THE GRIP OF THE PIT
Now, infidel, I have thee on the hip!
--_Merchant of Venice._
The visitors' gallery is an excellent vantage point from which to view
the trading floor of the Exchange. It runs the full width of the south
wall. The chairs entrenched behind the rail have acquired a slippery
polish from the shiftings of countless occupants just as the wall
behind has known the restless backs of onlookers who have stood for
hours at a stretch.
It is here that the curious foregather--good people from every walk of
life except the grain business. The tourist who is "just passing
through your beautiful city" and has heard that Winnipeg has the
largest primary wheat market in the world--the tourist drops in to see
the sights. Friend Husband is there, pretending to be very bored by
these things while fulfilling his promise to take Friend Wife "some day
when there's something doing." Young girls who only know that bulls
hate anything red and that bears hug people to death--they are there,
thrilled by the prospect of what they are about to witness with but a
very vague idea of what it will be. A dear old lady from the quiet
eddies of some sheltered spot has been brought in by the rest of her
party to see "goin's on" of which she does not approve because gambling
is a well-known sin. She is somewhat reassured by noting a few seats
away a man who wears the garb of a clergyman; presently he will take
notes for his forthcoming sermon on "The Propinquity of Temptation and
Its Relation to the Christian Life." The two young women who whisper
together in the corner have been reading stockmarket stories in the
magazines and they are wondering which of the traders, assembling on
the floor below, will have his coat and collar torn off and which will
break down and give vent to those "big, dry man-sobs" when his fortune
is wrecked!
Not the least of the sights at the Grain Exchange is the Visitors'
Gallery!
Two tanned farmers are discussing quotations and general conditions in
a matter-of-fact way. War demands, the unfavorable United States
Government report and rumors of black rust are making for a bullish
condition. Cables are up and the market promises to be wild this
morning. The gong will go in five minutes.
"The Pit" is out in the middle of the floor. There is an octagonal
platform, raised a couple of feet from the floor level. In the centre
of this platform three wide steps descend to floor level again; so that
the traders standing on the different steps are able to see over one
another's heads and note each other's bids. On the west side of the
Pit is an elevated, built-in desk like those seen in court-rooms,
somewhat resembling an old-fashioned pulpit; here three men sit
throughout the session. One keeps his fingers on the switch-box which
operates the big clock on the north wall where the fluctuations of the
trading are flashed on a frosted dial in red-light figures. At his
left sits a second man whose duty it is to record the bidding on an
official form for the purpose. At the right is a telegraph operator
who sends the record of the trading as it occurs to other big
Exchanges--Minneapolis, Chicago, New York, etc.
The telegraphic report registers in several instruments attached to the
big blackboard that occupies the entire north wall. Operators with
chalk and chalk-brush in hand move about the platform at the base of
this blackboard, catching the quotations from the clicking instruments
and altering the figures on the board to keep pace with the changing
information. A glance at this great blackboard will furnish the latest
quotations on wheat, oats, barley, flax, corn, etc., the world over.
Ranged along the entire east wall are the clacking instruments of the
various telegraph companies for the use of the brokers and firms
trading on the Winnipeg Exchange. Telephone booths at the north, seats
for friends of members on the west side, weather maps, etc., beneath
the gallery--these complete the equipment of the big chamber.
The group about the Pit, waiting for the market to open, grows rapidly
as 9.30 approaches. Members of the Exchange saunter in from the
smoking-room, swap good-natured banter or confer earnestly with their
representatives on the floor. In response to the megaphoned bellow of
a call boy, individuals hurry to the telephone booths. Messengers
shove about, looking for certain brokers. The market is very unsteady;
it may go up or down. The men are clustering about the Pit now; most
of them are in their shirt-sleeves and they are on tip-toe like
sprinters who wait for the starter's pistol. Some of them have
instructions to dump wheat on the market; some have been told to buy.
Hundreds of thousands of bushels will change hands in the first few
minutes. The market may go up or it may go--
Bang goes the gong! They're off! Above the red abbreviation, OCT., at
the bottom of the big clock the blood-red figure 5 indicates the
opening of the market at $1.45 even. With a mad swirl the trading
begins in a roar of voices. A small forest of arms waves wildly above
jostling bodies. Traders dive for each other, clutch each other and
watch the clock. The red figure 5 has gone out and 7/8 has in turn
vanished in favor of 5/8--1/2--3/8--4--(?) Instead of going up, she's
falling fast. Before the market closes the price may rebound to $1.55.
Somebody will make a "clean-up" to-day and many speculators will
disappear; for margins are being wiped out every minute.
To the Gallery it is a pandemonium of noise, unintelligible in the
volume of it that beats against the void of the high chamber. Only one
shrill voice flings up out of the roar:
"Sell fifty Oc, sev'-eights!" He offers 50,000 bushels of wheat for
October delivery at $1.43 7/8 per bushel. It's that fellow down there
with the blazing red tie half way up his collar. He hits out with both
hands at the air as he yells. A surge of buyers overwhelms him. They
scribble notes upon their sales cards and go at it again.
Down there in the mêlée those men are thinking fast. With every flash
of the clock the situation changes for many of them. Some pause,
watching, listening; others who have been quiet till now suddenly break
in with a bellow, seemingly on the point of punching the noses of the
men with whom they are doing business. Lightning calculation;
instantaneous decisions! "Use your discretion" many of them have been
cautioned by their firms and they are using it. A moment's hesitation
may cost a thousand dollars. Trading in the Pit is no child's play;
rather is it a severe strain even upon those who know every trick,
every firm and the character of its dealings, every trader and his
individuality, his particular methods--who know every sign and its
meaning, who can read the coming shout by the first movement of the
lips. And always, in and out, are darting the telegraph messenger boys
with yellow slips that cause upheavals.
"Why don't they take their time and do their trading more quietly and
systematically?" ventures Friend Wife up in the gallery.
"And lose a cent a bushel while they're turning around, eh?" laughs
Friend Husband. "On a hundred thousand bushels that'd only be a
thousand dollars. Of course that's mere car-fare!"
The dear old lady from the quiet eddies of Shelterville is shaking her
head in disapprobation and communing with herself upon the iniquities
of gambling.
"My, oh my! What won't men do for money! Jt-jt! Just look at 'em!
Fightin' like that for money they ain't earnt! An' that nice lookin'
young feller with the intelligent gold specs!--Dear me, it's enough to
make a body sad!"
She could not know that but comparatively few of the traders below were
representatives of brokerage firms which were trading on margins for
speculating clients--that most of the traders were negotiating
legitimate deals in futures for firms who actually had the grain for
sale, for exporters who would take delivery of the actual wheat for
shipment, for milling companies who would grind it into actual flour.
Because trading for delivery in future months affords opportunity for
speculation, it is not to be condemned necessarily. It is the balance
wheel which steadies the entire grain business. Even the speculating
element is not without its uses at times and the layman who ventures to
condemn This or That out of hand will do well to make sure he
understands what he is talking about; for the business of the grain
dealer is so subject to varying conditions and so involved in its
methods that it is one of the most difficult to be found in the
commercial world.
Trading in futures finds birth in the very natural disinclination of
Mr. Baker to buy his flour by the warehouseful. He does not want to
provide storage for a year's supply, even if he could stand such a
large bite out of his capital without losing his balance. So while the
bakery man is anxious to order his flour in large quantities for future
use, he is equally anxious to have it delivered only as he needs it,
paying for it only as it reaches him--say, every three months.
Before contracting for the delivery of the flour on this basis Mr.
Miller must look to his wheat supply on a similar basis of So-Much
every So-Often and he, too, has an eye on storage and, like his friend
the baker, he "needs the dough," as they say on the street, and he does
not want to part with any more hard-working money than he can help.
Accordingly he looks around for somebody who has wheat for sale and
will sell it right now at a fixed price but defer delivery and payment
to a future date. With the price of his wheat thus nailed down, Mr.
Miller can set the future price on his flour to his customers, taking
delivery and paying for the wheat as he requires it for filling his
flour orders.
In the meantime where is the wheat? Out near the fields where it was
grown, in country elevators perhaps, ready for transportation to market
as the law of supply and demand dictates instead of the whole crop
being dumped at once and smothering prices below the cost of
production. Or perhaps it is in store at the terminal where Mr.
Exporter can handle it. It will be seen that the mutual arrangement to
buy and sell for future delivery simplifies matters for everybody in
the grain trade.
The manner in which the legitimate trader in futures protects himself
from price fluctuation is easily understood. While a deal in cash
wheat would refer to a definite shipment as shown by warehouse
receipts, a deal for future delivery is merely an obligation involving
a given quantity of grain at a given time at a given price. Being
merely a contract and not an actual shipment, the seller does not
require to produce the grain immediately nor is the buyer required to
hand over the purchase price when the trade is made. Thus it is
possible to buy a thousand bushels to-day for October payment and sell
a thousand bushels to-morrow for October delivery, cancelling the
obligation. The trade can be balanced at any time before October 1st.
Again, a thousand bushels of October wheat may be bought (or sold)
to-day and the future switched to May 1st by the sale (or purchase) of
a thousand bushels for May delivery.
Take the man with the blazing red tie half way up his collar, the man
who this morning offered to sell fifty thousand bushels for October
delivery at $1.43 7/8. Suppose that he represents a company with a
line of elevators at country points. To his office at Winnipeg has
come word from country representatives that fifty thousand bushels have
been purchased for the company. At once he enters the Pit and sells
fifty thousand bushels for delivery at a future date, thereby "hedging"
the cash purchase out in the country. Once this future of fifty
thousand is sold the company no longer is interested in market prices
so far as this grain is concerned. If the market goes up, their cash
grain is that much more valuable, offsetting the loss of an equal
amount on the future delivery; if the price goes down, what is lost on
the cash wheat will be gained on the future. So that the difference
between the price paid for the grain at the country elevators and the
price at which they sold "the hedge" is the only thing which need
concern the grain company and it is here they must look for expenses
and profits. This method of hedging enables a grain company to make
purchases in the country on much smaller margins than was possible in
the early days when the marketing machinery was less completely
organized. It eliminates to the greatest extent the necessity of
speculating to cover risks.
The speculator's opportunity comes in connection with the fluctuations
of the market in deliveries. He merely bets that prices will go up or
down, as the case may be. He is not dealing in actual wheat but in
margins. He buys to-day through his broker, who has a seat on the
Exchange, and deposits enough money to cover a fluctuation of say ten
cents per bushel. If October wheat to-day is quoted at $1.45 his
deposit will keep his purchase in good standing until the price has
dropped to $1.35. He must put up a further deposit then or lose the
amount he has risked already, the broker selling out his holding. If
the speculator is on the right side of the market--if he has guessed
that it will go up and it does go up--he can sell and pocket a profit
of so-many-cents per bushel, according to the number of points the
price has risen. If he has bet that the market will go down the
situation merely is reversed.
The machinery for handling the huge volume of business transactions in
a grain exchange must be complete and smooth running to the last
detail, so designed that every contingency which may arise will be
under control. For simplicity and efficiency in this connection the
Winnipeg Grain Exchange occupies a unique position among the great
exchanges of the American continent; in fact, it is a matter for wonder
that its methods have not been copied elsewhere.
The Winnipeg Grain and Produce Exchange Clearing Association is a
separate organization within the Exchange and to it belong all the
Exchange members who deal largely in futures. Each day the market
closes at 1.15 p.m. By two o'clock every firm trading on the floor
must hand in a report sheet, showing every deal made that day by the
firm--the quantity of wheat bought or sold, the firm with whom the
trade was made, the price, etc. If on totalling the day's transactions
it is found that they entail a loss, the firm must hand over a cheque
to the Clearing House to cover the loss; if a gain in price is totalled
the Clearing House will issue a cheque for it to the firm so gaining.
Thus, if Jones & Brown have bought wheat at $1.39 and the market closes
at $1.35 they lose four cents per bushel on their purchase and must
settle the difference with the Clearing House. All differences between
buyers and sellers must be settled each day and if the volume of trades
has been heavy, the Clearing House staff work on their books--all
night, if necessary--until everything has been cleared for next day's
business. The firm which loses to-day may gain by to-morrow's trades,
maintaining good average business health. Any private trading which
may take place after official trading hours is known as "curb" trading.
The rules of the Clearing House are very strict. Any firm which fails
to report by two o'clock is fined. The Clearing House assumes
responsibility for all purchases and sales and, being actually liable,
keeps close tab on every firm. Each firm has a certain credit on the
books of the Clearing House, allotted impartially, according to its
standing, and this credit forms the fixed basis of that firm's
dealings. If its activities exhaust the line of credit, the Clearing
House calls for "original margins" at once--a deposit of so-many cents
per bushel for every bushel involved and for every point which the
market drops. The amount per bushel called for is entirely at the
discretion of the Clearing House authorities and if the quantity of
grain reaches dangerous proportions the deposit required may be set so
high that it becomes practically equivalent to cash purchase. To
"corner the market" under these conditions would require unlimited
credit with the Clearing House.
When Jones & Brown are "called" for deposit margins they drop
everything and obey. They have just fifteen minutes to reach the bank
with that cheque, have it "marked" and rushed to the Clearing House.
If they fail to arrive with it the Manager of the Clearing House will
step into their office and if there were any "hemming and hawing" Jones
& Brown would be reported at once to the Secretary of the Exchange who
would call a hurry-up meeting of the Exchange Council and Messrs. Jones
& Brown would find themselves posted and all trades with them forbidden.
All clerical errors in regard to trades are checked up by the Clearing
House and fines paid in for mistakes. Only a nominal charge is made
for its services--enough to pay overhead expenses--but the fines have
enabled the Clearing House to accumulate a large Reserve Fund which
gives it financial stability to provide for all responsibilities should
occasion arise through failure of any firm. All futures which have not
been cancelled before delivery date are negotiated through the Clearing
House and with its assistance the grain can be placed just where it
should go and tremendous quantities of it are handled without a hitch
and with the utmost despatch.
Excitement in the Pit is not always over wheat. It may be oats. It
was Canadian Western Oats which became the storm centre in 1911 when
the Grain Growers got into difficulty with the "bears." Traders who
attempt to boost prices are known as "bulls"; those who are interested
in depressing the market are "bears." A trader may be a bear to-day
and a bull to-morrow; thus the opposing groups are constantly changing
in make-up and the firm which was a chief opponent in yesterday's
trading may be lined up alongside the day following, fighting with
instead of against. It is all in the day's business and the strenuous
competition on the floor, into which the uninitiated visitor reads all
manner of animosity and open anger, is a very misleading barometer to
the actual good feeling which prevails.
In recording what now took place in the Pit in connection with the
farmers' commission agency it will be well to remember that the rest of
the traders would have acted in the same way toward any firm which was
fool enough to leave the opening for attack. It may be that as the
thing developed some of those who were specially interested in the
downfall of the farmers' organization seized the opportunity to ride
the situation beyond the pale of business ethics and in their eagerness
to be "in at the death" revealed special vindictiveness. But in view
of the long struggle with this element it was only what the Grain
Growers should have expected when they ran their heads deliberately
into the noose.
The situation was this: Shortly after New Year's the export demand for
Canadian Western Oats became heavy and it looked as if in Great Britain
and all over Europe, where the oat crop had been small, there would
continue to be a shortage of oats. In spite of this situation,
however, no sooner was the proposed reciprocity agreement reached
between the Canadian and United States governments of the day, on
January 26th, than market prices began to go down.
The then Manager of the Grain Growers' Grain Company came to the
conclusion that this price lowering was a local condition and that the
export market for oats was too strong to justify it or sustain it.
"I'll just step into the market and buy some oats," said he. "Later on
I'll sell for export at a satisfactory figure." Accordingly, one fine
morning he went into the Pit and began to buy.
The Manager's motive in attempting to sustain the market may have been
of the best; but it was the first time that such methods had been
attempted by the Grain Growers--methods which were not at all in
keeping with the avowed principles of the Company. The Board of
Control had every confidence in their Manager and, although he was
merely a salaried employee and not an executive officer, he had been
given a pretty free hand in the conduct of the Company's operations.
Apparently it did not occur to him that he should consult the Board
before entering the market on a speculative basis. Had the Board known
what he was about to do they would have vetoed it; but when they did
discover what was afoot it was too late to prevent the situation. It
developed very swiftly.
"The Grain Growers are up to the neck in May oats," was the whisper
which passed about among the other traders. That was all that was
necessary.
"Sell May oats! Sell May oats!"
On every side of the Pit they were being offered by thousands of
bushels--five--twenty-five--fifty thousand! The idea was to load up
the Grain Growers' Grain Company to the point where their line of
credit with the Clearing House would become exhausted, after which
every bushel would require a marginal deposit. Then when the Company
could carry no further burden the Clearing House would be forced to
dump back the oats onto the market, breaking it several cents per
bushel. At this lower price the traders who had obligated themselves
to make these big deliveries would buy back the necessary supply of
oats at a profit and everything would resume the even tenor of its
way--except the Grain Growers, of course. Their serviette would be
folded. Their chair would be pushed back from the table! They would
be _through_!
Up until now all the troubles of the farmers in marketing their own
grain may be said to have come from sources outside themselves; but in
the present instance they had nobody to blame but themselves for the
predicament. It arose at a time, too, when the other grain dealers
were beginning to recognize the farmers as a force in the grain
market--a force which had come to stay. It was unfortunate, therefore,
that just as they were beginning to acquire a standing as a solid and
sensible business concern, the Grain Growers' Grain Company should find
themselves driven into a corner, their backs to the wall, the focus of
pointing fingers and gleeful grins.
The fact that a salaried employee, not an officer of the Company, had
acted on his own initiative without the consent of the directors was no
excuse for a reliable business concern to tender as such. The first
question flung back at them naturally would be: "Then your 'Board of
Control' doesn't control, eh?" For although the Board of Control did
not know what their Manager was doing until it was too late to prevent
it, they should have known. That is what they were there for--to
protect the shareholders from managerial mistakes.
However, there they were. The only thing they could do was to fight it
out to a finish in the Pit and, if they survived, to see that no
similar mistakes occurred in the future.
All sorts of rumors were flying about the corridors of the Exchange,
gathering momentum as they passed from lip to lip, swelling with the
heat of the excitement until it was a general guess that the Grain
Growers must be loaded with anywhere between five and eight million
bushels of oats more than they had been able to sell.
It was only a guess, though, and a wild one. Many traders would have
given a good round sum to know exactly how the farmers' company stood
on the books of the Clearing House. Only the Clearing House and the
Company itself knew the true figures and the Clearing House officials
were men of the highest integrity who dare not be approached for secret
tips.
Thanks to the splendid export connection which had been built up in the
Old Country and to the equally solid financial relations with the Home
Bank, the farmers' agency was selling oats for export very rapidly. It
began to look as if they would get out from under the threatening
avalanche without much loss, if any.
The Company's old-time enemies apparently saw an opportunity to
undermine its credit at this crisis; for attacks began to appear in
print--accusations of speculation, of official negligence and so forth.
If the Grain Growers could be prevented from paying for the large
quantity of oats, delivery of which they would have to take on May 1st
to complete the export sales made during the winter--if they could be
made to fail in filling these export orders when navigation opened,
they would be smashed.
But in attacking the credit of the Grain Growers, these opponents
overlooked the rapid increase in paid-up capital and the ability of the
farmers to secure money outside of Winnipeg. It was not being
forgotten by the Grain Growers that upon the first day of May there
would be delivered to them over 2,200,000 bushels of oats.
When the day arrived, therefore, the money was on hand to meet every
contingency. Every bushel was paid for immediately. Within a few
weeks half of the quantity was riding the waves of the Atlantic, bound
for the Old Country to fill part of the sales already made there.
Before long some of the grain companies which had sold the oats were
trying to buy them back. Had the farmers' company been a speculating
firm they might have turned upon the market and cornered the oats with
a vengeance. It was one of those rare occasions when a corner could
have been operated successfully to a golden, no-quarter finish; for the
export demand was sustained and the local market could have been made
to pay "through the nose" for its fun.