may be

in that most of the orders are at the market. This difference attributed to the more consistent hedging practices of the Northwest. In the closing of a speculative trade there is perhaps more inclination to give the order at the market. Large speculators are, in general, more ready to buy or sell at the market, especially so if they are disposed to attempt manipulation. In the case of floor trade the distinction between orders at the market and orders with a limit is inapplicable, because the trader is in the pit executing his own order at the price that seems to him acceptable at the moment.

THE PIT TRADER'S OPEN-ORDER CARD.-The trader carries with him to the pit an open-order card or a similar memorandum on a sheet of paper. Some of the open orders may have been outstanding for weeks and may be far away from the market. The trader is nevertheless responsible for their execution if the price is reached. The cards are corrected each afternoon at the office and new cards made out every two weeks or so, or perhaps sooner, if they get too dirty and clouded.

ERRORS IN EXECUTION.-In the execution of orders errors frequently occur. The order as telephoned from the house to the exchange floor may have been understood to have referred to buying instead of selling; or the quantity.or price may have been incorrectly heard, or incorrectly written on the card. The pencil record that the pit trader has in his pocket may have been subjected to so much erasure and alteration that the quantity or the price for a particular order may be more or less illegible.

If the customer is not at fault, and if his order is of such a nature that without the error it would have been executed, he gets the contract in question, whether the transaction was actually made as he directed or not. If his order was to buy and the pit trader sold, the house takes the short trade and disposes of it as quickly as possible after the error is discovered, presumably taking a loss. If the error is discovered after the market is closed the house credits the customer with the transaction according to the terms of his order, and buys or sells at the opening. If the error consists in having bought more than the customer ordered, part of the trade goes to the customer and the rest is assumed by the house. If an open trade was closed by mistake, it must be reopened. If the price on an order with a limit was reached and the order was not executed promptly, but was later, the customer's account is charged according to the price at which he put in his order. If an error of this nature, however, is in favor of the customer, it is the practice of some houses to give the customer the benefit of the delay or mistake of the trader.

THE ERROR ACCOUNT.-Every commission merchant doing a considerable business has a separate so-called error account, on which the 169514°-20-14

balance is usually against the house; though it often happens that trades made in error are closed out at a profit. In the case of one wire house, not the largest, errors cost the firm over $25,000 during the year 1917. In another case, the net debit to income on account of errors was three times as much. But if the pit trader was responsible for the error trade he has to take the loss. If he makes a trade for which there was no customer, it is put down as an open trade on his account. But some commission houses themselves assume all errors, even though made by their pit traders. With orders executed on brokerage, of course, the loss from errors is the broker's.

It is the policy of most firms to close out error trades as soon as possible, regardless of whether it means a loss or not. The keeping open of such trades would, in effect, mean speculation by the firm. The blame for an error due to a misunderstanding between traders can not usually be fastened on either party to the trade, hence it is usual to divide losses on such errors.

There is one well-authenticated and rather recent case of an error of 4,500,000 bushels. A market order to buy 500,000 was missent by a telegraph operator, so it was received as one for 5,000,000 bushels. So large an error could only gradually be worked off. Owing to the condition of the market, it actually yielded a profit to the house involved. A loss of 1 cent a bushed on 4,500,000 would be a loss of $45,000, so the risk undergone was obviously great.

It is of interest to note that a wire house was willing to execute a 5,000,000-bushel order without first verifying it. Even the largest speculators order in multiples of 100,000, and at that very rarely, rather than of 1,000,000.

As has already been noted, errors in general result in losses. This is mainly due to the fact that most trading errors are in the price, and in that case the customer gets the benefit of an error in his favor, while the house has to take the loss. In case of an error of overexecution, however, the house has an even chance of a gain. The very large error above described was of this nature.

OPEN CONTRACTS.-When an initial order has been executed the customer has an open contract or open trade at his disposal. If he has bought he must sell before the result of his trade can be determined; and, similarly, if he has sold he must buy in. An order to close a trade is not different from any other order either in form or as regards the course through which it goes.

"STOP" ORDERS.-An order with a limit closing a trade, however, that has in view the prevention of an undue loss, and that is good until canceled or for some considerable period, is common enough to have a special name. It is known as a "stop loss order." If a selling order, it is placed some few cents above the market. If a

buying order intended to stop loss on a short sale, it is placed at some few cents below the market. Similarly, open orders to close a trade at a gain frequently stand on the books of a commission house, but they apparently have no special name, although they also may be called "stop orders." Such resting orders to take profits when a certain price is reached are comparatively common in the speculative grain trade.

TRADES CLOSED ON ACCOUNT OF INSUFFICIENT MARGIN.-The trade of a customer may be closed without regard to instructions from him. because his margin is exhausted, or because he fails to protect his account when a further margin deposit is called. In this case the order to buy or sell is given by the commission house under the provisions of its understanding with the customer. The result of such an order is usually the closing out of the customer's account. A small amount of his margin may be left to his credit. Very often, however, there is a debit on his account which the commission house would like to collect from the customer, but does not always attempt to get, because of conditions of law and public sentiment that make it difficult for a broker to completely recoup himself for a loss sustained on a customer's account in excess of the margin deposited.

THE P. AND S. ACCOUNT AND OTHER REPORTS TO THE CUSTOMER.-The notice sent to a customer informing him of the closing of a trade is called an "account sales" or a P. and S. (purchase and sale) slip. This states the date on which the future was bought, the price and the quantity, and similar facts for the sale, together with the difference between the value, or amount in money, of the purchase and sale applicable to the customer's account (the gross gain or loss), the commission deducted as due the broker, and, since December 1, 1917, the tax of 2 cents per $100 of value on sales. Sometimes the loss or gain is shown only as a net debit or credit with commission and tax deducted. This description assumes that the future contract will be closed by the purchase or sale of the future. If it is closed by delivery, the same sort of a P. and S. slip is sent out, but there will be an additional charge for carrying the grain, consisting of insurance, interest on money paid for the warehouse receipt, and the charge for storage. The net amount of gain or loss resulting from a future trade after commissions and other incidental charges have been made is carried to the customer's regular ledger account. The results of the trade can not be determined and credited or debited to the customer's ledger account until the trade is closed, which may be some months after it is opened.

Every effort is made to keep the customer informed as to the status of his transactions. Orders are acknowledged upon receipt. Prompt confirmation of the execution of orders, such notice to be in writing and given upon the day of the purchase or sale, is required

1

by the rules of the Chicago Board under penalty of suspension or expulsion. The "kick" of the customer is expected to correct errors due to the haste with which the work is often done. Confirmation giving the name of the house with which the trade is made, etc., is required by the bucket-shop laws of some of the States. It is also customary at the close of each week to mail the customer a notice of open orders awaiting execution and a similar notice of open contracts held for his account.

Section 2.-Customers' accounts.

THE CUSTOMER'S REGULAR LEDGER ACCOUNT.-Between the time of making a margin deposit and the time of closing his first trade, nothing is shown on the customer's regular ledger account as to the result of his trading except indirectly, if he has been called upon to increase his margin, for which additional deposit a credit is entered. Also, if his open trades showed a profit and he needed funds, he was, until recently, allowed to draw down the amount placed to his credit. In case the customer deals in privileges, the net amount he receives or pays for bid or offer is, of course, immediately credited or debited to his regular ledger account. If he is a seller or buyer of a privilege that proves "good," the result of such a transaction is primarily to open a trade on his account in the customers' option ledger, or to close a trade previously open. Such a transaction will take the same course as any other future transaction.

The regular ledger account of a grain-futures customer is different from the similar account of a customer in any other business in respect to the fact that there are no debits for the gross value of commodities dealt in, but only net entries for profits and losses on trades, unless a warehouse receipt is actually taken in on delivery and paid for. The assumption is that future transaction will be set against future transaction, and that the customer is interested only in the net.

On page 244 of this chapter is shown a chart indicating the relations between the important grain-futures books and records, as they group themselves, on the one hand, into those pertaining to the customers' accounts and, on the other, into those pertaining to dealings between commission houses with reference especially to the expeditious clearing of trades whenever there are equal quantities bought and sold in a given option, regardless of the identity of the respective long and short customers. The second is referred to as the street end of the accounts.

1 "Whenever a member of the association, acting on his own behalf or as the representative of a firm or corporation, shall have made a purchase or sale for another party for future delivery of contract grades of commodities dealt in on the exchange, such member or the firm or corporation of which he is the representative, as the case may be, shall notify the party for whom such purchase or sale was made, such notice to be in writing and to be given upon the day of such purchase or sale." (Rule XXII, sec. 12.)

THE CUSTOMERS' OPTION LEDGER.-Between the time when a future trade for a customer is executed and the time when it is closed, the only record that is necessarily made or shown as to the status of his trading is contained in the customers' option ledger. This shows for each customer the quantity, date, price, grain, and delivery month for each transaction. Purchases and sales are arranged in groups of columns on the two sides of the page, the bought or debit entries being on the left and the sold or credit entries being on the right. This customers' option ledger account is kept essentially in terms of quantity. Its purpose is to balance purchases against sales. The customer may have more bought or more sold of a particular option, and his option ledger is the book to which reference is made to determine the status of his transactions in this respect. When a trade is closed by the execution of a buying or selling order, as the case may be, an entry is made in the option ledger, usually opposite the corresponding sold or bought transaction, and the date showing when the P. and S. slip was made up and sent out is stamped or written in a column of the ledger provided for the purpose.

There are certain details in which the practice of future-trading firms as regards their methods of keeping the customers' option ledger differ in significant ways. If the trader has only one or two open trades in a single option, of course the simplest thing is to enter the opening trade as it occurs and match against it the closing trade. If a customer has a large number of trades open in various options, the question as to the matching or make-up of trades becomes often somewhat complicated. A closing trade must of course be matched against an open trade in the same grain and for the same delivery month. If the open trade is in job lots the trade must be made up in job lots. The job lot can be closed out only by a corresponding job-lot transaction. If there are few trades open there is little room for choice as to which sale shall be matched against which purchase, but if there is a choice the oldest trades are closed first.

If there are many thousands or hundreds of thousands of bushels in open trades on one or the other side of the customer's account, there is need of a definite rule in making up the trades. It might be convenient to match quantities against similar quantities, regardless of dates. This is not done. Of course, occasional instructions from the customer with regard to how to match up trades are followed, but a commission house feels that a customer who does this is somewhat of a nuisance, except in a case where it is known that the customer in question is acting for others and is merely giving instructions with reference to having trades of each customer for whom he acts returned separately to him, instead of being so combined and mingled that the P. and S. slip that he receives on behalf of his customers will contain the bought of one customer and the sold of another.