וסי cause useless fluctuations. There is apparently too mu tion for the quick turn. This applies especially to ou attempt to imitate the scalpers, buying or selling for loss) of a cent a bushel and keeping their trades open or so. The price judgments of such traders do not ma contribution to the market. This type of trader mig extent be kept out by providing for registration of pe ing to speculate in grain futures. A different atmosp commission houses would also help, but this is rather a trade ethics. The use of stop-loss orders should be discouraged, tends on the whole to impair rather than promote stabilit To the same end, very heavy trading of the plunger typ carefully supervised. General statistics of the volum trades from day to day by options 'should be made availa use of traders generally. Rules requiring well defined and adequate margin customers should be adopted by the exchanges. For th traders might have to be classified with reference to t needed. With regard to the customer's convenience-wh quently recognized by the broker in permitting him to pro by depositing securities, such securities being of course hypothecation-as well as in order to lessen the temptat broker to take undue risks in employing otherwise idle ca of customers, it might be made a general rule that se accepted, under proper conditions, for margins. Customer with brokers should be protected as adequately as are individuals with banks. Stricter margin rules would he out of the market an undesirable gambling element. V element may be brought into the market by the solicit broker, the posting of notices in customers' rooms calling tion of the public to the significance of the law with reg recovery of moneys lost in gambling, in States where the vides for such recovery, might be desirable. The broker is a trustee of the funds deposited with him of his membership on a speculative exchange, he is li tempted to use them in speculative and unduly risky ventu may come about either through his own speculations o granting too much credit to certain large speculators. I limiting the extent to which the resources of the house lent or pledged on behalf of any individual, whether I other person, similar to the regulation of loans by natio under the national bank act should be considered. Fu the books of all commission houses receiving deposits public to margin speculative trades or future contracts regularly subjected to Government audit. Certain memb exchanges have voiced objections to corporations havin liability being privileged to become members, a point of which the commission concurs. An extreme development the responsibility of brokers for the funds of customers where exchange members generally are jointly liable on d outsiders with any member. This appears to be in the line ress, although not a thing to be expected in the near futur m. Because likely to be tures. This or through Legislation se could be partner or onal banks urthermore, s from the = should be of view in re. EFFECTS OF FUTURE TRADING Section 1. Introductory. CHAPTER I SPECULATION The processes of future trading--the technique of operations, the rules under which future trading is conducted, the facilities used. etc.-have been described in Volume V of this report. Another volume (Vol. VI) has been devoted to the presentation and analysis of grain prices, cash and future. The main purpose of the present volume is to draw conclusions from the facts previously presented and from others still to be set forth such as may serve as the basis for judgments as to the efficiency and results of the future trading system, both as a whole and in various details and incidents. The general public associates future trading with speculation, although not all future trading is speculation. In the minds of graintrade men, moreover, the defense of future trading as the means of hedging becomes a defense of speculation. The fact is that the func tioning of future trading as at present conducted necessarily involves speculation as an important characteristic. Section 2. Specialization in commercial risk taking. The existence of a futures market facilitates the specialization of the function of bearing the risks that are due to price changes in such staple articles of commerce as can be made the basis of dealings in futures. Historically speaking, speculation by means of futures was a development out of the to-arrive contract by the use of which manufacturers and dealers were able to insure themselves a future supply of materials and commodities at a definite cost. Before such speculation came into existence, the function of bearing the risks of unpredictable changes in supply and price was performed by merchants. THE MERCHANDISING FUNCTION.-The merchant seeks profits from the purchase and assembling of commodities and their distribution and resale at an advance in price. He seeks not only to cover the costs of handling and satisfactory remuneration for the services performed, but also to take advantage of any advance of price, since his profits may be partly derived from favorable price changes. The speculator, on the other hand, while perhaps at times incidentally serving as a distributor of a commodity, is primarily a specialist in price changes, ordinarily buying and selling solely with reference to expected changes in price. Thus the merchant who is close to the producer collects commodities and materials for shipment, in addition to trading in them, and arranging for their transporta 13 shippers assemble small lots for packing and shipping, shipment to the commission man, wholesaler, or manufactu the jobber and retailer distribute the commodities or the into the smaller streams of consumption. The merchant may carry larger or smaller stocks acco judgment of the prospects of his business. This invol The merchant is not necessarily any more concerned with s of materials and commodities than is the producer or ma The fact that a merchant's place of business is general "store," however, indicates the merchant's interest in the risks due to changes in the prices of commodities held duri of time. Even if the merchant holds barely enough goods to shelves he is interested in price changes. He may delibe vide for taking on large stocks when he thinks prices are merchant who conducts his business in this way is, of cou lating. On the other hand, in certain lines of wholesalin chant may sell by sample or by grade and carry substa stock. His "stock in trade," so to speak, is the knowledg and what he can buy on a moment's notice. The handlin is conducted largely in this way by terminal market "ship have no warehouses (elevators). From such situations has the type of merchant who is interested in price differenc grades and varieties rather than in absolute prices. Futur are largely used, both as a hedge and as a standard of re this kind of merchandising. By watching spreads and (or "premiums" for variety or quality) the expert me finds more opportunities for profit in relative prices than be likely to obtain by wide-open speculation in either cash This is one reason why many grain merchants never specul way. Storage, as such-that is, warehousing-does not invo the merchandising function or speculative risk, since the may consist in renting space and accompanying facilitie chants and others. In practice, by the use of the futures m hedging, the speculative risk in holding grain may be larg nated. Thus the warehouseman may become the merchant the grain stored, and by hedging be able to hold it with from price changes. Of course, if the warehouseman sti trade and merely rents space to others who own the grain, are taking the risk of price changes, unless they hedge. THE SPECULATOR'S CONCERN.-The pure speculator (wheth in cash or futures) is concerned with price changes. Thes due to seasonal differences in production and consumption resulting failure of the two to vary in harmony with each to irregular changes in the adjustment between supply and and the resulting scarcity or abundance. The latter occur larly in all such branches of commerce as are affected by agricultural productiveness from year to year. The specul also attempt to anticipate the effects upon values of fina political conditions and changes. ording to his olves storage. such storing manufacturer. ally called a e speculative ring a period to stock his berately prore low. The Durse, specung, the mer tantially no ge of where ng of grain ppers" who as developed ces between res markets reference, in differences erchandiser n he would or futures. late in that bad his judgment, the speculator makes it possible for une mercnant or the manufacturer through hedging to sell his goods for forward delivery with less risk. An important feature of speculation is the practice of selling "short." This process consists essentially in the selling of commodities (or rights to obtain them) by those who do not own them, and perhaps at a time when the commodities are not yet in existence. Without short selling, facility in transferring the risks that the merchandiser or manufacturer does not wish to carry would be impaired. The short seller needs no equipment for his speculation except an opinion and adequate financial resources. On the long side the speculative equivalent of short selling is the buying of commodities (or of rights to them) by those who do not need them for use and do not expect to hold their contracts long enough to obtain actual possession of the commodities. THE SPECULATOR'S POSSIBLE SERVICE.-The skilled speculator is a student of demand-and-supply conditions in the broadest sense, and must have an opinion of the market in order to function efficiently as a risk taker. If the speculator is merely a gambler in a field about which he knows nothing, he tends to increase rather than diminish price fluctuations and associated risks and may, in any case, leave society worse off than it would have been without him. Even so, however, the mere gambler may incidentally help the hedging merchandiser whom he disburdens of the risk in question. Moreover, if the speculator attends too much to merely technical and temporary conditions, rather than to the more fundamental requirements of demand and supply, his service and economic efficiency are reduced; though the trouble may be more directly due to defects in the machinery of the speculative market instead of to the shortcomings of speculators as such. In other words, the fact that risk taking can be a distinct economic service is not a sufficient defense of speculation. It should also operate to reduce violent fluctuations in prices, that is, to stabilize values. The transfer of risks from merchants to speculators may be of service to members of the grain trade while involving no service, or even an economic disservice, to society in general. The "hedging" process by which, through the use of the futures market, the risk due to fluctuation in price is transferred, presumably to a speculator, is described in a later chapter. The futures market is sometimes said to offer to the hedger insurance against loss of profit, and the speculator is accordingly likened to an insurer, but the hedger foregoes a chance of gain as well as of loss, so there is no real analogy to insurance. Specialization in risk taking properly demands thorough study by speculators of prospective price changes and of existing factors that will bring about such changes. How far speculation is based upon expert examination and successful interpretation of those elements of the past and present situation which contain the seeds of the future is a matter considered especially in Chapters V and VI of this volume. HOW SPECULATION MAY STABILIZE PRICES.-According theory of speculation the paired purchases and sales in market of a representative speculator are generally separated in time; but he must be quick in forming an able promptly to change his mind, and therefore he m close out a trade almost immediately after making organized speculative market, moreover, what is here r the representative speculator is not the only class of trader; the "scalper" is at least as conspicuous and i In assuming risks, the speculator acts on the induce expected profit. He will not accommodate a merchar facturer that desires to hedge except at a price that more favorable to him-lower if he is a purchaser or seller than that which he expects to get when he close trade. Competition in the futures market tends, howe the hedging merchant or manufacturer most of the a the general expectation among speculators as to what t prices will be. It is contended that competition among those having propensities and having also the dealer's commercial and skill operates to prevent prices from going so low w plenty, or so high when there is scarcity, or to preven responses to lesser degrees of these conditions, than w case without speculation. In other words, it is argue and competitive speculation stabilizes prices. Such an abstract statement of the way the speculato likely to suggest that he has superior judgment as to If prices are to be stabilized by speculation, the majorit lators must be presumed to have such superior know judgment. This statement means that the most compete cessful speculator will be only somewhat more often wrong. This qualification does not in principle alter th as regards the argument that speculation acts as a st prices, though the degree of stabilization will depend upor to which speculators in general are right. A speculator who is more often right may be quite v particular time. In that case his opinion may be supp different from the opinions of other speculators, the mar ing their judgment rather than his. It may happen, hov the majority of speculators (or those making a major trades) are wrong at a particular time. In that case, it w their influence and operations do not tend to stabilize y level which properly corresponds to existing conditions and demand. A further aspect of the quality of the judgment and fo speculators, which is assumed in the stabilization argumen a comparison with merchants. It is implied that the s have better judgment or more foresight than the merch would otherwise be the instruments of adjustment between variable supplies. Or else the merchants are under some militating against the exercise of foresight in a way to correct and fair adjustment of prices. |