additional commitments, based upon the expectation of a further movement of the market in the same direction as that in which it has been moving. It will be noted that the pyramid stands upon its apex-that is, upon the comparatively small initial commitment. Therefore, it is not a very stable structure. Pyramiding by the individual trader is, of course, discouraged by the exchanges, but a prolonged bull movement involves a sort of pyramiding by the market generally; that is, the circle of speculation broadens and includes more and more those who are financially weak, and also those who are weak or merely imitative in their speculative judgment. The exhaustion of margins when the movement reverses itself, and the selling out of insufficiently margined accounts explains the sharpness of the reaction when it comes. Altogether, the peculiar sensitiveness of the credit structure upon which speculation rests is easily explained.

It should be noted, moreover, that the margin is largely, and perhaps essentially, a device by which the amount of purchases (or commitments) with limited funds can be greatly increased beyond what the purchaser is immediately, or in a reasonably short time, able to pay for. It is in this connection that the noninvestment purpose of the trader may become manifest. It is also here that the trouble arises when the market reacts.

INTEREST REVENUES OF THE STOCK BROKER NOT OBTAINED BY THE FUTURES-COMMISSION MERCHANT.-One important difference between the grain-futures commission house and the stock-exchange broker is due to the fact that the latter receives interest on balances due on uncompleted purchases of stock, while the nature of the commitment. in the case of a grain future is such that there is no occasion or excuse apparent for charging interest. The stock-exchange broker makes a large part of his income from the difference between the rate he pays and what he charges his customer for money used in payment for stocks purchased on margin. He may also be able to fend his customers' stocks to short sellers at a premium. But the futures-commission house merely puts up margins, making no pay

ments because of futures bought, and obtaining nothing for futures sold, until the maturity of the contracts. Its commission more nearly represents its entire earnings. The commission house may, however, gain considerably by reason of the fact that the amount of margins put up by it with other houses is probably considerably smaller than the amount deposited by customers, as is explained in a later section. (See p. 165.)

It appears, however, that it has not been uncommon for commission merchants to collect interest on the difference between the margin actually put up by a customer-which may be nothing-and the amount of margin deposited that would meet some standard requirement fixed by the commission merchant himself. This practice should be condemned as tending to defeat the purpose of the margin as security, and tending to impair the stability of the credit structure all along the line. The danger is less where the requirement of a margin is simply omitted, since in this case the commission house makes no profit by means of its laxness in exacting margins. But this practice also may add to the precariousness of future trading and the instability of future prices. As is noted below, the amount members may require from customers as margins is not regulated by the exchanges.

SLIGHT EQUIPMENT REQUIRED FOR FUTURE TRADING.-The work performed by a grain-futures commission merchant in the case of most future trades-that is, in those closed before the delivery month-is but little more than the necessary accounting incident to the transaction. All that trading in futures requires of the trader, moreover, is the possession of an opinion as to what prices will be in the future and the possession of a little money to back that opinion. In no other case of a speculative or other market is it possible for so large a volume of transactions to be put through on so relatively small a basis of capital or credit as in the case of grain futures. In fact, the grain speculator's investment in margins may, in some cases, be zero. The connection between the payment of a purchase price and the assumption of obligations of ownership, or of some of them, is often tenuous in speculative transactions, and probably more so in the case of grain futures than anywhere else.

Section 4.-Margins between commission houses.

THE MARGIN RULE.-The provision of the rules at Chicago relating to margins "put up" and "called" as between commission houses and brokers buying and selling from one another on the exchange is as follows:

On time contracts purchasers shall have the right to require of sellers, as security, a deposit of 10 per cent, based upon the contract price of the property bought, and further security, from time to time, to the extent of any advance in