TABLE 8.-Ratio of delivery month transactions to transaction in preceding months, Chicago, for years specified (percentages) In no case does the ratio of the volume of futures in the delivery month approximate the level of that in preceding months-a situation which would be represented by a 100 per cent ratio in this table. This statement would sometimes need qualification with reference to the fifth and even to the fourth month preceding delivery, but at this time the trading in an option has frequently not "got its growth." But as regards the May option for all three grains the long-lived option-the ratio is even lower for the fifth month than for the later months. 66 In general the cash handlers, and specifically the big elevators, are too much in control of the situation at this time to make the scalper or the outside speculative trader feel safe in buying and selling current-month future contracts. The delivery month is characterized by a wider daily range of fluctuations in prices than occurs in preceding months of trading. 20 This greater range of fluctuations tends to keep out the scalpers and others, but it may also be explained as the result of the absence of scalpers; and it is in general both effect and cause of the reduced volume of trading in delivery months. Nervousness on the part of traders has been offered as a reason why, in certain instances, they do not go into the cash month. But there are some scalpers who not only trade in the current delivery but will even seek to make something out of the fluctuations during the last hour or half hour of trading before the expiration of the option. In a futures market that functioned ideally it would seem that the transition from the ownership of the contract to actual possession of the grain or vice versa would be a matter of little concern to either buyer or seller. But, in fact, both speculators and hedgers. (at least those whose hedged stock is outside Chicago) are frequently 20 See Vol. VI of this report, Ch. XI, sec. 2. warned against staying into the current-delivery month. Trading in current-month options, or even holding on to a future trade up to the close of the month prior to delivery, is a question on which commission men frequently have pronounced views as to what is the proper course. One conservative Chicago broker has mentioned it as a point of conscience that he get his customers out of their trades and have them settled before the delivery month is entered. Because of unfortunate experiences, especially in May, 1921 and 1922, although those years are by no means entirely exceptional in character, commission men and grain men generally have seemed inclined to make it a general principle that all speculative trades, and even hedging trades, should be closed out before the delivery month. Such a conception on the part of dealers and traders attaches too little importance to the necessity of maintaining open and in good operating condition the normal channels of connection between grain futures and cash grain. CHANGES IN SPECULATIVE ACTIVITY BETWEEN DIFFERENT GRAINS.The most cursory examination of the general tables showing the volume of futures as it varies from month to month will suggest that often the speculative interest is transferred from one grain to another, when the opportunity for speculation in one is shut off. Perhaps the most conspicuous and important illustration of this was the shifting of interest on the part of New York speculators from stocks to grain when the New York Stock Exchange was closed in 1914. As between the grains, when wheat futures were cut off in 1917 there was a great increase in speculative interest in corn, as evidenced in Diagrams 3 and 4, shown opposite page 92.21 CORRELATION BETWEEN SPECULATIVE INTERESTS AND HEDGING REQUIREMENTS. That speculative interests and hedging needs are to a great extent independent variables is obvious. But it is possible that they are to some degree correlated with each other. In the following table the method of ordinal analysis is applied to test for the connection between volume of futures and the size of crops, which may be taken as an indicator of relative hedging requirements. For futures at Chicago it is necessary to base the index upon the data of clearances, which have been compiled by crop years and reduced to a relation to quantity of futures in terms of bushels by dividing by prices, as stated in a footnote to the table. The grains series includes the crops of rye and barley, a fact which is not so unreasonable as may appear, since rye futures were traded in during most of the period covered and merchants were in the habit of hedging cash barley in oats futures. The shorter-period 21 The shifting of interest from wheat to corn, and then to oats, during 1917 appears clearly in the figures for the volume of trading on the Chicago Open Board of Trade. The hedging element in trades on the Chicago Open Board is practically nil. Furthermore, these figures are derived from comprehensive records and not pieced out by estimation. The volume per month of trades on the open board was as great from June to October as in January to March, inclusive, although wheat trading was leading during the earlier three months and had dropped out entirely in the later period. Corn futures increased in volume between the two periods from 15,000,000 to 35,000,000 bushels per month. Oats futures increased similarly. The tendency to substitution of one sort of futures for another on the part of speculators has on occasion been made practical use of by the exchanges in starting up new futures to meet the needs of the speculative appetite. An oats futures market was started in Minneapolis after trading in wheat futures was suspended. Rye and barley futures were revived at Chicago in 1918, partly because wheat was out. When it seemed possible that a future trading law would be passed by Congress which would seriously restrict trading in grain futures, cottonseed oil futures, along with other newly thoughtup objects of speculative trading, were discussed and to some extent provided for at Chicago. figures for Minneapolis (14 years), however, are on a better basis, as regards both terms of the comparison, than the 30-year figures for Chicago. TABLE 9.-Ordinal analysis with reference to possible correlation between the volume1 of futures (Chicago and Minneapolis) and the size of crops, for years specified 1 For the nature of the indexes of volume see footnotes 2 and 3. The crop series used for the Chicago comparison is tons of the 5 grains, and the index for futures is obtained by dividing clearances by an index of the prices of wheat, corn, and oats. See p. 36 of Vol. V. The crop series for Minneapolis is spring wheat, and the indexes for futures are as shown at p. 37 of Vol. V. The result of this analysis is decidedly in favor of a correlation between small crops and a large volume of futures, and enough so to overbear the force of any necessary qualification due to weakness in the available data for the original series. Future trading, and especially speculation, is stimulated by small crops, although hedging need and participation are evidently greater with larger crops.22 DISTURBING FACTORS IN THE VARIATION OF THE VOLUME OF FUTURES.Factors affecting the course of future trading that have a special economic interest, but no significant relation to its seasonal variation, relate especially to taxes and tax administration. The available statistical data do not indicate that the taxation of futures had any marked effect on the volume of trading.23 22 The factor of trend affects the conclusion as regards the Chicago series, owing to the increasing size of crops being associated with some tendency to decline in futures. No such effect appears in the Minneapolis data. A test for Chicago by way of comparing the ordinals for the earlier and later half of the period shows sums of ordinals, respectively, of 336 and 129 for crops and 168 and 297 for future trading. The trend appears a large enough factor to account for the Chicago result, the crops being, so to speak, directly correlated with time and the futures inversely correlated with time sufficiently to account for the relation shown at Chicago. At Minneapolis, on the other hand, the similar sums are 49 to 56 and 50 to 55. A test by the logarithmic method (for which see Appendix B of Vol. VI of this report) for either negative or positive correlation between Chicago clearances and crops shows an indifferent result. A like test for degree of correlation between the clearances and quantities of wheat, corn, and oats shipped out of the county where grown (years 1897-98 to 1915-16) shows a rather greater, though not marked, leaning to negative than to positive correlation. The Minneapolis data, also, show a considerable leaning toward negative correlation. These results are especially significant because the method eliminates the influence of trend. 66 23 Taxes on grain futures at the rate of 1 cent per $100 of value were in force from Dec. 1, 1914, to Sept. 8, 1916. A similar tax was reimposed on Dec. 1, 1917, but at the rate of 2 cents per $100. This tax was amended in January, 1919, so as in effect practically to exempt so-called scratch or transfer trades. (The trades in question are defined as follows: So-called "transfer or scratch sales" or pass-outs are not subject to the tax, provided that the purchase and sale are made at the same exchange, on the same day, at the same price, and for the account of the same person. Regulation 40 (revised), relating to the stamp tax on issues, sales, and transfer of stock and sales of products for future delivery under the revenue act of 1918, approved Sept. 30, 1919, p. 24.) It should be noted that the volume of transfers was little affected by the 1914 tax, because they were thought to be exempt. The volume as tabulated probably omits a great part of such trades in the period 1914-1916 (as a result of accounting methods described at p. 247 of Vol. V); although the stamp-tax basis of the estimate in theory includes them. 1918, on the other hand, the proportion of scratch trades was probably much reduced by the weight of the tax; but such trades of this description as were executed were prac tically all booked like other trades. The tax on commodity futures was reduced to 1 cent per $100 of value in 1924. In The abolition of privilege trading at Chicago occurred in October, 1921, in anticipation of the going into effect in December of a Federal law prohibiting such trading. An examination of index numbers of the volume of futures by months before and after this event does not suggest that it had any marked effect. Section 4. Pit scalping as an element in futures. One type of future trading can so easily be distinguished objectively that the determination of its approximate share in the total can be satisfactorily accomplished. This is pit scalping. ESTIMATED PROPORTION OF PIT SCALPING AT CHICAGO. An attempt to determine the proportion and the volume of pit scalping at Chicago can yield only an estimate. The so-called "clearance rate" is practically a commission rate for scalping trades. It is open to members who execute their own trades and close them within 10 days, and, though the time is too long to conform to the strict definition of scalping, the difference is practically inappreciable. There are also scalpers who clear their own trades. These are sufficiently distinctive among the clearing members and can be satisfactorily identified for the purpose of an estimate of total scalping quantities. One of the forms (No. II, see Appendix D, p. 332) used for future trading returns for 1913-17, provided for a return of trades "cleared, but not made, for others." This describes the business of scalpers who put their trades through commission houses. To this group have been added the entire quantities traded in by scalpers clearing their own trades. The following table shows the proportion of scalping trades at Chicago: TABLE 10.-Ratio1 of scalping to total Chicago futures, by grains (percentages). A. BY MONTHS, JANUARY, 1916, TO DECEMBER, 1917 Wheat Corn Oats Wheat Corn Oats Wheat Corn Oats Wheat Corn Oats Estimated by assuming that the ratio of Form II trades to total trades for companies reporting Form II data (a verbal statement that there was nothing to report on Form II being regarded as a report) prevails for companies not reporting on Form II and by assuming the ratio to be 100 per cent for clearing members classed as scalpers. TABLE 10.-Ratio of scalping to total Chicago futures, etc.-Continued Month September option December option May option July option Wheat Corn Oats Wheat Corn Oats Wheat Corn Oats Wheat Corn Oats NOTE. These ratios are for samples of the total trade and the longer-period sample by grains is not Identical with the samples by individual options, since it was desirable to use as many returns as were suitable to the two bases, respectively. To preserve the comparability between options the same returns were used for all, and likewise for grains. The option sample consisted of data for 62 clearing members of whom 13 were independent scalpers, and the longer-period sample by grains for 45 clearing members of whom 12 were scalpers. The proportion of scalpers appears misrepresentatively low and that of wire houses is probably similarly too high. As general estimates the ratios are likely to be under the truth. (Cf. footnote 25, below.) On this showing it appears that scalping trades at Chicago may exceed 40 per cent of the total trading in a particular grain or option, except for oats, where the maximum ratio obtained is 32 per cent. The ratio varies greatly, but in general appears to increase with the activity of the market. But some of the earlier and smaller ratios (early in 1916) have a rather narrow statistical basis. Corn shows in general more scalping than wheat, but this result seems to be largely seasonal, wheat leading as regards this proportion in the last half of the calendar year. Both the corn and oats ratios were much higher after the decline of trading in wheat than they were in corresponding months of the previous year-a fact which may be referred in part at least to a transfer of the scalpers' business from wheat to the other two grains.24 With regard to the variation of the scalping trade by options, perhaps the most conspicuous result of the table is the sharp decline in the ratio at the delivery month. May, 1917, wheat, however, is in part an exception to the rule. December, 1916, corn is also an exception to the rule. There appears to be no notable uniformity about the distance of the maximum proportion of scalping from delivery, though it is most frequently the third month prior thereto. The initial ratios for the options seldom have a broad enough statistical basis to warrant attaching much importance to them. Although from other evidence of the proportion of scalping at Chicago, it appears that the figures derived from the sample just considered err by underestimation, there is no reason to suppose that they are otherwise misrepresentative.25 24 For indexes of quantities of futures traded in at Chicago by grains see Appendix E. 25 For wheat in 1923, The Grain Futures Administration estimates not less than 50 per cent to be trades of scalpers. In the same report of volume of scratch trades is estimated as follows: A substantial percentage of the transactions of these pit traders result in neither profit nor loss. Information in the possession of the Grain Futures Administration shows that on the average about 30 per cent of all transactions in wheat futures or the Chicago Board of Trade during 1923 were "scratch trades," or approximately 8,500,000 bushels per day. See communication from the Secretary of Agriculture transmitting in response to Senate Resolution No. 9, agreed to Jan. 8, 1924, the report of the Grain Futures Administration, etc. (68th Cong., 1st sess., S. Doc. No. 110, p. 3). |