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The exchanges are required to furnish the Secretary of Agriculture promptly with copies of bylaws, regulations, and changes therein, and to allow inspection of their books, records, minutes, and so forth, as well as the records of their subsidiaries. Exchanges also must require warehouses, in which or out of which commodities are delivered on futures contracts, to make reports, keep records, and permit warehouse visitation, as required by the Secretary of Agriculture.

The Grain Futures Act, as amended, will be known by the short title of “Commodity Exchange Act.” The word "grain”, wherever it appears in the act, will be stricken and the word "commodity” or “commodities" substituted.

The word “commodity” is defined to mean wheat, corn, oats, barley, rye, flaxseed, grain sorghums and mill feed.

In its amended form, the act will be readily applicable to any other commodity which Congress from time to time might determine should come within the protection of the act.

Now, these are the principal provisions of the pending bill. They appeal to us to being entirely reasonable and fair. They will not hamper or interfere with any legitimate market or speculative activity. They provide only such measures of governmental regulation and control as are appropriate and needful, if the exchanges shall at all times live up to their responsibility as public markets entitled to public confidence.

Mr. GLOVER. Mr. Chairman, I would like to ask a question right there. The CHAIRMAN. Mr. Glover. Mr. GLOVER. Mr. Mehl, in section 2, I notice that you change the present Grain Futures Act by striking out the word “grain” wherever it appears, and inserting in lieu thereof the word "commodity" or "any commodity", or "commodities.”

Mr. MEHL. Yes.

Mr. GLOVER. And in section 3 (a), the word "commodity” is defined. In that section you use the following words:

“The word 'commodity' shall mean wheat, corn, oats, barley, rye, flaxseed, grain sorghums, and mill feeds."

Now, in that you are leaving out one of the most important grains that I know anything about. At least, the greatest in my section of the country, and I was just wondering why you leave that out. I refer to rice.

Mr. MEHL. I was almost certain you would take offense at that, although that is not why we left it out, Mr. Glover, of course.

Mr. GLOVER. Then I assume that you would have no objection if I should offer, at the proper time, an amendment to take care of that.

Mr. MEHL. We will have no objection whatever to that, Mr. Glover. I might say that the only reason we left it out was because we have been unable to find a futures market in rice. Now, it may be that there is one.

Mr. GLOVER. I think I can point one out to you; and I will do that for your benefit.

Mr. MEHL. I do not think we will have any objection whatever to having rice included. Mr. GLOVER. All right.

The CHAIRMAN. Any further questions? If not, we desire to thank you, Mr. Mehl.

Mr. MEHL. Thank you.
The CHAIRMAN. Dr. Duvel.

STATEMENT OF DR. J. W. T. DUVEL, CHIEF, GRAIN FUTURES ADMINISTRATION,

DEPARTMENT OF AGRICULTURE Dr. DUVEL. Mr. Chairman and members of the committee, Mr. Mehl has given you a little résumé of the Grain Futures Act and the present proposed bill; and, as he says, we feel, on the basis of our experience for the last 10 or 12 years in administering the Grain Futures Act, that there is nothing in the present proposed bill that would interfere in any way with fair and honest trading in futures by those handling orders for customers..

I shall give only a brief statement for the record covering a little more history of the trading in grain futures.

Future trading in grain originated in Chicago approximately 75 years ago. Rather early in its history speculative operations assumed a very important part in the sale of grain for future delivery. This naturally was followed by complaints from producers and others, resulting from what seemed to be unwarranted price fluctuations. These complaints, in turn, reached Congress with a demand for legislation to prevent or to control sales of futures for speculative purposes. The first bill was introduced in the Forty-eighth Congress, in 1884. Hon. Seaborn Reese, of Georgia, introduced this bill. Its purpose was to prohibit by denying the use of the mails. The second bill was introduced in the Fortyninth Congress by Hon. Clifton R. Breckenridge, of Arkansas. This bill was to regulate futures trading.

However, 37 years elapsed before legislation was enacted. In 1921 the Futures Trading Act, providing for regulation of grain exchanges, became a law. It was immediately attacked in the courts, and its regulatory provisions were declared unconstitutional as an unwarranted use of the taxing power. Congress followed with a similar measure based on the interstate commerce clause of the Constitution. This act, known as the “Grain Futures Act of 1922", was contested in the courts, which resulted in a sweeping decision by the United States Supreme Court upholding the constitutionality of its regulatory provisions. This is the act under which we are now functioning.

The Grain Futures Act provides for the licensing of futures exchanges trading in grain, gives certain rights to cooperatives, requires that books and records shall be open to inspection, and that such reports shall be furnished as the Secretary may direct. It also provides for such investigations as the Secretary may deem necessary in the interest of the public and for the information of Congress.

Prior to the passage of the Grain Futures Act information as to the volume of trading or the volume of contracts open on the Chicago Board of Trade was not available. It was not known even by the officials of the board. This information 'is now compiled by the Grain Futures Administration and made public each day. This knowledge serves a very useful purpose. Reports also are required covering all accounts involving a specified number of bushels. Since last July these reports cover all accounts of 200,000 bushels or more. By this means a very close supervision is maintained over speculative activities, and the mere fact that such accounts must be reported aids materially in curbing excessive speculative operations detrimental to the market. Unfortunately, however, the act contains no authority to limit excessive speculative operations on the part of traders who, at times, buy or sell in quantities larger than the market can absorb without a wide and unwarranted movement in price.

I want to point out some of the high lights in our experience in administering this act during the past 10 years, more particularly to suggest to you questions that you might like to ask in order to bring out the facts which should be presented for the record, before going into the principal feature in the proposed bill, which limits individual speculative lines.

An intensive study of the effects of large-scale trading on price movement has shown that concentrated buying or selling of wheat futures in amounts of 2,000,000 bushels or more results in an abnormal price movement in more than 80 percent of the cases. Trades within a day by a single individual in much larger amounts are not uncommon. Our records show that occasionally the transactions of a single trader amount to more than 10 percent of the day's business. Operations of this kind in no sense represent a free and open market.

In the matter of open contracts, very similar situations arise. Individual speculators frequently accumulate lines of 5,000,000 bushels, and occasional much larger amounts. These lines are sometimes “long" and sometimes "short." However, inasmuch as those commonly referred to as the general public are generally buyers for “long” accounts, the professional speculator is likely to find his most profitable field in short selling.

One of the most outstanding examples of short selling in inordinate amounts was a case where two traders, designated as A and B, held 32.6 percent of the contracts open in the dominant future, their combined holdings being nearly 23,000,000 bushels short. They were not carrying “hedges”, as is so frequently claimed for the large speculator, and there is no question but that their selling exerted a very depressing influence on prices to the detriment to the wheat producers who were at the time in the midst of their market operations. While these large short lines were being accumulated, the price of the December future declined nearly 18 cents per bushel. That was from about the middle of July until the 8th day of September. May I call your attention to charts 1 and 2, the former showing the combined position of 42 traders and the latter the position of two of the group. Mr. HOPE. That was this last year? Dr. DUVEL. That was in 1926. Mr. HOPE. In 1926.

Dr. DUVEL. That was in 1926. The United States wheat crop that year was 831,000,000 bushels. The short sales by these two traders represented nearly

3 percent of the entire crop. It was equivalent to 15 percent of the crop of the great wheat State of Kansas. It was 30 percent of the Oklahoma crop that year. It was more than 50 percent of the crop of each of the States of Ohio, Illinois, Nebraska, Montana, and Washington; two and three-fourths times the wheat crop of Iowa. It was nearly twice the production of each of the four States of South Dakota, Maryland, Virginia, and California, and was about one and one-third times the crop of Michigan.

The most prolonged and persistent short selling by large traders covered the period from April 1930 to October 1932. Over the period of more than 242 years the large speculators who held futures in amounts of 500,000 bushels or more, when taken as a group, were net short 643 days out of a total of 769 days, or 83.6 percent of the time. The more important features of these transactions are fully set forth in Senate Document 61, of the Seventy-third Congress, which is a report submitted by Secretary Wallace under date of May 13, 1933.

I might state that the document is very brief, and if you have not read it, I think it would warrant your going over it carefully.

In order to secure a more comprehensive picture of operations in wheat and corn futures, an investigation was made covering the market position of all traders as of June 30 and their trading on July 1, 1931. A report of this investigation is now in course of preparation. Of a total of 9,525 traders in the market, 7,000, or 74 percent, were speculative. The number of traders on the long side of the market was four times greater than the number on the short side of the market. In other words, there were 4 buyers to 1 seller. And, I might add, that is usually the case; that is, a great deal of the time you have more buyers in the market than sellers. That is true by reason of the fact that the buyers are made up largely of the general public, the people who trade in small lots, while the sellers are usually the large professional traders and the hedgers.

Of more than 5,000 traders who had an open interest in wheat futures on June 30, 1931, a total of 2,224, or 21 percent, held job lots only; that is, less than 5,000 bushels. Of the 5,000 traders in wheat, 3,973, or nearly 80 percent, were speculators. Of these 3,973 speculators, 3,174, or 80 percent, were long; 548, or 14 percent, were short; and 251, or 6 percent, were both long and short.

Of the 3,174 speculators who were long, 762, or 24 percent, held but 1,000 bushels each. An additional 561, or 17 percent, held 2,000 bushels each.

There was a total of 1,592, or 50 percent, of the traders holding a long position, who were interested in job lots only; that is, less than 5,000 bushels; including the small traders, who were long an even 5,000 bushels, there was a total of 2,309, or 73 percent.

This is representative of the traders who carry not only the hedging load but the weight of the short selling by professional speculators whenever they are operating on the short side of the market. This is more clearly set forth in the fact that on July 1, 1931, one trader sold 1,200,000 bushels; and another 1,000,000 bushels. The combined sales of these two traders, aggregating 2,200,000 bushels, offset the purchases on that date of 663 small traders.

The CHAIRMAN. How much wheat was actually delivered on that date? Have you that information?

Dr. Duvel. No; I do not, Mr. Chairman. The quantity of wheat delivered normally under these contracts averages about one-fourth of 1 percent of the total volume in the transaction.

The short sales of these 2 large traders represented more than 6 percent of the day's business, and at the close of the market 1 of these traders was short 5,420,000 bushels, or 6.6 percent of the total contracts open on that date. The market closed with a net loss of 274 cents per bushel.

It is important, however, to keep in mind that large speculative traders are not always short sellers. That was very clearly demonstrated during the sharp advance in wheat prices last summer. Imbued with sincere confidence in the President and aided by the prospective short crop, speculators, both large and small, were eager to buy wheat futures. This orgy of speculative buying unfortunately resulted in a too rapid advance in prices and the accumulation of excessive speculative lines.

When the reckoning day came and some of the larger holders attempted to take profits, while others sold short in the apparent belief that prices were too high, there was a precipitous decline of more than 25 cents per bushel in 2 days. This occurred on July 19 and July 20, 1933. Subsequently, about the middle of October, there was another drastic decline and the evidence shows that the market would have been completely demoralized as a result of excessive speculative

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activity had it not been for the prompt action of the Government in making purchases of large quantities of wheat for emergency relief.

- Ability to deal adequately with the situation at that time was aided materially by the information which the Grain Futures Administration was in position to supply as a result of reports covering all important accounts.

As previously stated, our studies show that concentrated large-scale operations result in abnormal price movements in more than 80 percent of instances. In this connection, it is necessary to keep in mind that markets do not advance because there are more purchases than sales; neither do they decline because there are more sales than purchases. The two are always equal. There cannot be a purchase without a sale. Prices, however, are influenced more by the manner in which purchases or sales are made, how the orders flow into the market, and how they are executed, than by the volume alone. For example, our studies show that successive sales from a single source aggregating two or three million bushels in the course of an hour's trading exerts a far greater influence upon price than the same volume of orders originating from widely different sources and executed in small amounts.

It is often contended that large traders merely anticipate price changes, that by their better foresight and greater ability they are able to determine in advance when conditions justify an advance or decline in price of a kind to give them a profit.

If we accept this assumption, then we must also assume that the ability to prophesy is in some way passed around from day to day from one speculator to another. We must assume also that the ability with which each trader is able to pierce the future and to properly measure the fundamental factors which influence the market is directly proportional to the extent of the price movement. But when measured by this yardstick, it is apparent that these large traders do not successfully anticipate price changes. On the other hand, the evidence accumulated shows, in the majority of instances, that these wide price changes are due primarily to the sheer force of large-scale trading. Putting on a load greater than the market can absorb without moving prices out of line always results in wide price fluctuations.

The theory is frequently advanced that large speculators are necessary to carry the hedges. If this were true in the fullest sense, their trading should be larger in years of abundant supply when heavy stocks accumulate. On the contrary, speculators are more active in years of short crops and small supply. This applies to small speculators as well as large-scale operators.

It is also contended that short selling by large traders increases as prices advance and diminishes as prices recede. This is on the theory that short selling is a price stabilizer in that it prevents prices from going too high, and that covering keep prices from going too low. Investigation, however, shows that large traders more frequently sell short on declines than on advances in price. Experience teaches them not to fight an advancing market, but to do heavy selling after the top has been made and prices turn downward.

The covering of a large short position is equally well managed by the experienced trader. The statement is made frequently that a short seller is a potential buyer. Theoretically, this is correct. His short sales must be closed by buying back the same future; that is, he must cover his short position, assuming that he does not intend to deliver the actual grain. Those who stress this view make every effort to leave the impression that the short seller covers his position by buying back his futures openly in the pit. This view sounds right to those who do not know the technique of the large professional traders. It can be and sometimes is done that way, but professionals generally resort to a method which is much more profitable to themselves. They resort to the use of “privileges”, or what is more commonly known as "puts and calls."

It is only fair to say that the grain exchange code recently approved by the President eliminates the trading in privileges. But at the same time I want to give you some of the background to show how large speculators operated through the use of privileges.

Covering through privileges can be explained best by examples of actual transactions. For instance, on the 17th of a certain month, when farmers were marketing wheat heavily, one trader was short 3,815,000 bushels. At the close of the market on that day, he sold bids, good for the next day, to the extent of 1,200,000 bushels. On the following day he sold in the futures market an additional 300,000 bushels, thereby materially aiding in forcing the price down through the bids.

The market closed at a loss of 244 cents. Bids were good. While he was not able to secure futures for all of the bids sold, there was put to him 600,000 bushels. Thus he was able to cover 600,000 bushels at an artificially depressed price, which was influenced in part by his sale of futures amounting to 300,000 bushels.

On the 19th of the month he again sold futures to the extent of 1,200,000 bushels, increasing his short position to 4,715,000 bushels, and the market closed with a net loss of three-fourths of a cent. On the same day he sold bids good for the next day to the extent of 1,000,000 bushels. The following day he added to the weight already on the market by selling an additional 500,000 bushels of futures, bringing his total short position up to 5,215,000 bushels.

The price broke 17 cents, and the market closed 15 cents lower. Bids again were good and the 500,000 bushels sold by this trader helped to make them so. There was put to him on bids 735,000 bushels, thus reducing his short position by that amount without purchasing a single bushel in the open market.

This is the way some of the “potential" buyers operate.

I give you that background as an illustration, because we find a large proportion of the large traders, as a rule, entering the market by selling short, and subsequently covering through bids. They can operate to better advantage on the short than on the long side, because the general public, as a rule, are buyers and not short sellers. The general public comes into the market on the buying side. They do not know how to sell short.

And, as I have stated previously, we find that there are from 4 to 5 buyers to 1 seller. They represent all classes of persons and are widely scattered throughout the country. But as to the volume, the speculative selling is concentrated in a few hands.

In this connection I wish to refer to the period from April of 1930 to June 1932; that is, when our prices were declining. That is the period when the large traders were short 643 days out of a total of 769. That is pretty well illustrated by chart no. 3, which covers the period from April 1930 to June 1932. If you will take occasion to examine Senate Document No. 61, of the first session of the Seventy-third Congress you will find a much fuller explanation of the important points. You can tell from this chart where the crest appears. The heavily shaded portions show points of speculative short selling.

Mr. HOPE. May I ask a question there?
The CHAIRMAN. Mr. Hope.

Mr. HOPE. What constitutes the largest operation or transaction that you have a record of?

Dr. DUVEL. We have had a number running over 2,000,000 bushels. During the 10 years prior to March 1933 there were 16 speculators that reached 2,000,000 bushels or more. There was one at 16,000,000, and here is another at 8,000,000 or 10,000,000.

Mr. HOPE. What is the largest single case?
Dr. DUVEL. I beg your pardon?
Mr. HOPE. The largest speculative transaction?

Dr. DUVEL. That is evidenced here on this chart. At that time two traders had 23,000,000 bushels. That was in 1926. At that time they controlled 32.6 percent of the total contracts in the dominant futures, their combined holdings representing nearly 23,000,000 bushels short. The general public was supporting the market and carrying the extra load occasioned by the selling of these two speculators.

During the collapse in the market last year most of the large accounts were on the long side. We had one series of accounts under single control that ran practically 16,000,000 bushels long.

Another series of accounts, involving five traders acting on the advice of a single individual, aggregated around 20,000,000 bushels long. Large lines of this character invariably exert a very disturbing influence on the market before they are closed out. The character of these accounts is shown in chart 4.

In the former case the accounts were lodged in three different sections, one coming out of New York, another from Chicago, and a third from the Pacific coast, but under single control.

This chart, no. 5, represents the market position of 13 different accounts, controlled by 10 traders, and involving approximately 30,000,000 bushels. In their efforts to take profits the price collapsed. A single group during the 2 days of July 19 and 20 liquidated a little over 6,000,000 bushels. The entire group liquidated 15,000,000 bushels. The market will not absorb 15,000,000 bushels without affecting the price very seriously.

The CHAIRMAN. Why do those who are engaged in these operations object to having their names disclosed?

Dr. DUVEL. Traders give many reasons for objecting to disclosure of names, To disclose names of large traders and their market position would, of course.

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