New-York tribune., 1909-12-06
EXCHANGES BLAMED
FOR SYSTEM.
Commissioner of Corporations
Sharply Citicises Nesc
York Methods.

drawn in Parts ~ and V OF the renort
Of Herbert Knox Smith. Commissioner
cf Corporations, on the conduct OF such
exchanges. The practice OF dealing in
futures. as carried on at present. IS con-
denned. although the report does not
condemn the existence OF the exchange.
The brief discussion Of general spec
uls;ion in this report says Mr.. Smith.
recognizes the possibilities for good
inherert in q great central market like
q cotton exchange and the need that
this good be developed and evils elini-
mated by regulations in line with econo-
mic Law"
The report especially condemns deal
ings in futures. denouncing this form OF
speculation as pure gambling and highly
injurious 10 legitimate trade. In QUO
tstions Tor future" deliveries OF cot
ton. il says, the market is so uncertain
and so many elements OF chance enter
into the transaction that al bids are
made al q much lower figure than those
offered Tor cotton actually in existence.
The effect Of these fictitious quota
uons. the report points out, tends 10 mis-
lead the cotton planter as 10 the true
value Of his crop. honestly grown. In
addition. il leads brokers 10 play" both
sides of the market 10 protect them
selves against loss in such trades, with
the result that the producer is forced
20 pay in the end, while the farmer also
loses
The report, while recognizing that the
exchanges in New Orleans and New
York are necessary, does not mince
words in criticising the New York ex-
change After declaring that the New
Orleans methods Of conducting trans
actions in cotton follow natural lines.
The Commissioner says il has been proved
that The abnormal depressions in the
future price in New York were almost
wholly due 70 improper artificial condi-
tions now maintained by the New York
Cotton Exchange. BY maintaining them
rhe Kew York exchange is responsible
for e very real injury 70 the producer
ana merchant"
NEW YORK AND NEW ORLEANS.
Comrnenthag on the methods Of the
New York exchange. the Commissioner
says, in rart;
As shown in this report, the successful
use ot the future market by the cotton
trade depends on the maintenance Of q
Substantially constant margin between the
price Of midcEng cotton ana the price or
TIE New orleans Cotton Exchange ois-
rlnctlv provides that the grades other than
niddllng shall be deliverable only on the
bEsis 5ust described-that is. al the actual
cotton a. the time OF deiivery-and. in the
main, the normal margin between the
price OF current future contracts ano the
SPOT price OF rnicdllng cotton has been
fa,rly well although by no means perfect
lv. maintained at New Orleans.
A. New York. on the other hand, the
crsdes other than rniddling are deliverable
a. arbitrary price differences Established
hv 1 rc1isior committee only twice year
a. most, once in September and again IN
November. This committee Is allowed Nlrt-
lailv complete discretion in determining
ditereuces hNed by u have been wlcely
a. variance with The true commercial dif-
fcrences al the very time they were estab-
hshed- II other instances tnese arbltraig
Cifere1ces although originally In accord
wiil the true commercial differences IN
TIE SPOT market, have later become Tar
on of line with these commercial differ
ences. which fiuctuate with changes ID
supply and demand for specific grades
This arbitrary method Of establishing
contract differences at New York works
greet INJURY 10 dealers in exchange con-
tracts and especially 70 BUYERS. since
Tie seller has the complete option OF Sc
iecrion. he naturally delivers those graoes
which. because OF these erroneous olner-
flces- are most otefValueo a. c9ini'aie CO
Wifh uidd Ing. This means that the puf-
chaser VIII suffer an unjust loss, since
when he disposes Of the cotton IN the spot
market he can OBTAIN only the commercial
differences. Consequently. buyers OF con-
tracts seek 20 escape this loss, ether oy
tir'e OF purchase OF. IL they have already
purchased such contracts, by selling them
cut IL the latter case they must seA 70
hgyers who will similarly endesNor 70
protect themselves. Either effort, there-
fore results IN an abnormal depression or
discount q the future price In eornpalT,i.soh
VIII The actual or SPOT price of fnldollhs-
The principal other evils OF cotton con-
tracls are Lrst. the overgrading OF cotton
GUY W1ds rs5re sS.ee 81 deiiversbie grades
TIE former evil has existed chiefly IN ths
ew York iarksi Ihe eneet ,s ss,,s ol sDs
ffe overvaluation by means or fa4se olIier
@no's. namely, 70 produce an s.ohoi iiial
ois'9lnt ot Tho contract price
SURE THING" AFFAIR
TIE f1ed-dinereuoe system of the New
io.k exchange represents tne - s's,.- ~
l.af.te operators 10 avoid the Tisk lnNolfso
.n i.e proper performance OF .nslt IN diiHi a.
frnrtt1n. while seeking 10 retain an inc
Agother serious objection is that per-
naIeDt differences, like the 'nKed' oli-
fercucos nov employed by the New YORK
fheiange throw an unjust Duroen ePyyit Pyi
t-fera 81 contracts. As conciuslNe9.s -
llef frou The risk of changes IN grane
differences unless De Is willing 10 ehier
lilo "a specific contract Wlch ine DsytIs -
Hasi until some system Dr. aehiseq VIZ VIZ
FiN ~ The same time protect the nom
sFeeIlative buyer. This argument realig
p heads j win, tails you lose pfclosl-
tion; ir Is 4 plea that The seller be given a
sure thing" -.
Slcf Permanent differences certainly
would ncr;letuste the evil FOR which lis
AeW York Cotton Exchange mas beeh hlo1SS
tellOgsfr criticised. namely, abiiot % Ne
fuCf- Nations in the discount of the tutSi.S
lrice. Advocates % such lerniaIient -. -
ftreuces themselves admit that since these
oinerepces. even on a percentage basis. are
loluc ~ times 20 he az variance WIN ths
tfue commercial differences. the contfs 81
lrice must fuctuate relatively 10 ne h%lla- %
ding price IA order 20 corTect liile IL IL
Parity between the Two sets oi ollet eiis.s, ss,
D. other words. that the c1uHach 49, -
must more or less frequently. 80 70 90 80
abnormal discount This means thsA DOtti
fhe primary functions OF the eAcilatffe !" 80
be perverted, namely, the fofecahi'i.5l fofecl IA,
prices and hedging. A future price WI, -,t
nay be distorted simply as resut oi y
fcisl differences obviously ceases 20 De
true reflection Of the marker taine ~ ILL., ILL.,
ding cotton. while. as repeateoiy Saos S-,ei,, a.,
srCh fluctuations IN the future pic 20. 20 s'g 49,
destroy the usefulness OF ID ~. ne - - es
hedeine Uurposes u is diflcut 20 80
now t5s asSorRtton 81 q system 50 directly
~ conflict with the two funostilsss ilssss.sed ~
poses OF an exchange can De 5lsuhSu'
WORSE THAN BUCKET sHo
In br,ef IN. bureaus contention IS thst
-. 49, NrrLr Cotton ENciiaitf