his commitments in the commodity dealt in. His turnov and his gross margin is smaller than the producer's. Es far as his stock on hand, which is the bulk of his busines varies greatly, seasonally or otherwise, he will depend borrowed money. He can not so well stand sharp price f as the producer and will naturally resort to hedging f they are available. The marginal interest or equity of the speculator is typ smaller than that of the dealer. He makes large profits by stretching his resources rather thin. His main relian being wiped out may be his confidence in his ability to get market quickly. The farmer's position is in general more like that of ducers than like that of grain dealers. In general he own though he may have little else above his debts. Even if and other circumstances would make a comparatively sma tion in the price of his crop critical, the most he could d the use of futures would be to insure a satisfactory price if it occurred. Otherwise, by hedging, supposing it could be d just when he should hedge-possibly, for example, as soon of his crop can be definitely estimated-he would cut hi of returns which may be badly needed as much as prote against losses. It is significant that the farmer's ownership is an incident of production and the risk in holding it is an incident, not voluntarily entered upon as such. A deci the time of his dissociation from such risk, though it may b on somewhat speculative grounds, is not like a decision to e a speculation in futures. Moreover, the farmer's interest in never becomes exclusively a matter of the price to be obtaine is also more or less of the possibility of use on the farm as native to sale, especially for corn and oats. Eve THE ELEVATOR'S POSITION.-The country elevator that bu from the farmer without hedging it evidently has a prepon not quite an exclusive, interest in price changes. The elev terest in the grain is transient and does not involve appreci tribution to its value by manufacture or "processing." it is a mere trading interest, however, the fact that returns business are largely dependent upon price changes, as well differences between terminal and local prices, would not business particularly speculative, provided such price chan to balance each other. In the case of a retail store the retu vary because prices and the volume of trade fluctuate from time, but in the long run the returns may be fairly steady. I larly not impossible that in the long run the country elevat get a fair margin of return from its sales, even though t fluctuated all the time. The elevator, however, has in general only a comparative equity" in the grain it has bought. It needs a large worki tal for a few months after the harvest and, of course, ma porary loans of a bank or some other source. The elevator's in the grain is largely marginal. Practically what makes t tion of any holder of grain highly speculative is his owner 1 ness property, - facilities if ypically still et out of the f other pro- enter upon buys grain s from the tor might ing capikes tems interest the posirship of ceipts as collateral for loans. Stock exchange usage makes the distinction between speculation and investment substantially in this way, the one who purchases" on margin" being considered a speculator and the one who buys outright an investor. THE MANUFACTURER'S POSITION.-The situation of the manufacturer, as regards the element of speculative interest, is generally different from that of the wholesaler, though the difference is largely a matter of degree. In general the spread between what he pays for raw material and what he receives for the finished product is larger, which condition may enable him to stand fluctuations in the price of the raw material better. He also often has a much better knowledge of conditions affecting the demand for his product, and sometimes he may have considerable control over those conditions, while the grain dealer's market for staple grains may be radically affected by events happening on the other side of the globe. SPECIAL REASONS FOR HEDGING BY GRAIN MERCHANTS.-Even though there is some force in the contention that the holder of a narrow equity in cash grain who does not hedge it in the futures market is speculating, the difference between this case and that of a trader in grain futures should be pointed out. The merchant holding unhedged cash grain is taking a mercantile risk of price fluctuation that is incidental to his business of handling grain, while the speculator in futures chooses to take a price risk as such. But the argument for hedging is strong in proportion to the smallness of the grain dealer's turnover profit, and also because his mercantile interest is in grain only instead of being divided among a considerable number of commodities. It is his business to know price conditions and prospects in his line. He can control his stocks and inventories with reference to such conditions and to the extent of his unencumbered liquid assets. He can to a large degree sell the actual commodity as fast as he buys. But the considerations favorable to hedging are strongly reinforced if his own working capital is small relatively to the scale of his operations and if the effect upon his holdings of such price fluctuations as may be expected is relatively large. A SIMPLE DEFINITION.-Speculation in grain futures may be described as future trading that is not hedging. While there may be speculation in cash grain that does not make use of futures, it is so mixed with essential merchandising functions that it has comparatively little significance for present purposes. Speculation may be subdivided into that which is legitimate and that which is mere gambling. By an almost inevitable turn and tendency of speech, however, speculation without qualification is taken to mean speculation as a business enterprise. It is not at all necessary that the line of distinction between these two species of speculation be easily or sharply drawn. There doubtless can be speculation in a commodity by the accumulation of stores in excess of ordinary merchandising requirements. Where there is a differentiated opportunity for the speculative interest and activity, such as is afforded by futures markets for the • On this subject compare value added by manufacture with cost of materials in the data of the Census of Manufactures. pure speculation in that commodity will enter there. of unhedged grain is, however, an alternative to specul of futures, practically available, however, only to su grain elevators. "Spreading"-between two options or between two a distinctive operation in futures, which is not in tra cluded under speculation. In the sense that it involves of one contract by another of opposite character, spread hedge. Hence spreading might be excluded from the speculation. For a given quantity of commitments the the same on a spread as it is on a hedge." But the ris creased by enlarging the scale of operations. Speculation is not in most branches of trade actual from other mercantile transactions and, because of the purposes, a good working definition can not insist upon interest in future changes in prices. In the form of fu however, by reason of the abstraction of the specula from all other concerns, speculation might be thus exacti Buying commodities merely for resale and without any contributing to their progress toward the ultimate speculation completely differentiated from any other k ness transaction. Such speculation pure and simple is realized in future trading. Speculation in grain futures as distinguished in the two kinds, namely, ordinary speculation and pit scalping ference is explained in detail below in Chapter III. "Unusual gain," or the hope of such gain, is someti part of the definition of speculation. The unusualness realized or hoped for is considered relatively to the effort directly devoted to the speculation. The profits resulting a successful speculative operation in futures may often be in amount in relation to the total value of the contracts Section 6. Development of speculative facilities. It is pertinent to the conception of speculation in grai trading other than hedging to note the extent to which fu kets are designed to facilitate speculation. The system is a product of gradual evolution and in no sense contrive structed for any definite ulterior purpose. But in the development of such a consciously evolved human instit often be read the purposes of those who took the successi adapting it to commercial and other needs as they were Once a market for futures had developed, out of toother forward delivery transactions in actual grain, the it became the more serviceable it appeared to be to the chandiser as well as to those deriving revenue from comm future trades. The earlier future contracts at Chicago w ently largely drawn to suit the buyer, giving him, equall seller, the option as to time of delivery. But only an elev 7 Summaries for simultaneous day-to-day price movements (at pp. 135 Vol. VI of this report) indicate that Chicago and Minneapolis wheat example, are more closely correlated than either market's future prices with prices. 8 ing was put into effect by the State of Illinois in 1871 so tha buying and selling "by grade alone" could be more safely pursued The life of the contract was gradually extended from "next week and "next month "-terms appropriate to cash trading-until sale were made for delivery almost a year ahead. The outsider wa thus less likely to come into contact with the actual grain. Th period of delivery was standardized as an entire month and th trading sought the most active "months" until they became stand ardized as the four familiar options. Methods of offsetting an substitution on contracts and the invention of a clearing house re leased margins that might have otherwise been tied up for lon periods. It is generally believed that these changes served the grai trade. Indeed, they served it doubly, by simplifying and stand ardizing a contract the merchant often used and also by makin the futures attractive to speculators who were always ready to trad and who thus supplied a continuous market. All these change made the market more attractive to the mere speculator and wer intended to do so, hence it is fair to say that the system of futur trading is designed to facilitate speculation, whether by experts o by mere gamblers that is, future trading on the part of those wh have no interest in actual grain and only a desire to profit by pric changes. The possibilities of buying and selling are unlimited except b limitations of ability to put up margins. Up to the first of th delivery month, aside from the execution of trades in the pit, th work of the broker for his customer consists in attending to margin and keeping accounts straight. There is no occasion to handle ware house receipts prior to that date. Short selling is not restricted by the necessity of borrowing them for the purpose of making de liveries and long buying does not involve paying for anything unti the delivery month. It would seem almost impossible to devise system of trading more completely flexible and expansible as re gards volume than that of futures, which is a system of trading in agreements to sell and to buy that involve no possible contact with the actual commodity until the delivery month. Section 7. Varieties and characteristics of speculation. PIT SCALPING.-Speculation logically includes pit scalping, but i is often practically necessary to regard the two as different opera tions. Speculation can not be distinguished from scalping merel on the basis of the elapsed time between the opening and the closing of the contract. The Chicago speculative grain trade distinguishe between the scalper and the speculator as elsewhere indicated. Describing scalping as a pit operation serves to distinguish it from the carlot scalping of cash grain. A member of the Chicago board makes the distinction between the scalper and the speculator applicable, even where both expec History of Chicago Board of Trade, Taylor, Vol. I, pp. 404-410 one who is looking for a "revision of values," and he such a revision to occur before the close of the market. would not let a trade go more than a cent against him take profits before it got as much as a cent in his favo speculator would hold on, perhaps with several cents or in his favor. The scalper is not concerned with whether the level of prices is too high or too low but o wave length of the minor fluctuation and with whether a moment the fluctuation is near the crest or near the bo trough. Whether the speculator buys or sells will in th affected by whether he already has trades open, and on In general, even according to this conception, the spe distinguished from the scalper's trade "gets on the book there a while." Traders who sit out a trade in the customers' room of sion house, and close it on the same day it is opened, r pit scalpers in their trading methods, i. e., in their attit market fluctuations, but they are nevertheless to be speculators, even in the narrower sense. The extent to chance, as opposed to the influence of sound commercial determines the result makes such trading in effect pure Such traders are not representative speculators. THE SPECULATOR'S TRADING FURTHER DISTINGUISHED. usage or attempted usage of the speculative grain trade which the purchase of a grain future with the intention several months is referred to as an "investment," and t of a speculator for the long turn as an "investment acco usage is objectionable. Such a trade is of course in speculation. 66 A certain large speculator has described his operatio sisting simply of buying when the grain is cheap and se it is dear. Another refers to dealing "for the long turn acteristic. The difference between large speculative oper carry a line," and pit scalpers is well conveyed by suc Such a speculator may in part execute his own trades. moreover, take advantage of temporary fluctuations by their open interests, expecting to load up again and to carr a longer period a large net amount, long or short acc whether their fundamental view is bullish or bearish. T course no definite line to be drawn between such speculato pit scalpers who carry some of their trades on a specula But some large speculative operators never go on the flo exchange. Speculators as such are not interested in the fluctuations that occur from moment to moment in the pi the scalper is usually even at the close of the day, the specul have several million bushels of open trades at a time. I a successful operator, he will usually not let it be general just how much he is trading and perhaps not on which si market. How some degree of secrecy is maintained previously described.10 The very fact that he is long of 10 See Vol. V, Ch. V. |