2

described in a later section. The rule also provides that "when the actual grain is delivered on future contracts the regular commission on [cash grain] consignments shall be charged." This is similar to the Minneapolis provision, but the possibility of resale by way of the futures market is apparently not covered.

MEMBER RATES AT MINNEAPOLIS AND KANSAS CITY.-Member rates at Minneapolis are "not less than one-half of the regular rates of commission." The brokerage rate at Minneapolis is not less than 15 cents per thousand bushels, and the rate that is above described as "for clearing" is 25 cents per thousand. The availability of the rate for clearing is not limited with reference to the time during which a trade may be left open. The rates are slightly different, but the general system is the same as at Chicago.

3

At Kansas City the member rate is $3.12 per 5,000; the rate for clearing, $1.50 per 5,000; and brokerage or futures, $0.50 per 5,000.* The clearing charge is not available where the trade is carried for more than one day, whereas at Chicago the limit is 10 days.

THE TENDENCY TO AN INCREASE IN COMMISSION RATES.-The tendency of the Chicago Board of Trade has of late been toward an increase in commissions charged. An attempt made in the summer of 1918 to increase the nonmember rate to $10 per 5,000 and the member rate to $5, leaving the scalper rate unchanged, failed to get the necessary votes. Following is a tabular statement of rates in force at Chicago. and of changes made in the last 30 years: 5

1 See Ch. III, sec. 2.

Rule XXI, sec. 9b.

3 The compensation of a broker may be arranged between himself and his principal except that in futures such compensation shall not be less than 15 cents per thousand bushels. Members of this association shall not act as brokers for persons not resident members of this association. In the case of members who do their own buying and selling, but clear their contracts through other members or firms, the minimum rate of commission shall be 25 cents for each 1,000 bushels of grain. (Rule VIII, sec. 9.)

4 On future trades, the following scale shall apply: Buying or selling, giving up the name of the principal before the close of the market, per 5,000 bushels, 50 cents.

For buying and selling, closing the trade and clearing same day, per 5,000 bushels, $1.50.

For buying and selling, applying the offsetting trade to the principal through the clearing house, per 5,000 bushels, $1.50.

For buying and selling and clearing when carried for more than one day, per 5,000 bushels, $3.12. (Rule XXI, sec. 9d.)

In 1881-which is the first year in which the commission rates on futures appear in the rules, as printed in the annual reports of the Chicago Board of Trade--the subject as regards grain is covered in Rule XV, sec. 4, as follows:

"The following schedule of commissions is established for the government of members of the association as the minimum rates of charges for the purchase and sale or purchase and shipment of the several commodities named, whether the property be purchased for an immediate or contracted for a future delivery; and whether the contract for purchase or sale be first in order in the transaction, to wit: In cases where the transaction is made by the order or for account of parties not members of the association; for the purchase and sale of property in the Chicago market; in all kinds of grain in lots of 5,000 bushels or more, one quarter of a cent per bushel. In cases where the transaction is made by order or for the account of parties who are members of the association, the minimum charge shall be one-half the above rates. For brokerage where the

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name of the principal is given on the day the transaction is made, and the broker thereafter ceases to be considered as the principal: In all kinds of grain, 25 cents per 1,000 bushels."

1 Pit brokerage for 1914, $0.10 for a 1,000 lot.

2 There is added also the provision for" Foreign rates, exclusive of the Dominion of Canada, five-sixteenths of 1 cent per bushel to nonmembers and one-quarter of 1 cent per bushel to members."

RATES FORMERLY UNSETTLED AND MUCH REBATED.-The rates shown in the rules for the early portion of this period may be taken with a grain of salt. While according to the rules of 1887 a member violating the commission rule incurred the penalty of suspension for a first offense and expulsion for a second, the penalty clause appears to have been repealed and rates charged left without effective regulation during the decade of the nineties. The rules were subjected to a general revision in 1883, and commission rates reduced, presumably to the 1887 basis, but no copy of the 1883 rules is available. The rule penalizing the giving of rates below the Board's schedule was repealed in 1885.1 The penalty had apparently been temporarily restored on the basis of lower rates between 1883 and 1885. The proposed adoption of a uniform commission rule was voted down by the New York Produce Exchange in 1882.2 It appears that in the eighties commission rates were only beginning to be settled on a fairly uniform basis.

During the nineties the cutting of commissions was rife and business over private wire from New York was handled for as little as 50 cents per 5,000 lot. Penalties were restored in 1901, or shortly before. From 1905 the penalty has been expulsion from the Board and there is a clause by which the directors of the Board are authorized to offer a reward of $2,500 for evidence leading to conviction of violation of this rule."

REASONS FOR THE DIFFERENCE BETWEEN MEMBER AND NONMEMBER RATES.-The difference between nonmember and member rates may be explained on general economic grounds, the presumption being that a member will trade in much greater volume than a nonmember. In commercial practice discounts " to the trade," or to those who are regularly in the business, may in large part be explained in this way. Discounts prescribed by a trade association (such as the Chicago Board of Trade) to apply between members, however, have a broader foundation. It is a benefit to the trade that dealers be mem

1 Taylor's History, p. 719. 2 Annual Report, 1883, p. 49. 3 Rule XV, sec. 9, F and G.

bers. Uniformity of trade practices is more effectively promoted. The association can discipline members for "unmercantile conduct." Disputes between members can be settled by arbitration.

Credit relations between members, though also of general importance, are particularly important in connection with future trading. This has been stated to be the principal justification for a member rate half the full rate. The nonmember is not bound to live up to the rules of the Board. Most of the losses on accounts of customers are from nonmembers. Expulsion from the Board at Chicago involves the forfeiture of the value of the membership. Losses from nonmembers in connection with stop orders on futures are particularly heavy. A member who runs over a stop order settles; a nonmember refuses to settle nine times out of ten. The credit relation is particularly important in connection with future trading because of reluctance to attempt to recover losses incurred on a customer's account through legal procedure.

WHY THE SPECIAL "CLEARING" RATE.-AS has been noted above, the scalper's commission rate is commonly referred to as "for clearing.' The correctness of the description does not appear at first sight, since the same books are kept and the same entries made as for any other customer. But the volume of trading is large and in general both sides of the trade are made the same day, since the scalper expects to be even at the close. Hence, the trades settle within themselves and are cleared immediately. The entire day's trading is disposed of on a single account-purchase-and-sale statement. There is no wire expense and no expense for soliciting business-that is, for the operation and maintenance of branch offices and blackboards-chargeable to this class of business. In brief, only a part of the machinery of the modern commission house is used in serving the scalpers.

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However, a good many commission houses do not feel that clearing" for scalpers not in their employ is remunerative. There is some risk in dealing with an unconnected scalper, who may be also clearing through other houses. The low rate is partly a matter of policy and partly competitive. The more substantial scalpers find it cheaper to hire a clerk and clear for themselves. If all did their own clearing, however, the work of making settlements would be more complicated. The scalpers also constitute a considerable body of voters on questions before the Board. They were exempted in the proposed general increase of commission rates that failed to pass in 1918, largely for reasons of Board politics.

ONLY MINIMUM RATES PRESCRIBED.-The rules of the Chicago Board of Trade prescribe only minimum commission rates, and commission houses may at their discretion charge more. Competition, however, supported by the convenience of a generally accepted standard, means that these minimum rates are practically always the actual rates charged. In the South and the extreme West the rates are likely to

be doubled, because of the extra wire expense. It appears that correspondents and others in Europe are not given the benefit of member rates because of the expense of cables.1 There is also at least one house in Chicago that does not extend to pit scalpers generally the benefit of the $1.25 rate, allowing it only for its own pit traders' transactions on their personal accounts. A scalper not employed by the house pays the member rate, doubtless subject to deduction for brokerage, on all trades.

The adoption of a rule providing for a special rate for job-lot trade higher than one-fifth of the 5,000 rate was preceded by the charging of a higher rate on the part of several important commission houses before the sentiment of the Board developed sufficiently to embody this principle in the rules. However, while some houses were taking job-lot business only at a higher commission rate, others were refusing to take it at all. It is as much work to take care of a 1,000-bushel lot as of a 5,000, the only difference being that of increased responsibility on the larger lot. The change in the rules meant giving a better standing to such trading.

TRADE ASSOCIATION POLICY IN RELATION TO RATES.-The fixing of minimum commission rates should be viewed in the light of the fact that the speculative exchanges are trade associations formed to promote the interests of their members. The prescribing of minimum rates of commission is a measure designed to regulate competition. It restricts competition by preventing the lowering of rates below the prescribed minimum. This is done in the interest of members. But it is also doubtless in many respects in the interest of the public. The customer knows what the rates are and will not be tempted to give his trade to a badly managed or unsound concern because of a low or rebated rate. The small and the large trader may expect to receive the same treatment. The commission house is under less temptation to meet expenses or make profits through illegitimate practices, presumably contrary to the interest and rights of the customer.

A system of secret or discriminatory rebates fosters dishonesty. The dishonest broker finds other sources of income besides commissions and therefore is ready to cut first and farthest. Where rates established are the result of a standardization of existing practices, the public certainly suffers no harm. It is possible, however, that once the control of rates is established, the power obtained by a trade association will be used to increase them beyond what is economically necessary. A commercial body can not always be trusted to be entirely impartial as between itself or its members and the general public.

This remark applies before provision was made in the rules of 1919 for a special foreign rate.

WHEN COMMISSIONS NEED NOT BE CHARGED.—Where the price at which a cash transaction takes place is made contingent upon the price at which a future trade is executed, the future, under certain restrictions, may be handled without charging a commission.1

This sort of thing occurs where a commission merchant or elevator that is a member of the clearing house buys or sells hedged grain and simultaneously takes over the hedging future sale or purchase, the consideration for the cash grain being a specified premium over the future. A mill may have hedged flour sales, later exchanging the futures for cash grain with an elevator. An exporter may have sold a cargo of grain for export and bought the future immediately for insurance, then proceeded to pick up the cash grain here and there, exchanging the future wherever possible. The transfer of the future may be at the last closing or the next opening price, or the agreement may be made during trading hours and the future transferred at the market.

Certain kinds of transfers of stocks can be effected under the rules of the New York Stock Exchange without the payment of commissions; for example, the transfer of securities between two customers of the same broker at an agreed-upon price, and transfers between brokers where a customer changes from one to the other. It appears that in both these cases of the transfer of an open future trade at Chicago commissions would be paid. This is partly a logical consequence of the fact that commissions are for buying or selling or for both buying and selling, and also of the fact that such a transfer of a trade from one trader to another involves the making of a new settlement or ring, the same as in the case of a new trade or the regular closing of an open trade. There appears to be a tendency to an increasingly strict interpretation of the rules in the collection of commissions, doubtless associated with the increasing emphasis laid upon the execution of all trades in the pit.

The importance of uniform commission rules is by no means adequately indicated by a description of the rates prescribed. The policies of members of the exchanges in making purchases and sales is regulated in many respects by interpretation of the commission rule. In some such cases there is no good reason why a separate rule should not be adopted and published. These interpretations will be referred to on occasion in various other connections.

1" On all transactions where the purchase or sale of cash grain is made contingent on the price ruling for future delivery, and where the purchase or sale of the future delivery is at once accomplished, fixing by such transaction the value of the cash grain so bought or sold, it shall be construed that the purchase or sale of the future delivery shall be a part of the cash transaction. Should the purchase or sale of grain for future delivery upon which the cash transaction is based be held subject to the convenience or subject to the orders of the parties with whom such transaction is made, then all such business for future delivery shall be subject to the regular rates of commission as prescribed in Rule XIV."-Rule XIV, sec. 9 A.