Central Stock & Grain Exchange v. Board of Trade of City of Chicago Christie Grain & Stock Co. et al. v. Board of Trade of City of Chicago, National Exchange Bank v. National Bank of North America, 132 Soby v. People, 31 Ill. App. 243; 134 Ill. 66; 25 N. E. 109. 335 Tomblin v. Callen, 69 Iowa 229; 28 N. W. 573– 291, 315 United States v. Patten, 226 U. S. 525– 325 Van Dusen-Harrington v. Jungeblut, 75 Minn. 305; 74 Am. St. Rep. 463; Young, Ex parte, 6 Biss. (Bissel's U. S. C. C. Rep.) 58.... 325 ACKNOWLEDGMENT. The Commission desires to make acknowledgment in connection with this volume of the report on the Grain Trade of the valuable services rendered by Mr. W. H. S. Stevens, Assistant Chief Economist and examiner in charge of the inquiry; by Mr. G. P. Watkins, who had immediate charge of the preparation of this volume; and by Mr. John R. Dowlan, who assisted in the legal phases of the work. The Commission desires also to acknowledge the assistance of the Bureau of Markets of the Department of Agriculture in the prosecution of the field work of the inquiry and in making a special report on Chicago wire houses. 15 LETTER OF SUBMITTAL. FEDERAL TRADE COMMISSION, TO THE CONGRESS OF THE UNITED STATES: The Federal Trade Commission submits herewith Volume V of its Report on the Grain Trade. The present volume is entitled "Future Trading Operations in Grain." It thus deals with one phase of the subject of grain futures, a part being reserved for other volumes. This volume is intended to describe how future trading is done, or the technique of operations, including a description of the facilities or machinery for such trading and, of course, including such íncidental references to purposes and functions as may be necessary to an understanding of the technique. No attempt is made in this portion of the report to answer the question as to the desirability or undesirability of future trading. Future trading is a comparatively modern commercial practice and, as measured by extent and variety of use, is probably more important in the United States than elsewhere. It is especially important as applied to grain trading. The character and uses of the future contract have not hitherto been described with sufficiently specific detail, it is believed, for a proper comprehension of the system. Hence, it has been found necessary to devote the present volume to what is essentially a description of future trading operations. The future contract is not a contract of sale but an agreement to sell at a future time on specified or understood terms applying to a prospective actual sale. Such an actual sale may or may not occur as a result of the future transaction. Reference to transactions in futures as "sales" and "purchases," however, is in accordance with trade usage and scarcely avoidable, despite its inaccuracy from a legal viewpoint. Payments made at the time of giving an order or of the execution of a future contract are not part payments toward the purchase price but are merely deposits made to secure the rights of each of the contracting or interested parties. Such "margins" are deposited by the seller as well as by the buyer. As a matter of fact, the great majority of future contracts are settled before maturity and without any actual sale occurring. In other words, it is only exceptionally that a transfer of grain or payment for grain occurs as a result of future trading, though delivery is necessarily contemplated in a valid future contract. Such con 169514°-20-2 17 templated delivery is generally obviated by a subsequent contract, or contracts, which have the effect of canceling the first contract. It should be noted that settlement and cancellation of future contracts prior to the time of delivery is essential to the serviceability of the most important of the business uses of the future contract, namely, "hedging." Affording an opportunity for hedging--which is a device to enable a merchant or manufacturer to avoid certain commercial risks-is the principal economic service of future trading. For example, an elevator company on buying a thousand bushels of actual grain, sells a contract for a thousand bushels of futures against this cash purchase, expecting to buy in this quantity of futures at the time the actual grain is sold. Any marked change in market or other conditions will affect the prices of actual or cash grain and of contracts for the future delivery of grain substantially alike. If, therefore, the price of the actual grain purchased declines 10 cents between the time of its purchase and the time of its sale by the elevator company, the price of futures will presumably also have declined about 10 cents. As the elevator company when it bought the actual grain also sold a future contract, the company is thus enabled to buy in the same quantity of futures for 10 cents less than it paid for them, thus compensating itself for its 10-cent loss upon the actual grain and leaving it with only its ordinary merchandising margin. Similarly, only the merchandising margin of profit is left if prices go up, though the cash grain be sold for much more than the ordinary excess above the price paid for it. The point of interest as regards hedging in the present connection is the fact that the hedger will not ordinarily deliver on his future sale. He will probably not wish to hold the grain long enough to reach the delivery month, and furthermore the grain is likely to be of such a quality that he can get a premium for it in the "sample market" that is not obtainable through delivery on the future. His future contract enables him to avoid speculative risks in price, but does not necessarily involve delivery. It should be noted that a miller similarly hedges by buying futures against flour sales contracts, and that the miller also seldom wishes to take delivery on his hedges, preferring to buy grain with reference to its adaptation to his particular needs and on the basis of the testing of samples. The process of settlement by offset is designed to dispose as soon as possible of sales and purchases of the same trader that cancel each other, and also of sales and purchases of different customers of the same commission house that compensate or balance each other at the time and do not involve a net obligation to other houses. Such settlement is accomplished by various types of "clearing" and the methods of clearing future contracts, whether by clearing houses or |