B is in this case purely a speculator, having judged that con ditions of supply and demand would bring about higher prices, and acted on his judgment. B may have, however, sold to D, and D to C, and C to K, and K to X, of the same wheat between March 10th and April 20th, each of these traders having gained or lost as the market price fluctuated from day to day. These various parties whether trading directly for themselves or through brokers, were thus specu lators, though not one of them in selling knew whether or not in selling to C he was dealing with the actual receiver of the wheat, or just another speculator.
We have seen in a previous chapter that warehouse receipts form the basis of future trading in wheat and cotton. The receipts are not actually passed from hand to hand each time a contract is sold. The seller is permitted to issue a so-called "delivery" or "trans ferable" notice in which he notifies the buyer that he stands ready to deliver certain receipts in fulfillment of the contract. The receipts are actually tendered only when a contract is closed out by a delivery of the actual grain or cotton which it represents.
The board of trade rules provide that delivery may be offset by some corresponding trade or contract, if such offset is consented to by all parties, and that bal ances shall be payable immediately. Thus two con tracts which agree in all particulars except price may be offset and may be settled by a payment of price differences. Contracts may in this way be closed out by direct settlement between the parties concerned, by so-called "rings," and through a clearing 4. Ringing out.—A ring is formed where a whole group of traders gets together. A has sold 5000 bushels to B ; B has sold a like amount to C ; C has sold to D ; and D has sold to A. It will be noticed that a ring has been formed, in that the last one in the chain has sold to the first. If all the sales had been made at exactly the same price, these four traders would merely agree to cancel the transactions with each other without the payment of money. How ever, since the prices usually differ, some will have net balances due them and others will owe on balance. These balances may then be settled by a few pay ments involving small amounts.
Let us suppose that A sells to B a given quantity of a commodity of contract grade at a price of 90 cents per unit. The ownership of this is evidenced by a warehouse receipt. The future market closes that night at 91 cents, so A passes to B a check for one cent per unit. The next day B may sell to C, and he, through others, to K, and the market closes that night at cents. Checks are passed between all parties for differences between prices at which purchases and sales are made, with K having paid 1/2 cent to J. The
process continues up to X, who buys when the market is at 95 cents. Differences have been passed, until X has had to pay to W, from whom he made purchase, 5 cents per unit, and to A, 90 cents per unit. In this way the ring is made complete, each trader intervening between A and X being able to secure his profit or pay his losses promptly hence ob viating the necessity for the clearing 5. Clearing-house.—This is the most improved method for facilitating the settlement of contracts. It resembles bank clearing-houses in large financial centers. The economic importance of the clearing house system rests in the saving of time and friction which frequently arise in the settlement of a large number of accounts, by affording a central office with an organization of trained officials where the numerous transactions can be cleared. The clearing-house is an independent organization with its own set of officers, rules and regulations. Its function is to keep a record of the sales and to open up accounts with the exchange members.
In order to facilitate the settlement of contracts by offset, each member is required to keep a "settlement book," in which shall be entered the names of parties with whom settlements have been made, the dates and terms of the trades included in such settlements, the terms of such settlements, the prices at which the com modities were originally sold or purchased, the amounts due to or from him or them on each separate settlement, and also the net amount due to or from him or them on all settlements.
When the business day ends the members go to the clearing house and pass in their accounts or "reports." If the clearing house sheet as made up shows a credit to the owner of the "report" a draft for the correct amount is drawn on the clearing house. If the day's dealings have netted the member a loss he passes a check for that amount to the clearing house. The clearing house performs the settlement and obviates the necessity of each member hunting out those with whom he has made contracts during the day. In the above supposed case: when C traded with B, then C's name appeared at the close of that day's business on the clearing-house records, and when C made an opposite trade with D, then D's name appeared on the clearing-house records, but 'C's obligations were closed and his name dropped. This process showing always the original trader A and the last trader up to X, who, on delivery day, was shown to be the actual purchaser of the commodity. The clearing-house clerk would pass these promptly to Mr. X, and instruct him to make full payment to Mr. A, and thus become the new owner of the commodity.