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speculative business done by the latter. The correspondent may thereby be prevented from accepting some undesirable trade. It is also thereby made more difficult for the correspondent to "bucket " trades or match the orders of his customers against each other, thereby retaining the whole commission instead of a share of it, of course in violation of the rules of the Board, which require the actual execution of trades in the pit.

It is felt to be necessary to "protect the trade" against unwise or unethical conduct on the part especially of small "country" dealers. It is said that the customers themselves feel more secure if their individual accounts are placed on the books of the Chicago house. Some of the largest wire houses do not thus carry the individual accounts of correspondents' customers, but most of them appear to follow this practice to some degree. A wire house will handle the business of some correspondents in one way and some in the other.

In the case of a branch office operated by an employee of the Chicago house all accounts are, of course, kept at the main office. It was formerly held by the directorate that the Chicago house could not properly keep the books for its correspondents on the ground that this was performing a service for them in violation of the commission rule. On May 26, 1914, a rule was adopted which authorized the division of commissions and also permitted the rendering of accounts (in other words, the mailing of purchase and sale slips) direct to the customer, though that result was not specifically contemplated. The practice in question is often referred to as "rebating" the correspondent, and it was more or less common for many years before thus specifically legalized. It appears that the directorate did not, at the time of posting this rule, recognize that this would be done in particular for correspondents rather than for local members. But no action was taken to prevent such extra service to the correspondent when the matter was called to the attention of the directors by the committee on violation of rules. Later the directors specifically approved of keeping correspondents' accounts in Chicago in the several cases referred to them with regard to permissibility under the commission rule. At the same time the Chicago wire houses concerned guaranteed to the members of the Board and to

1 The clause reads as follows: "A member (meaning also a firm or corporation entitled under the rules to members' rates) may secure and turn over business in grain or provisions, for future delivery, coming under the provisions of this section, to the other members of this association to be executed; and it shall be in order for the members executing such transactions, if so instructed by the party turning the business over to them, to render accounts therefor direct to the nonmember customer, at nonmembers' rates, and to allow to the members turning the business over to them members' rates on the same, i. e., one-half of the foregoing minimum rates of commission; provided that all such business shall be turned over free of all expense to the executing member." Rule XIV, sec. 4, G.

customers the financial responsibility of two correspondents in question in these cases.

THE MINNEAPOLIS SITUATION.-At Minneapolis there has also been an evolution away from prohibition of splitting commissions, and in the direction of the keeping of accounts for the individual customers of correspondents at the head office. A resolution of the directors of the Chamber of Commerce dated July 12, 1910, reads in part, as follows:

The board of directors deems it a violation of the commission rule for members to solicit futures business in other exchanges through individuals whose payment for services is dependent in any form whatever upon a commission or percentage basis.

Again on January 25, 1916, this principle is confirmed in the following terms:

After due consideration it was the opinion of the board of directors that resident members could not divide the commissions earned on business transacted for nonmembers except with other resident members, and this would apply to both cash and future transactions.

But on September 21, 1917, among other regulations regarding solicitors then adopted, is a provision in section 2, that "the compensation of the solicitor shall not exceed one-half of the commission earned by his employer." Another article reads:

The members of the Chamber of Commerce at Minneapolis shall record the transactions in the name of the principal and not in the name of the solicitor, and shall render accounts of purchase and sale direct to the principal, charging the regular rates of commission to the principal as provided by the rules.

This provision specifically applies, with regard to the keeping of accounts of correspondents' customers, the procedure recognized by the Chicago Board. It should be noted that there is only one wire house having a head office at Minneapolis. The above provisions are applicable to correspondents and solicitors depending upon public wires.

THE QUESTION OF THE RESPONSIBILITY OF A HEAD OFFICE FOR CORRESPONDENTS. The question of the possible responsibility of Chicago houses for their correspondents has been a frequent subject of consideration by the directors of the Chicago Board. The manager of a branch office is a mere agent of the main office and there is in that case, of course, no room for doubt as to responsibility. The correspondent, on the other hand, is conducting business on his own account. But he is presumably a member of the Chicago Board and advertises that fact, and is also likely to exploit the name of the Chicago house with which he has private wire connection. Under such circumstances the customer may obtain the impression that he is entrusting funds to the care of the Chicago house, and in any

case, he is entirely warranted morally, if not legally, in assuming that the Board is interested in the conduct of its members.

These questions were discussed at length by the board of directors in 1915 and rules framed and recommended by the rules committee, both to prevent such acts on the part of a correspondent as might lead the public to believe the Chicago house in any way financially responsible for his operations and to give the directors powers of audit and examination of correspondents' books. Later in the same year a recommendation of the same purport, also including proposed rules, was made by the market-reports committee, and it was adopted by the directors and posted for vote by the membership. This was after the Board's counsel had stated his opinion that correspondents constitute a class by themselves to a degree sufficient to make rules specially relating to such members legally sound. The arguments for the proposed rules presented in a circular to members under date of November 29, 1915, were as follows:

Because of lack of understanding of our rules or otherwise, certain nonresident members, doing business in their own names as correspondents of members here, have created scandals involving the good name and dignity of this association in their locality. The proposed amendment will place within the authority of the association the means of obtaining accurate information of the business methods used by all nonresident members acting as correspondents and enable it to correct undesirable practices, chief among which has been their continuing in business after they have become insolvent, with resultant heavy losses to their customers.

The Hughes Commission, appointed by the Governor of the State of New York to investigate speculation in securities and commodities, in its report, in part, said: "It is a deplorable fact that with all their power and ability to be informed, it is only after a member or firm is overtaken by disaster causing serious disturbance, involving scores of innocent persons, that the exchange authorities take action. No complaint can be registered against the severity of the punishment then meted out, but in most cases the wrongdoing thus atoned for might have been discovered by a proper system of supervision, and the vastly preponderant value of prevention over cure demonstrated." A law has since been enacted in that State, with a penalty of a maximum fine of $5,000 or imprisonment of two years, or both, making it an offense for a stockbroker or commission merchant to receive any money from a customer ignorant of such stockbroker or commission merchant's insolvency, and who thereby causes the customer to lose a part or all of it. The same commission recommended supervision of books by the exchanges as a preventive and a cure. There is a genuine need of action by this association of the nature provided for in the proposed amendments.

But no such rules were finally adopted by vote of the members. SUPERVISION AND AUDIT OF CORRESPONDENTS BY THE BOARD.-However, the board of directors, apparently on the basis of their regulatory powers, have attempted a degree of supervision over correspondents. A traveling auditor was appointed in 1915 and has acted on the initiative of the directors without reference to complaints

previously made, despite doubts as to the sufficiency of existing rules. But such audits have apparently not been systematic or remarkably successful. In one case a Philadelphia firm was compelled to restore to its customers large sums wrongfully taken from them, but the responsible party is still active in business as a member of the Chicago Board of Trade. The disciplining of several correspondents may be attributed to the same measures.

On October 16, 1917, a special committee on nonmember correspondents recommended an amendment to the rules providing that any house doing business for such a nonmember correspondent assumes responsibility for losses and violations of rules due to his acts the same as if they were acts of the resident member. No action was taken.

CORRESPONDENTS RELATE TO PRIVATE WIRES.—Although it is natural and substantially correct, at least as regards Chicago houses, to think of the correspondent in connection with private wires, there are some correspondents—that is, dealers who as a regular business submit orders for others who use the public wires. They are comparatively unimportant. Occasionally a private-wire house will have a public-wire correspondent.

The control of branch offices and correspondents, as superposed upon the ordinary control over members and upon an adequate censorship of news, completes the control of private-wire systems. Section 9.-Rates of commission.

THE MEMBER, AND NONMEMBER RATE AT CHICAGO.-A fundamental rule of the Chicago Board of Trade relating to commissions on futures is as follows:

For the purchase or for the sale or for the purchase and sale by grade alone of wheat, corn, or oats to be delivered in store, either for immediate or future delivery, $7.50 per 5,000 bushels or multiples thereof, and $2.50 per 1,000 bushels or multiples thereof for delivery in lots of less than 5,000 bushels.'

The member rate is half the full rate on 5,000-bushel lots, that is, $3.75, and $1, or somewhat less than half the full rate, on 1,000 lots. Both these rates are given as of 1918.

THE RATE IS FOR BUYING AND SELLING OR FOR EITHER.-It is significant that the commission for handling future trades is for both buying and selling. The covering or liquidation of a future contract in the pit probably involves rather less work for the commission house than its completion by delivery. Furthermore, it is seldom that either the speculator or the hedger wants delivery, hence it is practical to assume that the trade will be closed in the pit. Since there is a single charge for the two transactions, there is no occasion to make any entry in the customer's regular ledger account until the

1 Rule XIV, sec. 4 B.

trade in and out is complete, when the commission, together with taxes, is added to or deducted from the loss or gain in rendering the "account purchase and sale."

THE "CLEARING" RATE.-There is a special rate of $1.25 per 5,000 bushels for less than the complete handling of the transaction, in effect for accounting and clearing, the charge being commonly said to be “for clearing." This is open only to members trading in the pit who execute their own trades and is subject to limitation with regard to the time during which the trade remains open. The rule covering this is as follows:

To members who personally do their own buying and selling, but who clear their trades through other members, the minimum rate of commissions on all transactions opened and closed within 10 days shall be 25 cents per 1,000 bushels of grain.

3

This is in effect a special rate to pit scalpers, though, of course, other. members may execute trades for themselves and are likely to close at least some of them within the 10 days. Under such circumstances, if the latter pay commissions instead of clearing their own trades, they obtain the $1.25 rate. On the other hand, a scalper may occasionally leave a trade open more than 10 days, in which case he pays the member rate, subject to deduction for brokerage, as described below.

It will be noted that there is no distinction made between 5,000 lots and 1,000 lots as regards the rate to scalpers. This rate as a whole is based upon general considerations of policy rather than upor unit cost. The member rate on job lots is similarly less in proportion to the nonmember rate than in the case of 5,000 trades.

PIT BROKERAGE.-The above rates for members are subject to deduction for brokerage as follows:

*

*

* 15 cents per 1,000

For the purchase or for the sale by grade alone bushels for delivery in lots of 5,000 bushels or multiples thereof, and 25 cents per 1,000 bushels for delivery in lots of less than 5,000 bushels.*

Pit traders who regularly execute trades for others on this basis instead of on salary are called "give-up" brokers, or pit brokers.

A commission house may either employ its own pit traders or have its future trades executed in the pit on a brokerage-in effect a piece rate-basis. In fact, however, all the considerable commission houses handling outside trade pay (or prior to 1919 paid) their pit traders salaries instead of brokerage. Attempts have been made to put all pit trading for others on a brokerage basis. But it has been felt that

1 The customer's commitments are posted only to the customers' option ledger until a trade is closed. (See Ch. V, sec. 2.)

2 For a detailed description of methods and results of clearing futures, see Ch. V, secs. 4-6.

3 Rule XIV, sec. 4 II.

4 Rule XIV, sec. 2 B.

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