contract. The period for which a grain privilege runs is usually brief, most commonly a day; that is, to the close of the next day's futures market. "Weekly " privileges may be exercised at or before the close of trading for the week (or for the next week).

Privileges are a species of what are known to the lawyers as "options." The option is more or less familar to the general public in connection with real estate transactions, where in consideration of a small sum an agreement to sell a specified piece of real property within a specified time at a given price is entered into by the owner.

Privileges are also called "puts and calls." The two species indicated are known in the Chicago trade as "bids" and "offers," a bid being an agreement on the part of the seller of the privilege to become a purchaser of the future, and an offer, a similar agreement, to become a seller of the future, in each case at the previously specified price instead of at the price prevailing in the market at the time when the privilege is exercised. The seller of the privilege may, of course, be the buyer of the future if the privilege is exercised, and vice versa.

"BIDS AND OFFERS FOR DEFERRED ACCEPTANCE."-The rules of the Chicago Board of Trade deal with privileges under the name of "bids and offers for deferred acceptance" and specify the form of contract to be used as follows (Rule XXII, sec. 20):

BID MADE SUBJECT TO DEFERRED ACCEPTANCE.

CHICAGO, ILL.,

day of

19-.

I will give [price] per bushel for [number of] bushels of contract grade of [grain] for delivery during [delivery month], 19, same to be delivered in store in regular warehouses under the rules of the Board of Trade of the City of Chicago.

This offer is subject to acceptance by you until the closing hour for regular trading on [month and day], 19—.

(Signature)

The prescribed "offer" form is the same as the above "bid" form, except for the first phrase, which reads:

I will sell [number of] bushels of contract grade of [grain] at [price] per bushel for delivery, etc.

The distinctive characteristic of the privilege contract appears in the last clause. The reference to the commodity and delivery month serves merely to define the option to which the privilege relates. The price named is the price at which the future contract will be executed if the privilege is exercised. The reference to delivery "in store in regular warehouses," etc., is verbiage and tends to obscure the fact that the privilege relates only to a contingent future contract. Any consideration of delivery is a degree further removed. The employment of these phrases in this connection, however,

doubtless has reference to the legal need of affirming that the contract "contemplates delivery." Of course the future contract itself is made "under the rules of the Board of Trade of the City of Chicago."

PRICES OF BIDS AND OFFERS.-The price paid and received for the privilege contract is not the price indicated in the above form, that being the price of the contingent grain future. Both bids and offers are by custom sold at the rate of $5 per 5,000 lot, this being, in effect, the premium paid for the insurance of the prospect of obtaining a future at the specified price. The seller of an offer is subject to taxation since December 1, 1917, which tax is commuted or shifted to the buyer by adding $1.25 per 5,000 lot to the price, making the price $6.25. Of course the price of the future named in the contract varies with the condition of the market and the degree of risk incurred by the seller of the privilege. It is of the nature of this sort of business that but a small percentage of privileges can be worth exercising, or "good," since the privilege is exercised as an alternative to buying or selling the future directly upon a less favorable market, and the loss of the seller of a privilege that is good is likely to be much greater than the small premium received. In other words, the privilege seller may be forced to buy or sell the future at considerably over or under the market.

INDEMNITIES.-Privileges are sometimes called "indemnities," at least in the Chicago trade. The indemnity contract proper, however, was of a somewhat different nature, though designed to meet the demand for "bids and offers." The two species of indemnities were called "ups and downs." This type of contract is now obso

lete and of merely historical and illustrative interest. It will be dealt with in a later connection. (See the chapter on privileges in

a later volume of this report.)

The subject of privileges is fully treated in the chapter so entitled in a later volume of this report. They are mentioned in this connection for the sake of completeness in reviewing the means and methods of future trading. The structure and operation of the machinery of future trading can be treated satisfactorily without considering this rather extraneous, or at least superposed, type of contract.

Section 3.-The pit and its use.

DESCRIPTION OF THE PIT.-The facilities for dealing in futures are in general the same as those used for cash grain dealings. The pit, however, is distinctively a future trading facility. The pit is so called from the fact that, in order to facilitate the exchange of signs, as well as of oral communications, steps rising upward from the center are built around a small octagonal or circular space. The

For corn; for oats 15 cents per thousand.

number of steps varies with the size of the pit and may be as many as six. By this means the traders can see one another better and tell what is going on throughout the pit. The importance of signs as a means of transacting business-though this does not mean that the pit is dumb or noiseless-makes some such an arrangement necessary. To the outsider, the language of the pit is practically unintelligible. This is partly due to the amount of noise from shouting orders and acceptances, but it is also due to the large extent to which an unfamiliar sign language is used. Certain gestures have as definite a significance in the pit as have the words which may accompany them, but which may not be heard, because of the noise and confusion.

This type of structure is apparently used on the grain exchanges for no other purpose than dealing in futures. Where future trading is unimportant there is likely to be no pit and where there has ceased to be this occasion for a pit the structure is likely to be removed. In Chicago there are four pits on the main or trading floor of the Board of Trade building. These are for wheat, corn, oats, and provisions. The sample tables for trading in cash grain occupy a comparatively inconspicuous place at the side of the room. The extent of provision for cash trading is commonly more conspicuous. At Minneapolis, most of the trading floor is taken up by sample tables, but there are also two pits. On other exchanges a single pit serves for all futures.

HOURS OF TRADING.-The hours of future trading on the Chicago Board of Trade are from 9.30 o'clock to 1.15, except on Saturday, when the hours are from 9.30 to 12. Privileges are traded in after the close of the regular future trading, from 1.30 to 2.30. The pit trader in futures and privileges is therefore busy almost continuously, if the market is active, from 9.30 to 2.30.

The privilege of going on the floor, except as a visitor with a cară of admission, is open only to members. Only members can trade.

CLASSES OF TRADERS IN THE PITS AT CHICAGO.-Theoretically, any member of the Board of Trade may execute a future trade in the pit. Actually, pit trading is a specialized occupation. It is done to some extent by old members of the Board, who have other interests, but who still go on the floor of the exchange and trade for themselves or customers. Such a trader may be giving most of his attention to cash-grain customers. Some large traders who are frequently on the floor never execute their own orders.

The men who spend their time in the pit are of several classes. Some of them work on a salary, especially those who represent the wire houses, executing orders telephoned to the trading floor from the office of the wire house. Such pit traders usually trade also on their own account to a greater or lesser extent, depending somewhat upon the degree to which they are kept occupied with orders from

1 Prior to the amendment of the rules referred to in sec. 9 of this chapter.

their employers. Some of the large wire houses may have as many as a dozen men in the different pits, perhaps three or four in wheat, and one or two each in corn, oats, and provisions.

1

Besides these pit traders on salary, there are pit brokers, who make an occupation of pit trading for others, but who work, so to speak, on a piece basis. The brokerage charged is $0.75 per 5,000 lot, either bought or sold. Prior to 1918 it was 50 cents per lot. Men who make a business of such brokerage are also likely to trade on their own account. All are said to trade more on their own account when the orders that come their way from others are comparatively few.

Another class is the independent pit scalper, who trades exclusively on his own account, or at least is not trading for others on a salary or brokerage basis as a regular thing. Some of these pit scalpers have a few customers for whom they execute trades on the regular commission basis. Some of them clear their own trades. Only those who clear their own trades are allowed to execute orders for others except on a brokerage basis.

The larger number of professional pit scalpers clear through others. There is a special rate (see p. 86) commonly referred to as a "clearing" rate, for this class of commission business. A considerable number of local commission houses have chiefly this class of business. In some cases pit scalpers have formed partnerships, principally for the purpose of doing the necessary bookkeeping and clearing for the group.

Some pit trading is done by the floor men of cash houses, who are usually occupied at the cash tables, but who may go into one or another of the pits to execute an occasional order in a future. More often a cash house that receives orders to be executed in the pit will turn them over to some one regularly in the pit who acts as broker for it.

Altogether, the extent to which trading members who do not make pit trading an occupation enter the pit for thẻ purpose of executing orders is comparatively small. Some members prefer to stay out of the pits, feeling that the atmosphere there is not conducive to sound judgment with reference to the long turn.

The largest of the Chicago pits will comfortably accommodate 150 traders. The number of men in the pits for trading purposes at one time may go above 300. Nearly all those present trade more or less on their own account, but the number of professional scalpers is somewhat less than a majority. A few houses do not allow their pit traders to trade on their own account, but most of them are compelled to do so in order to get competent men for the work.

Prior to the amendment of the rules referred to in sec. 9 of this chapter.

Some pit brokers do little or no trading on their own account. But both the salaried and brokerage class of pit traders are in general heavily interested in scalping.

The special characteristics of the pit-scalping trade will be the subject of discussion in another connection. (See the chapter on this subject in Vol. VII of this report.)

The above description applies to the Chicago Board. There is much less future trading, and especially much less scalping of futures, or trading for small differences by men who have no business interests outside of the pit, on other exchanges. Conditions are different in proportion to the difference in activity or volume of trading. As regards the conspicuousness of the professional scalper, indeed, they are probably different in greater proportion than the difference in volume. Elsewhere than at Chicago the place of the scalpers in maintaining a continuous market is largely taken by houses that specialize in spreading between markets; that is, in buying on one market and coincidentally selling the same option on another with reference to obtaining profits from fluctuations in the difference in price from one market to another.

Section 4.-Quotations.

THE CLEVELAND TELEGRAPH Co.-The Cleveland Telegraph Co. is in effect the quotations department of the Chicago Board of Trade. This is a separate corporation, the entire stock of which is owned by the Board. It was organized in 1900 for the purpose of collecting and distributing the Board's quotations. At that time there was a sharp controversy between the Board and the public telegraph companies on the subject of keeping the future quotations away from the bucket shops, and the Board contemplated building its own telegraph lines between the important terminal markets.1 The Cleveland company has become, however, merely the agency of the Board for collecting the continuous quotations of futures, which it supplies to the telegraph companies and to certain subscribing local members.2 It has the exclusive right to record and distribute quotations of the prices at which transactions take place in the pits.

THE 10-SECOND PRICE RECORD.-Price reporters of the Cleveland company are stationed at each pit, sometimes two being assigned to a

See Vol. II, Ch. III, sec. 10.

2 The agreement with the telegraph companies, dated April 15, 1901, included the following:

"The Board of Trade agrees to employ or cause to be employed without expense to the party of the second and of the third part a sufficient number of competent persons for the purpose of collecting and transmitting the said quotations of sales upon said exchange, including the necessary force of messengers for carrying said messages of sales and reports to the transmitting operator, so that the parties of the second part and of the third part shall obtain complete and continuous quotations throughout all the sessions of said Board of Trade of the prices at which commodities dealt in on such exchange are bought and sold."