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Author: 
 
 Todman, Frederick 
 Simson 
 
 Title: 
 
 Brokerage accounts 
 
 Place: 
 
 New York 
 
 Date: 
 
 1916 
 
^^-noi.^-T' 
 
 MASTER NEGATIVE « 
 
 COLUMBIA UNIVERSITY LIBRARIES 
 PRESERVATION DIVISION 
 
 BIBLIOGRAPHIC MICROFORM TARGET 
 
 ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD 
 
 Jltisiiiesft 
 T56P 
 
 Todman, Frederick Simson. 
 
 Brokerage accounts; a treatise on the business of 
 brokerage, its accounting books and records, by Fred- 
 erick Simson Todman ... New York, The Ronald press 
 company, 1916. 
 
 xviii, 19-338 p. incl. forms. 22i"". (Ronald accounting series) $3.50 
 
 1. Brokers — Accounting. i. Title. 
 
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 Brokerage Accounts 
 
 A Treatise on the Business of Brokerage 
 Its Accounting Books 
 and Records 
 
 ^ 
 
 By 
 FREDERICK SIMSON TODMAN, M.C.S. 
 
 LECTURER, NEW YORK UNIVERSITY 
 DEPARTMENT OF FINANCE 
 
 RONALD ACCOUNTING SERIES 
 
 NEW YORK 
 THE RONALD PRESS COMPANY 
 
 1916 
 
 I 
 
. ../ 
 
 ,!o - 
 
 \a't\3 
 
 Copyright 19 i6 
 
 BY 
 
 THE RONALD PRESS COMPANY 
 
 '3 
 
 
 ^ 
 
 D. 
 
 Its ^ 
 
 c/'^.A 
 
 " 
 
 To The 
 
 School op Commerce, Accounts and Finance 
 
 OF THE New York University 
 
 This Book is Cheerfully Dedicated 
 
 T) -HBO.-?? 
 
 Wmi«m O. Hewitt Press, Brooklyn, Printert 
 J. F. Tftpley, New York, Blndem 
 
 )^ 
 
i 
 
 i 
 
 PREFACE 
 
 Wall Street has been discussed from almost every 
 conceivable point of view. Its economic value to our present 
 commercial machinery has supplied the basis for many finan- 
 cial articles. Its functions have been made the subject of 
 discourse and legislation. 
 
 An article written by Professor S. S. Huebner of the 
 University of Pennsylvania, emphasizes the relation of the 
 Stock Exchange to capital seeking a market.* He speaks 
 of that institution as the "political and financial nerve center 
 of nations and the barometer of national prosperity and 
 adversity"; further stating that the stock market serves a 
 most useful purpose in directing the flow of capital from 
 channels where least needed into those where it can be most 
 beneficially and profitably employed. 
 
 In a report by the Hughes' Commission, appointed in 
 1908 to investigate exchanges, the New York Stock Ex- 
 change is commented upon as follows: "The volume of 
 transactions indicates that* the Exchange is today probably 
 the most important financial institution in the world. In the 
 past decade the average annual sales of shares have been 
 196,500,000, at prices involving an annual turnover of 
 nearly $15,500,000,000; bond transactions averaged about 
 $800,000,000." 
 
 Notwithstanding the commanding position of the Stock 
 Exchange in the world of business and commerce, and the 
 careful consideration it has received from almost every 
 angle, one most important factor has been sadly overlooked 
 — one upon which rests the entire mechanism of "The 
 Street" — its accounting. When the voluminous transactions 
 of Wall Street are considered, the total absence of literature 
 
 *Annals of the American Academy of Political and Social Science, May, 1910. 
 pages 1-23. 
 
VI 
 
 PREFACE 
 
 bearing upon the technique of its accounts is a matter of 
 
 surprise. 
 
 From the recording standpoint, Wall Street activities 
 resolve themselves into a study of brokerage accounting, 
 and this must logically first discuss the metfiods, practices, 
 and accounts of stock brokers. 
 
 But Wall Street in its broader sense includes not only the 
 stock market and the clearing house, but embraces also the 
 Cotton Exchange through which approximately 15,000,000 
 bales of cotton are marketed annually, and the Produce Ex- 
 change, which deals in grain, provisions, and cottonseed-oil. 
 These commodity exchanges almost equal in importance 
 the Stock Exchange itself, and their accounting must be 
 treated in any comprehensive consideration of Wall Street 
 accounting. 
 
 The subject of brokerage accounting, as intimated, is an 
 almost untrodden field. For this reason its interest to the 
 practitioner should be the greater. The present volume is 
 intended to cover the subject with reasonable completeness 
 and to give at least a fair insight into the very technical 
 operations of "The Street." 
 
 The author has been unable to avail himself of the work 
 
 of others in this field, as beyond a few scattered references, 
 
 there is an utter absence of literature treating the accounting 
 
 feature of brokerage as practiced in this country. The 
 
 demand for such a treatise prompted its preparation, being 
 
 so written in partial fulfilment of the requirements for the 
 
 degree of Master of Commercial Science of the New York 
 
 University. The work is, therefore, of a pioneer nature, 
 
 and the author hopes that it may contribute its mite to the 
 
 science of accounting. 
 
 Frederick Simson Todman. 
 
 New York City, 
 March 1, 1916. 
 
 Chapter 
 
 II 
 
 
 CONTENTS 
 
 PART I— STOCK BROKERAGE 
 
 Customer and Broker .... 
 
 Legal Relation of Customer and Broker 
 Duties of the Broker 
 Duties of the Customer 
 Rules of the Stock Exchange 
 Duration of the Agency 
 Stop Orders and Margin Calls 
 Representation on the Exchange 
 
 The Books of Account .... 
 
 Individuality of Records 
 
 Influence of State Law and Exchange Rules on 
 
 Records 
 Uniformity in Brokerage Bookkeeping 
 Records Used in the Stock Brokerage Business 
 
 III Purchases and Sales Books . 
 
 Advantage of a Bound Record 
 
 Clearing House and Ex-Clearing House Books 
 
 Use of the Purchases and Sales Books 
 
 Page 
 . 19 
 
 25 
 
 29 
 
 IV The Blotters .... 
 
 Blotter Entries 
 
 The Blotter as a Financial Record 
 
 The Principle of the Blotter 
 
 Cash Entries 
 
 The Blotter as a Barometer of Finance 
 
 Alternating Blotters 
 
 Ruling and Arrangement of the Blotter 
 
 Distinction between the Blotters 
 
 Vll 
 
 [•: 
 
 33 
 
via 
 
 CONTENTS 
 
 Chapter 
 
 V 
 
 VI 
 
 VII 
 
 Page 
 40 
 
 The Ledgers 
 
 Classification of Ledgers 
 
 1. The Customers Ledger 
 
 Hedged Accounts 
 
 Objections to the Hedged Account 
 
 Customers Ledger Not Subsidiary to General 
 
 Ledger 
 Definition of "Customers" 
 
 2. The Private Ledger 
 
 3. The Securities Ledger 
 
 Stock Loans 
 
 The Ruling of the Securities Ledger 
 Method of Keeping the Securities Ledger 
 Auditing the Securities Ledger 
 
 4. The General Ledger 
 
 The "Borrowed and Loaned" Books . 49 
 
 Lending Stocks 
 
 Borrowing Stocks 
 
 The Advantages of Borrowing and Lending 
 
 Mark-down and Mark-up 
 
 Stocks Borrowed and Loaned Book — Its Ruling and 
 
 Arrangement 
 Checking the Record 
 Money Borrowed and Loaned Book — A Record of 
 
 Collateral 
 Collateral Substitutions 
 Payment of Loan and Return of Securities 
 Relation of Money Borrowed and Loaned Book to 
 
 Other Books 
 
 Customers Stock Margin Record . 58 
 
 Trading on Margin 
 The Margin Record 
 Marginal Requirements 
 Operation on Credit Extension 
 Operation on a Cash Margin 
 
 VIII Miscellaneous Stock Records; Order 
 
 of Entry 62 
 
 Stock Transfer Register 
 The Vault List 
 
 Chapter 
 
 IX 
 
 X 
 
 1 1 
 
 XI 
 
 v] 
 
 [•} 
 
 XII 
 
 CONTENTS 
 
 Revenue Tax Register 
 Solicitors' Production Record 
 Order of Entry 
 
 The Clearing House Sheet . 
 
 The Stock Clearing House 
 
 Clearing House Stocks 
 
 The Methods of the Gearing House 
 
 The Gearing House Sheet 
 
 Balancing the Clearing House Sheet 
 
 Clearing House Deliveries 
 
 Gearing House Delivery Prices 
 
 Receive and Deliver Tickets 
 
 The Broker's Clearing House Balance 
 
 Balancing the Blotters 
 
 Balancing the Gearing House Blotter 
 
 The Ex-Clearing House Blotter 
 
 Further Uses of the Ex-Clearing House Blotter 
 
 Balancing the Ex-Blotter 
 
 Transactions of a Stock Brokerage 
 House — Methods of Operation , 
 
 Typical Transactions 
 
 Inception of a Brokerage Partnership 
 
 Opening Entries 
 
 Customers' Purchases and Sales 
 
 Financing the Transactions 
 
 Borrowing Stocks against Short Sales 
 
 Odd-Lot Transactions 
 
 Routine Records 
 
 Customers Margin Book 
 
 Call Loans 
 
 Final Entries 
 
 Transactions op a Stock Brokerage 
 House — Purchase and Sales 
 
 The Daily Routine 
 Borrowed Stock 
 Stock Returns 
 Short Sales 
 
 IX 
 
 Page 
 
 t. 6y 
 
 77 
 
 83 
 
 1/ 
 
 92 
 
 / 
 
CONTENTS 
 
 Chapter 
 
 y 
 
 XIII 
 
 yxiv 
 
 i 
 
 Page 
 
 Cash Items 
 
 Financing the Purchases 
 
 Premium and Interest on Stock Loans 
 
 Recording the Day's Transactions 
 
 The Day's Transactions 
 
 The Call and Return of Stocks Loaned 
 
 Interest on Stocks Loaned 
 
 Collateral Bank Loans 
 
 Time Loans 
 
 Coupons 
 
 Equity in Collateral Loans 
 
 Clearance Loans 
 
 The Mark-Up and Mark-Down 
 
 Interest on Bonds Purchased or Sold 
 
 Dividends on Stocks 
 
 Due Bills 
 
 Transactions of a Stock Brokerage 
 House — Customers' Accounts and 
 Statements no 
 
 Monthly Statement 
 
 Interest Charges 
 
 Relation between Accounts and Statements 
 
 Transactions of a Stock Brokerage 
 House — Closing the Books . .114 
 
 Income 
 Expense 
 
 Omitted Expenses 
 Accruals 
 Reserve Accounts 
 
 The Income Statement 
 
 1. Income from Operation 
 
 2. General and Administrative Expenses 
 
 3. Solicitors' and Branch Office Expenses 
 
 4. Net Income from Operation 
 
 5. Secondary Income 
 
 6. Deductions from Income 
 
 7. Net Income from all Sources 
 
 8. Profit and Loss Charges 
 
 9. Distribution of Profit 
 
 Chapter 
 
 XV 
 
 CONTENTS 
 
 The Balance Sheet 
 Balance Sheet Items 
 Assets 
 Liabilities 
 
 Proprietors' Accounts 
 Table of Equities 
 Combination Equity Statement and Balance Sheet 
 
 Failure and Dissolution 
 
 Voluntary Dissolution 
 
 Involuntary Dissolution 
 
 Release of Securities Held by Bankrupt 
 
 Customers' Equity in Deposited Securities 
 
 Equity in Clearance Loans 
 
 Disposal of Broker's Stock Exchange Seat 
 
 XI 
 
 Page 
 
 123 
 
 129 
 
 134 
 
 PART II— COTTON BROKERAGE 
 XVI The Cotton Futures Market 
 
 The Market 
 
 Customs of the Futures Market 
 
 Books of Account 
 
 The Customers' Records 
 
 The Street Records 
 
 XVII Customers' Records 
 
 Purchases and Sales Book 
 Customers Margin Book 
 Customers Contract Book 
 Customers Ledger 
 General Journal 
 General Ledger 
 Cash Book 
 Balancing the Cash Book 
 
 XVIII Customers' Records — The Account 
 
 Sales Register . . j.j 
 
 Ine Contract Differences Account 
 
 Factors Affecting the Contract Differences Account 
 
Xll 
 
 Chapter 
 
 Page 
 
 CONTENTS 
 
 Arrangement and Operation of Account Sales 
 
 Register 
 Customers' Accounts Payable 
 Customers' Statements 
 Statement of Open Trades 
 Account Sales Statement 
 
 XIX The Street Records .... 148 
 
 Purchases and Sales Book 
 
 Cotton Contract Blotter 
 
 Street Ledger 
 
 Arrangement of Street Ledger 
 
 The Street Margin Book 
 
 Ruling and Arrangement of the Street Margin Book 
 
 Relation between Margin Book and Street Ledger 
 
 Margin Call and Release 
 
 Interest on Margins 
 
 Original Margins 
 
 Time for Deposit of Market Margins 
 
 XX Settlements between Brokers . • IS7 
 
 Conditions Affecting Settlements 
 Methods of Settlement 
 
 1. Direct Settlement 
 
 2. Ringing Method 
 
 10:30 A.M. Bids 
 
 Ring Clerks and the Clearing House 
 
 3. Street Let-out 
 
 4. Tender of Notice 
 
 Clearing House Payments on Settlements 
 Brokers' Statement or Settlement Book 
 
 XXI Contract Differences and the Point 
 
 Balance 167 
 
 Requirements as to Records 
 
 Contract Differences Account 
 
 Point Balance 
 
 Proof of Contract Differences Account 
 
 Confirmation Slips 
 
 Chapter 
 XXII 
 
 XXIII 
 
 XXIV 
 
 XXV 
 
 CONTENTS 
 
 xm 
 
 Page 
 
 Transactions of a Cotton Brokerage 
 House — General . * . . . . 176 
 
 Typical Transactions 
 
 1. Direct purchases 
 
 2. Direct sales 
 
 3. Hedging 
 
 4. Speculation 
 
 5. Straddles 
 Notice of Delivery 
 
 Adjustment of Difference between Purchase and 
 Notice Prices 
 
 Sales for Actual Delivery 
 
 Adjustment of Difference between Sale and Pur- 
 chase Prices 
 
 Expiration of Options 
 
 Broker's Net Interest 
 
 Borrowing a Place 
 
 Transactions of a Cotton Brokerage 
 House — Incidental .... 184 
 
 Branch Offices 
 
 Solicitors 
 
 Floor Brokerage Business 
 
 Clearances 
 
 Carrying Transactions 
 
 Change of Name or Price 
 
 Half-Commission Brokerage 
 
 Transactions of a Cotton Brokerage 
 House — Closing the Books . . 189 
 
 Adjusting Entries 
 Income and Expense Factors 
 The Financial Statement 
 The Balance Sheet 
 Dissolution 
 
 Spot Cotton .... 
 
 Technicalities of the Spot Market 
 Details of Actual Delivery 
 Accounting Entries for Actual Deliveries 
 Limits of a Cotton Contract 
 
 . 196 
 
f 
 
 XIV 
 
 Chapter 
 
 CONTENTS 
 
 Cost of Contract 
 
 Grades of Cotton 
 
 Grade Premium and Discount 
 
 Storage and Labor 
 
 Customer's Contract Difference Credit 
 
 Insurance and Interest Charges 
 
 The Spot Register 
 
 Page 
 
 CONTENTS 
 
 XV 
 
 Chapter 
 
 XXX Cottonseed-oil and Coffee Brokerage 225 
 
 Cottonseed-oil Brokerage 
 Coffee Brokerage 
 
 PART III— PRODUCE BROKERAGE 
 
 XXVI Produce Brokerage — Its Customs and 
 
 Records 204 
 
 Conditions and Customs 
 Books of Account 
 The Blotter; the Street Ledger 
 The Clearing House Ledger 
 Qosing the Books 
 
 PART IV— BROKERAGE AUDITING 
 XXXI Audit of Stock Brokerage Books 
 
 Purposes of Audit 
 
 227 
 
 Scope of Audit 
 
 XXXII 
 
 XXVII 
 
 i 
 
 Produce Brokerage — The Clearing 
 House System 209 
 
 New York Produce Exchange Clearing House 
 
 Association 
 Operation of the Clearing House System 
 The Clearing House Sheet 
 Clearing House Adjustments 
 Clearing House and Customers' Settlements 
 Proof of Contract Differences— Grain Account 
 
 I 
 
 XXVIII 
 
 XXIX 
 
 Margins . . . . . • • 217 
 
 Original Margins 
 Market Margins 
 Margin Details 
 Release of Margins 
 
 Chicago Board of Trade Brokerage . 221 
 
 The Chicago Board of Trade 
 
 The Grain Market 
 
 Provisions 
 
 Commissions Charged New York Members 
 
 Accounting for Chicago Trades 
 
 XXXIII 
 
 Audit of Stock Brokerage Books- 
 Asset Accounts ^ 
 
 Stock Accounts Receivable ^ 
 
 The Revenue Stamps Account "^ 
 
 Securities of Customers 
 
 Depreciation of Securities Owned 
 
 Money Loaned Account ^ 
 Furniture and Fixtures 
 Land and Buildings 
 Stocks Borrowed 
 Dividends Receivable 
 
 Audit of Stock Brokerage Books- 
 Liability Accounts— Income Items 243 
 
 Liability Accounts 
 Accounts Payable ^ 
 Dividends Payable ^ 
 Stocks Loaned 
 Bank Loans and Brokers' Loans ^ 
 
 Income Items 
 Commissions 
 
 Wet ^^%f'^f ^^'^^'^ ^" Customers' Accounts 
 Interest on Stock Loans and Premiums 
 Expense Items 
 Final Procedure 
 
• m I ■Pw^ 
 
 ^^, 
 
 XVI 
 
 Chapter 
 XXXIV 
 
 XXXV 
 
 h} 
 
 CONTENTS 
 
 Audit of Cotton Brokerage Books 
 
 Outline of Audit 
 
 Accounts Receivable 
 
 Street Margins 
 
 Open Trades of Customers 
 
 Verification of the Contract Differences Account 
 
 Accounts Payable 
 
 Commissions 
 
 Interest on Margins 
 
 Audit of Other Commodity Departments 
 
 Page 
 
 . 249 
 
 Chapter 
 
 CONTENTS 
 
 PART V— FORMS 
 Stock Brokerage Forms .... 255 
 
 1. Purchases and Sales Book— Clearing House 
 
 2. Purchases and Sales Book— Ex-Clearing House 
 3a. Blotter (left) 
 
 3b. Blotter (right) 
 
 4. Securities Ledger 
 
 5a. Stocks Borrowed and Loaned Book— Borrowed 
 
 Section 
 5b. Stocks Borrowed and Loaned Book— Loaned 
 
 Section 
 6a. Money Borrowed and Loaned Book— Borrowed 
 
 Section 
 6b. Money Borrowed and Loaned Book— Loaned 
 
 Section 
 7. Margin Card, showing an account long of the 
 
 market 
 Margin Card, showing an account short of the 
 
 market 
 Loose-Leaf Margin Sheet 
 Stock Transfer Register 
 Vault List 
 
 Revenue Tax Register 
 Oearing House Sheet 
 Gearing House Blotter (left), showing methods 
 
 of balancing 
 14b. Gearing House Blotter (right), showing 
 
 methods of balancing 
 
 XXXVI 
 
 & 
 
 9. 
 
 10. 
 
 n. 
 12. 
 
 13. 
 14a 
 
 
 ^i 
 
 ISa. Ex-Qearing House Blotter (km .i,„ • 
 
 transactions at tin,e of in^pt/on 'f bt ZTf 
 
 ISb Ex7 ' T''' °' P-^^hases or sales ' 
 
 ^Sactions ?r ^'T' <"«"*>' ^"-'"R 
 
 t;?aS of r" • ^'r^ <"«•«>• ^^owin^ 
 
 17 r... .* *''^*""8 """"se balances 
 
 I?b""r' **°"*'^ Statement-Aciunt of 
 
 18 r/. •^°""'-^^«'^<' Transactions 
 
 'rhHoneSL^ Statement-Account of 
 '' '"HrrBro'^nLt'-— --nt of 
 
 "• ;rZ'TraSons"--'-^- ^^ 
 
 ^. Customer's Ledger Account-John Tones-Lo„. 
 
 IhoT'^'^" AccountJ^HenS BroiTn!! 
 
 23. Solicitors' Production Record 
 
 24. Eqmty Table or Statement of Margins 
 
 Cotton Brokerage Forms 
 
 25. Purchases and Sales Book 
 -• ^°Se-Leaf Margin Sheet 
 
 2 S: me": Sr ^-■^-^-^eaf Sheet 
 
 29. General Journal 
 
 3^. Cash Book-Receipts 
 
 30b. Cash Book-Disbursements 
 
 31. Street Margin Ledger 
 
 ,f ^*^eet Ledger-B. & Co. 
 
 ^. Customer's Statement 
 
 34. Statement of Open Trades 
 
 Z' o ''''''""^ ^^^^^ Statement 
 36a. Street Blotter (left) 
 
 -36b. Street Blotter (right) 
 
 3«>. street Marfin B:ot !Sl^7ish^rt"=nt 
 
 xvii 
 Page 
 
 283 
 
 ill 
 
xviii 
 Chapter 
 
 CONTENTS 
 
 39. Margin Call 
 
 40. Margin Response 
 41a. Margin Certificate 
 
 41b. Margin Certificate (back) 
 
 42a. Street Blotter (left), showing Street let^ut 
 
 transactions 
 42b. Street Blotter (right), showing Street let-out 
 
 transactions 
 
 43. Gearing House Sheet used in Settling Trans- 
 
 actions 
 
 44. Bill used in Settling Transactions in Gearing 
 
 House 
 
 45a. Broker's Statement or Settlement Book (left) 
 
 —Payment Side 
 45b. Broker's Statement or Settlement Book (right) 
 
 -Collection Side ^ 
 
 46. Customers' Open Trades 
 
 47. Street Open Trades 
 
 48. Contract Differences "Dummy" 
 
 49. Notice of Delivery and Form of Transfer 
 
 3U. Demand by Purchaser preceding Delivery of 
 Cotton 
 
 51. Solicitors* Production Record 
 
 52. White & Co.'s Account in Fairfield & Co's 
 
 Street Ledger 
 
 53. McFarland & Co.'s Account in White & Co 's 
 
 Street Ledger 
 
 54. White & Co.'s Account in McFarland & Co 's 
 
 Street Ledger 
 
 55. Spot Bill 
 
 56. Spot Register 
 
 Page 
 
 XXXVII Produce Brokerage Forms 
 
 57. "Bought" Slip 
 
 58. "Sold" Slip 
 
 59. Qearing House Sheet (January 5^ 
 
 60. Gearing House Sheet (January 6) 
 
 313 
 
 
 •<♦ 
 
 1: 
 
 Brokerage Accounts 
 
 Part I — Stock Brolcer 
 
 age 
 
 CHAPTER I 
 
 CUSTOMER AND BROKER 
 Legal Relation of Customer and Broker 
 
 Under the law of agency it is clearly pointed out that , 
 broker constitutes himself an af^ent in / ^^.^^ °"* ™' * 
 nf Ui. ^ agent m executmg- the order* 
 
 Hen aruTerof'" '"' " "" "^""''^^ ^ '^"'^o^^ 
 
 the right ant h/^^^^^^ ^-^ '" determining 
 
 ract n a h! T 1 '^' ''''^'''''' P^^''^^ ^o the con 
 
 and therefore l^und "fo^w di^^^^^^^^^^^ ^" ^^^"1 
 
 L^hTalid*? ': ^^^"■"- ''' ^ " -sTr 
 
 tomer who alone takes the risk of the venture 
 
 in the case of Markham v. Jaudon f41 N Y ?^A^ •* 
 was held in substance that a broker 'c^ir ^' '* 
 
 times be of «,rl, , i! * dealings may some- 
 
 tfe broker a„ ,^n, ' '°""*'° "■"'■'"" 
 
 'Galigher v. Jonej, 129 U. S. 193. 
 
 19^ 
 
20 
 
 STOCK BROKERAGE 
 
 i' 
 
 CUSTOMER AND BROKER 
 
 21 
 
 P 
 
 The broker's agency usually carries with it a personal, 
 material interest; that is, he has an interest in the subject 
 matter of the contract by reason of necessary outlays and 
 advances made for the customer while the account is still in 
 force. This material interest extends to the equity which 
 the broker may have on account of commissions, or part 
 payment for stocks purchased and interest accrued. The 
 term most frequently used to characterize dealings in which 
 such interests arise, is "marginal trading." 
 
 Duties of the Broker 
 
 1. The law of agency imposes upon the broker the exer- 
 cise of reasonable skill, diHgence, and good faith. 
 
 2. The law of agency enacted in New York, which be- 
 came effective as a statute in 1910, strictly prescribes that 
 the broker must submit a statement of purchase or sale upon 
 the execution of an order, stating the description of the secu- 
 rities traded in, the name of the person or firm from whom 
 purchased or to whom sold, and the exact time of execution. 
 The penal law also provides that any broker who refuses this 
 information within one day after a written demand has been 
 made shall be guilty of a misdemeanor, and such infraction 
 shall be punishable by a fine or imprisonment, or both. 
 
 3. The broker also contracts, although impHedly, to pro- 
 vide the means with which to make delivery to the purchaser 
 in the event of a "short" sale by a customer. 
 
 4. The broker also agrees to carry the "short" account 
 of a customer for a reasonable length of time, thus allowing 
 the latter an opportunity to buy in or "cover" such shortage 
 at a lower price. 
 
 5. A very important duty devolves upon the broker to 
 notify his principal before closing an account ia the case of 
 inadequacy of margin to protect the customer's holdings. 
 
 I 
 
 t4 
 
 There are various circumstances which enter into such cases, 
 where the important point of dispute centers about questions 
 of reasonable time, service of notice, past habit of dealing, 
 usual custom, and other factors which preclude the establish- 
 ment of a fixed rule to govern the enforcibility of the broker's 
 duty to notify. 
 
 6. Inasmuch as the broker is an agent, he must render an 
 accounting to the customer whenever such a statement is de- 
 manded. An action in equity may be instituted against the 
 broker upon failure by him to comply with the customer's 
 demand for a statement. Here, again, the fiduciary nature 
 of the broker's employment is made manifest. 
 
 Duties of the Customer 
 
 The customer, as well as the broker, has certain duties to 
 perform and rules to adhere to in his transactions with his 
 agent, the broker. These duties are as follows : 
 
 1. The customer should keep his account amply mar- 
 gined. 
 
 2. The customer must indemnify the broker for all out- 
 lays and losses incurred for his account. 
 
 3. The customer impliedly agrees to pay the usual com- 
 mission, and as soon as his order is filled this charge auto- 
 matically becomes an obligation. 
 
 4. The customer impliedly authorizes the broker to 
 pledge any securities purchased for him, for an amount not 
 to exceed the total indebtedness in such customer's account. 
 Formerly this authority was frequently carried so far as to 
 jeopardize the customer's equity. To prevent this malprac- 
 tice, a law was enacted which strictly forbids the broker 
 from overborrowing on his principal's securities. A viola- 
 tion of this law makes the offender liable for an action in 
 conversion. 
 
 A 
 
i 
 
 22 
 
 STOCK BROKERAGE 
 
 Rules of the Stock Exchange 
 
 Both the customer and the broker agree to abide by the 
 rules and regulations of the Exchange where the transaction 
 is consummated. The constitution of the New York Stock 
 Exchange is so replete with rules for trading and conduct of 
 its members, that misunderstandings as to the general pro- 
 cedure seldom go to court for decision. 
 
 Duration of the Agency 
 
 The rights and the duties of the two parties, broker and 
 customer, continue until the purposes of the agency shall 
 have been consummated. They are terminated through the 
 sale of securities held by the broker for the benefit of his 
 principal ; or by a transfer of the account and the securities 
 upon payment made by the customer; or upon payment for 
 his benefit by a third party. 
 
 In cases where a customer is "short" of the market, the 
 account is technically closed at the time of "cover," or in 
 other words, when a purchase is made against the shortage. 
 
 In the case of a "close-out" or involuntary disposition of 
 the principal's holdings — either "long" or "short" — ^the 
 account is closed and the agency thereby terminated against 
 the customer's wish. 
 
 This method of closing an account is in line with the 
 principle of law which gives a person the right to preserve 
 his lien or equity in the subject matter of a contract. 
 
 Stop Orders and Margin Calls 
 
 The system of "stop loss orders" is resorted to in cases 
 where a customer's margin is near the point of exhaustion; 
 and before his stock is sold, it is always to be presumed that 
 sufficient and reasonable notice has been served upon the 
 customer, declaring the intention of the broker to "close out" 
 
 CUSTOMER AND BROKER 
 
 23 
 
 the account. This notice must state the time and the place 
 of disposition. What constitutes reasonable and sufficient 
 notice is determined by the circumstances of the particular 
 case. Generally speaking, the broker should notify his cus- 
 tomer that his margin is running low, and request additional 
 margin before the account is closed out. 
 
 Where the market is "wild," the customer should be kept 
 informed so that proper provision may be made by him for 
 the protection of his interests. In a normal market, how- 
 ever, more formal notice should be sent, when the conditions 
 are such as to require the customer's attention. But it must 
 again be emphasized that it is incumbent upon the broker to 
 give notice before any steps are taken by him to make dispo- 
 sition of a customer's securities. 
 
 Upon payment made by the customer in answer to the 
 call for additional margin, or when a reduction in the hold- 
 ings has taken place, the stop loss orders should be cancelled 
 and the account allowed to continue as theretofore. 
 
 Representation on the Exchange 
 
 All the more important concerns engaged in the trading 
 of securities for the benefit of third parties have representa- 
 tion on the "board" or "floor" of the Stock Exchange in the 
 person of a firm member. All orders for the purchase or 
 sale of securities are sent to him for execution. 
 
 Many concerns, however, though actively engaged in the 
 stock and bond business, have no connection with the Stock. 
 Exchange. AH their orders for the purchase or sale of 
 securities are given to a brokerage firm which has member- 
 ship in the Exchange, and the latter firm treats the transac- 
 tions in the same manner as they do other customers' com- 
 mitments. 
 
 These non-membership firms keep accounts with cus- 
 tomers in the usual way, but they must also keep accounts 
 
24 
 
 STOCK BROKERAGE 
 
 with their brokers who execute their orders on the Ex- 
 change. Thus, if a customer desires to purchase 100 shares 
 of Steel at 60, the order is given to the Stock Exchange 
 house, and if executed, will be entered in the following man- 
 ner: The customer is charged with $6,012.50 (brokerage 
 $12.50), and the Stock Exchange concern is credited with a 
 like amount. This entry, as is the case with all other 
 entries, is passed through the usual general journal. If the 
 stock is purchased outright and paid for in cash, the trans- 
 action is passed through the ordinary cash book. No tech- 
 nical books of account are necessary. 
 
 The question might properly be asked how such 
 brokers find it worth their while to engage in this business. 
 The answer is that a small profit is realized in the difference 
 in interest between what the broker is charged and what he 
 in turn charges his customers. The truth of the matter is 
 that most of the profit from such a business is made in bond 
 transactions not listed on the Exchange. In such bond deals 
 the usual commission of 1/8% is charged by the broker, 
 besides any other perquisite which he may receive in the 
 transaction. To illustrate the latter point, suppose that the 
 broker receives a bid for bonds at 100 minus 1/16, and that 
 he makes the offer to his client at 100, or 100 plus 1/8 com- 
 mission. All such differences make for profit. Persons 
 engaged in this business usually operate on a limited capital, 
 and their profits are not any too large. 
 
 There is still another group of Stock Exchange concerns 
 which, while operating on the Exchange, do not settle their 
 own transactions, leaving this matter entirely in the hands 
 of other firms. For this service they are charged a com- 
 mission of 1/32% on purchases and a like charge for selling. 
 Such brokerage houses do not have occasion to use technical 
 books, as all entries are passed through the journal or the 
 cash book. 
 
 CHAPTER II 
 
 THE BOOKS OF ACCOUNT 
 
 Individuality of Records 
 
 Generally speaking, each line of business has its own 
 records peculiar to that business, from which it should be 
 possible to read the history of the enterprise. Also, if these 
 books are systematically arranged, it should be possible to 
 compile from them such financial statements as will enable 
 the executives to determine the present condition and the 
 future administrative policy of the business. Hence, for an 
 accounting system to be efficient it must be one "created to 
 meet the particular needs of the business for which it is in- 
 tended, and not a general system forced on the business 
 regardless of its individual requirements."* 
 
 Influence of State Law and Exchange Rules on Records 
 
 Individual needs in the business of brokerage require 
 that the set of books employed to record the transactions 
 be of such construction, ruling, and arrangement as to con- 
 form not only to the type of the organization, but to the 
 somewhat dictatorial policy of bookkeeping custom which 
 prevails in "The Street." The very technical pursuit of the 
 business itself presupposes a set of technical books. Also, 
 to some extent, the books are affected by the laws of the 
 state and the rules of the Exchange. Likewise, the by-laws 
 of the Stock Exchange relating to the delivery of securities 
 and the commission laws, prescribe certain books which must 
 contain specified information. To illustrate the extent of 
 Exchange supervision when hearings are in progress, the 
 Board of Governors, or any special committee which that 
 
 ♦"Practical Accounting Methods," Moxey, page 1. 
 
 25 
 
 t I * 
 
26 
 
 STOCK BROKERAGE 
 
 body may designate, may demand and enforce the produc- 
 tion of all the private books of account used by any member 
 of the Exchange, under pain of suspension or expulsion. 
 
 Uniformity in Brokerage Bookkeeping 
 
 Unlike mercantile or manufacturing businesses, in which 
 the books and the method of keeping them are so often the 
 unrestricted selection of the employer or the bookkeeper, and 
 vary in almost every case, brokerage books are, to a certain 
 extent, uniform in all the different brokerage houses. What 
 is more, the method of keeping these books is practically the 
 same in the different houses in spite of the fact that a better 
 grasp of accounting principles may dictate, in some in- 
 stances, a more sensible and accurate handling of certain 
 items. Even though the books may. be elaborated and 
 vary as to detail, the principles underlying the theory 
 and the construction of the accounts remain unchanged and 
 unchallenged. 
 
 Behind this supporting theory is to be found the in- 
 violable custom of doing business. Each brokerage house 
 meets practically the same problems as does its neighbor, 
 and the solution and disposition of the problems are univer- 
 sally and well established. There are seldom to be met two 
 conflicting theories to render a problem unworkable. 
 
 For purposes of analogy, let us take two banks doing the 
 same kind of business and located in the same vicinity. As 
 the supreme authority, the banking laws are the directive 
 agencies for the conduct of the business. A strict adherence 
 to banking custom, or what may be termed precedent, would 
 very likely be responsible for the establishment of some posi- 
 tive accounting system which would be found in either bank. 
 The introduction of the clearing house brings new needs in 
 connection with the records employed, which are the same 
 for both. As a result of this we find that the system of 
 
 
 THE BOOKS OF ACCOUNT 
 
 27 
 
 accounts obtaining in one bank may be safely expected in 
 the other bank doing a similar business. Thus it happens 
 that the books of account of a business like banking or 
 brokerage, although highly developed and diversified in 
 character, are the creatures of the same necessities, and are 
 therefore in their important features practically the same. 
 
 At this juncture let us remember the fundamental prin- 
 ciple that books are either journals or ledgers; they either 
 recite facts or summarize them. If we can take the com- 
 ponent parts of the antiquated day book and call one section 
 the purchase journal ; one, the sales journal ; the third, pur- 
 chase returns; and the fourth, sales returns, etc., the division 
 should not confuse us if we but remember the origin and 
 character of the book. For the same reason the high-sound- 
 ing and technically named records of the broker should not 
 be confusing. Some of these are statistical in nature and 
 construction, and can scarcely be called financial books of 
 account. Others, of which mention is made later, indicate, 
 if by no other means than their names, the class to which 
 they belong. 
 
 Records Used in the Stock Brokerage Business 
 
 The books of account and record which are most com- 
 monly found in the business of buying and selling securities 
 for customers are as follows : 
 
 1. Purchases and Sales Books 
 
 2. Blotters 
 
 3. Customers Ledger 
 
 4. Private Ledger 
 
 5. Securities Ledger 
 
 6. General Ledger 
 
 7. Stocks Borrowed and Loaned Book 
 
 8. Money Borrowed and Loaned Book 
 
 y 
 
28 STOCK BROKERAGE 
 
 9. Margin Book 
 
 10. Stock Transfer Register 
 
 11. Vault List 
 
 12. Revenue Tax Register (required by law)' 
 
 The individual books and records, in the order given 
 above, are analyzed and explained in detail in the several suc- 
 ceeding chapters ; the form, ruling, and arrangement of each 
 being shown. A study of form and ruling is important in 
 technical books of account such as these. Half of the ques- 
 tion as to whether the record is one of original or secondary 
 entry, is answered by a knowledge of the prescribed con- 
 struction of the accounting media. Since there has been 
 such a complete departure from the simple column system of 
 books, columnarization also should be closely observed in 
 this study. 
 
 
 s 
 
 CHAPTER III 
 
 PURCHASES AND SALES BOOKS 
 
 Advantage of a Bound Record 
 
 As has been mentioned, the broker is mainly occupied in 
 trading in securities for the benefit of third persons. There- 
 fore, the first book for recording transactions is the "Pur- 
 chases and Sales Book." This may be either a loose-leaf 
 device or a bound book. While loose-leaf systems are rather 
 prevalent, it appears that, as a book of initial entry, the con- 
 tents of this record could be best preserved in bound form, 
 thus avoiding the probability of loss or destruction inherent 
 in loose-leaf devices. 
 
 Clearing House and Ex-Clearing House Books 
 
 By reason of there being an arbitrary classification of 
 stocks into two divisions, i.e., (1) clearing house issues, and 
 (2) ex-clearing house issues, it is found very convenient to 
 employ two purchases and sales records. The ease with 
 which odd lots of stocks and bonds can be segregated from 
 the clearing house listings, makes this division a very simple 
 and expedient one. Thus, the ex-clearing house book will 
 contain odd lots of a clearing house nature, hundred-share 
 items of an ex-clearing house character, and odd lots of the 
 latter class; also bonds of all descriptions. The clearing 
 house book contains, strictly, listings of the Clearing House 
 in quantities of 100 shares or multiples thereof. The two 
 books are similar in construction, the arrangement being 
 such that a complete history of each transaction is given. 
 The transactions of each day are grouped conveniently and 
 chronologically. 
 
 29 
 
30 
 
 STOCK BROKERAGE 
 
 k 
 
 From Forms 1 and 2 it will be seen that all essential 
 information concerning purchases and sales is furnished by 
 these records. 
 
 Use of the Purchases and Sales Books 
 
 The subject matter contained in these forms is almost 
 self-explanatory. But as some question might be raised as 
 to the uses of the "When Received," "When Delivered," and. 
 "Time" columns, a word of explanation becomes necessary. 
 
 As stated more fully later, all securities are scheduled for 
 delivery upon the next business day, Saturdays excepted. If 
 the seller is unable to deliver within the prescribed time, he 
 has "failed to deliver," and makes up for this deficiency by 
 delivering the securities in question upon the next following 
 day and within the set time. 
 
 The "Time" column is used for the purpose of recording 
 the character of the accepted bid or offer as made between 
 the brokers in the transaction. 
 
 Under Article XXIII, Sec. 3 of the Constitution of the 
 New York Stock Exchange, bids and offers for the purchase 
 and sale of securities may be made as follows : 
 
 (a) "Cash," i.e., for delivery upon the day of contract. 
 As soon as the bid or offer is accepted, the stocks and bonds 
 are delivered to the broker and payment is made upon them. 
 
 (b) "Regular way," i.e., for delivery upon the business 
 day following the contract. This is the most common 
 method of dealing, and in absence of any other specifications 
 in connection with the purchase or sale, it is always presumed 
 that "regular way" is intended. 
 
 (c) "At three days," i.e., for delivery upon the third day 
 following the contract. It may be that securities may be 
 coming from out of town, or that they are not within the 
 immediate control of the seller for some other reason, or that 
 the buyer will not be in a position to accept the securities 
 
 PURCHASES AND SALES BOOKS 
 
 31 
 
 before that time ; all of which makes necessary the specified 
 bid or offer. 
 
 (d) "Buyers' or sellers' options" for not less than four 
 days nor more than sixty days. On such transactions writ- 
 ten contracts are exchanged on the day following the trans- 
 action, and carry interest at the legal rate, unless otherwise 
 agreed ; on these contracts one day's notice is usually given, 
 at or before 2:15 p.m., before the securities are delivered 
 prior to the maturity of the contract. These bids and offers 
 are usually made where it is impossible to make delivery of 
 or receive the securities involved for at least four days. This 
 method of trading is greatly in vogue among brokers who 
 buy or sell for European account. 
 
 On Forms 1 and 2, illustrations of the various methods 
 of buying and selling are given. Invariably all clearing 
 house items are "regular," whereas "odd lots" and bonds 
 represent largely the other bids and offers. Of course, by 
 prearrangement, stocks which belong to the clearing house 
 division and which are coming from abroad, may be made 
 ex-clearing house and subjected to the rules of delivery pre- 
 scribed for other than "regular" transactions. 
 
 Abbreviations are used for the purposes of the purchases 
 and sales book. "C." for cash; "R." for regular way; 
 "S. O.^" or "B. 0.3" for seller's or buyer's option at three 
 days; "B. O.^*" or "S. O.^" for buyer's or seller's option at 
 four days. Where more than four days is intended, the 
 exponent indicates the number of days allowed for delivery 
 or receipt of the securities. 
 
 By writing in the date of receipt or delivery of the shares 
 or bonds purchased or sold, and the character of the bid or 
 offer, the record is made complete, statistically. Hence, all 
 entries expressed therein are traceable chronologically to the 
 succeeding book or books involved in the transaction, by 
 merely referring to the date of settlement. 
 
32 
 
 STOCK BROKERAGE 
 
 This information is mandatory on the part of the broker, 
 and the book in which it appears is one of the many necessary 
 records which he must furnish when called upon to do so 
 by the Exchange. 
 
 J 
 
 CHAPTER IV : 
 
 THE BLOTTERS 
 
 * Blotter Entries 
 
 After the transactions have been recorded in the pur- 
 chases and sales books, the same trades are written up or 
 entered in either the "Clearing House Blotter" (Form 14) 
 or the "Ex-Clearing House Blotter" (Forms 15, 16), de- 
 pending altogether upon the classes of securities, whether 
 they be clearing house or ex-clearing house issues. Here, 
 again, this division facilitates entry and classification of 
 securities. 
 
 The Blotter as a Financial Record 
 
 In the stock brokerage business, both the general journal 
 and the cash book, as they are commonly used, are completely 
 superseded by the blotter, which is really the first book of a 
 financial character. From it are posted to the ledger all 
 purchases and sales and all other entries involving either 
 cash, transfers from one account to another, or adjustments. 
 . It is the record which is in use throughout the entire business 
 day. It reveals the cash condition of the firm and deter- 
 mines the extent of borrowing necessary to finance the trans- 
 actions of the customers. It also measures the lending 
 capacity of a firm which, having too large a surplus of cash, 
 may lend the same out "on call." The auditor will find that 
 the blotter, if well kept, will furnish every detail essential to 
 a thorough examination of the broker's operations. 
 
 The Principle of the Blotter 
 
 The principle underlying the operation of the blotter, 
 
 33 
 
34 
 
 STOCK BROKERAGE 
 
 1 
 
 which makes possible the combination in it of cash book and 
 journal, may be traced to its columnar ization. This is so 
 arranged and regulated by usage that the appearance of an 
 entry in one column or another, will indicate immediately 
 whether cash has been exchanged in the transaction or 
 whether it is intended merely to effect a transfer from one 
 account to another. 
 
 When the broker advances cash for the payment of. his 
 customers* purchases, or when cash is received against the 
 sales of securities, elements of commission and transfer tax 
 enter into the transaction. When stocks are ''returned'* or 
 "called," an interest item is to be considered ; when money 
 loans are liquidated, the same factor of interest must be 
 reflected in the blotter. Throughout, it will be observed 
 that the special ruling of the blotter classifies and character- 
 izes its entries. 
 
 Before taking up the discussion of blotter columnariza- 
 tion, another salient feature which distinguishes the blotter 
 should be commented upon. Instead of the debit and credit 
 journal columns adjoining each other (as in the two-column 
 journal), or appearing upon the same page, here the debit 
 entries affecting the accounts appear on the "To Receive" 
 page and the credit items are removed to the adjoining or 
 "To Deliver" page. 
 
 Cash Entries 
 
 Under the general principles of the cash book, the receipt 
 of cash is reflected on the left side of the book, and the cor- 
 responding credit is given to the account yielding the benefit. 
 In the case of the blotter, the receipt of cash is shown on the 
 deliver page. Again, the disbursement of cash, appearing 
 upon the right side of the cash book, is reflected on the re- 
 ceive side of the blotter. The idea of the purchase and con- 
 sequent charge to the customer, or the sale and credit to the 
 
 THE BLOTTERS 
 
 35 
 
 K 
 
 
 
 customer, is paramount, while the cash receipts or disburse- 
 ments are considered only as incidental for the reason that 
 all transactions are of a money or financial nature ; and it is 
 presupposed that cash will be either received or paid as the 
 circumstances require. To further clarify this apparent in- 
 consistency, it may be said that custom has established the 
 rule in the Street that all purchases and settlements therefor 
 be shown on the receive page of the blotter ; the debit in this 
 case meaning a debit to the customer and a credit to cash. 
 On the other hand, all sales and the subsequent receipt 
 of cash are reflected on the deliver page, and the credit 
 so appearing is a credit to the customer and a charge 
 against cash. 
 
 While it requires constant watchfulness on the part of 
 the bookkeeper to post debit and credit items correctly from 
 the ordinary cash book, and while he must keep the principle 
 constantly before him that an item on the disbursement page 
 is to be read : "Debit account ; credit cash," the arrangement 
 of the blotter, on the other hand, is such that when an item 
 appears on the right-hand page it means at once a credit to 
 the account. Thus no mental process becomes necessary 
 to assist in posting the entry correctly. 
 
 Since the blotters serve as cash books, it is necessary for 
 the cashier to adopt some means whereby the cash balances 
 at the close of a given day can be carried forward to the suc- 
 ceeding day's blotter. As the chain of entries would be 
 disturbed by this, the cashier will, at the close of each day's 
 business, balance the blotters and carry forward to the suc- 
 ceeding day's records the balance which appeared at the close 
 of the previous day, as shown on Form 16. By this method 
 each day's transactions are complete by themselves, and only 
 for the purposes of correction are the entries appearing for 
 previous days referred to again. The balancing of the blot- 
 ters is treated more in detail in Chapter X. 
 
36 
 
 STOCK BROKERAGE 
 
 THE BLOTTERS 
 
 The Blotter as a Barometer of Finance 
 
 * 
 
 From what has been said in the preceding paragraph, it 
 is apparent that the balance of cash for any particular day 
 can be found by deducting the amount appearing on the re- 
 ceive page from that which appears on the deliver page. The 
 cashier therefore looks to the blotter for the condition of his 
 balance. This is the barometer of his finances, from which 
 he reads the amount necessary for immediate purposes, or 
 what amount he can lend on call. The importance of this 
 is quite apparent. At the close of the daily business the 
 cashier takes into consideration the value of the purchases 
 to be provided for on the following day and the proceeds 
 which the sales of securities will net. Taking into account 
 the present bank balance or balances, adding the proceeds 
 from sales, and deducting the cost of purchases to be 
 financed, a cash condition is arrived at which determines 
 immediately the extent of borrowing or lending. Besides, it 
 determines the means of procuring needed funds, or shows 
 the extent to which excess funds may be loaned. 
 
 Alternating Blotters 
 
 Where the single blotter system is in operation and the 
 volume of business is large, the bookkeepers find difficulty in 
 getting an opportunity to post the daily transactions. This 
 is due to the fact that under such conditions the blotter is 
 balanced at a very late hour, and that as soon as it is bal- 
 anced, the blotter clerk begins to enter the purchases and 
 sales, charges and credits, for the ensuing day. This he 
 does because it is absolutely necessary that these records be 
 kept up to the mark. An unusual delay will almost 
 invariably result in a loss to the broker. 
 
 In order to obviate the disadvantages attaching to the 
 single blotter system, many concerns in the Street have 
 adopted the system of alternating day blotters. . Under this 
 
 37 
 
 » 
 
 method two clearing house and two ex-clearing house blot- 
 ters are employed, and are operated in such a manner that 
 the transactions of the preceding day are conveniently posted 
 without interruption to either the cashier's department or 
 the blotter clerk. To this end the clearing house trans- 
 actions occurring on Monday and Wednesday are entered in 
 the blotter known as the "Tuesday and Thursday C. H. 
 Blotter." All clearing house listings which have been dealt 
 in on Tuesday, Thursday, Friday, and Saturday are entered 
 in the "Monday, Wednesday, and Friday C. H. Blotter." 
 
 All ex-clearing house items are treated in the same way, 
 giving rise to the need of a "Monday, Wednesday, and Fri- 
 day Ex-Blotter," and another in which to write up the pur- 
 chases and sales settled on Tuesday and Thursday. The 
 ex-blotter of Tuesday and Thursday carries with it the petty 
 cash entries which are frequently "put through" (posted) 
 on Saturday. In order, therefore, that the name of this 
 book shall cover its purpose fully, it is usually called the 
 "Tuesday, Thursday, and Saturday Ex-Blotter." 
 
 Any cash disbursements other than for the payment 
 against purchases, or cash receipts other than for the sale of 
 securities, find expression in the ex-clearing house blotter 
 in use the day on which the receipt or disbursement is made. 
 The same holds true of adjustment entries. Thus, the Mon- 
 day, Wednesday, and Friday ex-blotter might contain an 
 odd-lot purchase made on Saturday, and under the same date 
 there might appear an entry attesting to the receipt of $500 
 as margin from John Jones. In other words, cash disburse- 
 ments and cash receipts are posted to the various accounts 
 concerned upon the day that such cash exchanges are made. 
 
 Ruling and Arrangement of the Blotter 
 
 The blotter may be in the form of a loose-leaf device, or 
 it may be a bound book. The latter is preferable for the 
 
38 
 
 STOCK BROKERAGE 
 
 reason that, being both cash book and journal, its records 
 are permanent and important — too important to be exposed 
 to the destruction or loss so easy under the loose-leaf 
 systems. 
 
 It will be seen, by referring to Form 3, that for the most 
 part the descriptive captions of the blotter columns are iden- 
 tical with the headings found in the purchases and sales book. 
 Thus the history of any transaction is doubly given, but in 
 the blotter it is expressed in financial form ; that is, the values 
 as well as the quantities of shares in a transaction are given. 
 
 Distinction between the Blotters 
 
 The clearing house and ex-clearing house blotters are 
 identical as to form. They differ, however, in the uses to 
 which they are put and in the method of balancing. Thus 
 the ex-clearing house blotter serves for the recording of all 
 the issues of stocks and bonds entered in the ex-clearing 
 house purchases and sales book, as stated in Chapter III. 
 Also it performs the additional function of a journal in the 
 matter of adjustments, and as a cash book in reflecting the 
 cash receipts and disbursements of the business. Its func- 
 tions reach as far as controlling the clearing house items 
 after they have passed through the usual channel of clear- 
 ance with the New York Stock Exchange Clearing House. 
 As can be judged, then, the clearing house blotter serves 
 only for the entering of such issues as come directly under 
 the jurisdiction of the Clearing House, leaving the matter of 
 cash exchanges therefor to the ex-clearing house records, 
 depending altogether upon which day's book is being used. 
 
 In contents as well as in use do these blotters differ. 
 Taking as a simple illustration, the "Interest" columns in 
 the respective blotters, it will be found that the interest ap- 
 pearing in the clearing house blotter will represent interest 
 on clearing house stocks only. This interest will arise from 
 
 THE BLOTTERS 
 
 39 
 
 r 
 
 "returned" or "called" stocks. The "Interest" column of 
 the ex-blotter will represent, invariably, the interest which is 
 paid or received from money loaned or money borrowed 
 transactions. With the clearing house blotter the main con- 
 cern is the return or call of stocks use^d for delivery purposes 
 only. As explained in Chapter VI, lending or borrowing 
 stocks involves the use of money upon which interest is 
 calculated. In the matter of the ex-clearing house record 
 the interest arises without regard to stocks, their return, or 
 call. 
 
THE LEDGERS 
 
 41 
 
 CHAPTER V 
 
 THE LEDGERS 
 
 Classification of Ledgers 
 
 The ledgers used in the stock brokerage business may, 
 for the purpose of division, be classified as follows : 
 
 L Customers Ledger 
 
 2. Private Ledger 
 
 3. Securities Ledger 
 
 4. General Ledger 
 
 A majority of the brokerage houses combine the first 
 and second of these ledgers into the general ledger. How- 
 ever, as this is not always done, the form and ruling of 
 each ledger is here considered separately. 
 
 I. The Customers Ledger 
 
 On the debit side of the customers ledger, which is usu- 
 ally a loose-leaf device, the following columnar arrange- 
 ment is the one commonly employed: "Date," "Explana- 
 tion," "Price," and "Amount" (to be charged). In case 
 of a purchase, the commission of 1/8 of 1% is not entered 
 to be added to the purchase price, but is included as part 
 of the total cost of the purchase, i.e., the amount to be 
 charged. Thus, in the purchase of 100 shares of United 
 States Steel common at 54, the cost will appear as $5,412.50 
 and not $5,400 as might be expected. In other words, the 
 commission charge is included in the cost of the shares, and 
 the total placed in the "Amount" column. Besides pur- 
 chases, the interest charges, computed monthly, and the 
 
 40 
 
 f 
 
 record of the "net longs" are reflected on the debit side of 
 the customer's account. Long securities represent either 
 securities held during a period as margin against other pur- 
 chases, or as margin against short sales and net purchases 
 of the same security. 
 
 On the credit side of the account will appear the sale of 
 stocks and bonds; the delivery of securities to a customer, 
 or for the account of the customer against liquidated bal- 
 ances; also payments in cash on account of margin. "Net 
 short" securities of a similar class will be brought down after 
 balancing the account. By the expression "short" is meant 
 the selling of shares, not previously purchased or held, but 
 sold with the expectation of realizing a profit through the 
 decline in value of such shares. The subsequent purchase 
 of shorts is known as "short covering" or "cover." 
 
 Hedged Accounts 
 
 An account may be long and short at the same time. As 
 an illustration, a customer may be long of Union Pacific 
 and short of United States Steel. Such an account is said 
 to be "hedged." This expression means a mixed account, 
 containing items reflecting contradictions or opposite ten- 
 dencies. 
 
 The term "hedged" also means a condition of an account 
 in which the prominent feature is the sale of a different 
 security from the one "long," or the purchase of a different 
 security from the one "short." The true purpose behind such 
 trading is to check losses caused by a declining market when 
 long, or by an advance in prices when short of the market. 
 
 The status of some accounts which will be found spread 
 upon the customers ledger, no matter which system is 
 adopted, will be quite alarming when the point is reached of 
 preparing the balance sheet, compiling the "Table of Equi- 
 ties" (Form 24), or computing monthly interest charges on 
 
42 
 
 STOCK BROKERAGE 
 
 the customers* accounts. Taking a hypothetical case, let it 
 be assumed that John Wilson purchases 100 shares of Steel 
 at 56; that upon this purchase he deposits the sum of $1,000 
 as margin (equivalent to ten points). His debit balance 
 then is $4,612.50, against which he retains an equity or mar- 
 gin in his holdings. In technical parlance, this is a long 
 account. The market declines, and in order to check further 
 loss he elects to sell 100 shares of Union Pacific at 157. 
 After deducting the usual charge for commission and tax, 
 the proceeds from the sale of the Union Pacific are $15,- 
 685.50. By reason of this sale, Wilson receives a credit, and 
 the account at this -point is "hedged." Wilson's account will 
 then have a credit balance of $11,073. This, of course, is a 
 fictitious credit, and this status of the account is explained 
 by the statement that such a credit exists subject to certain 
 short coverings or disposal of longs. 
 
 Wilson has a margin on the Steel stock. If he should 
 either deliver the Union Pacific to his broker, or cover this 
 stock, his account would again become one of like tenden- 
 cies — a simple account technically known as a "long" ac- 
 count. Or if the Steel stock should be sold, the account 
 would still retain the simple form under the technical name 
 of a "short" account. In the latter case Wilson would re- 
 tain an equity in his short Union Pacific to the extent of the 
 balance of $1,000 deposited as margin, less any loss or in- 
 terest charges which he might have suffered on his Steel 
 
 stock. 
 
 This mixed account difficulty may be overcome by set- 
 ting up separate "short" accounts for the purpose of segre- 
 gating short sales of the customers, who at the same time 
 are perhaps long of other securities as shown by other 
 accounts called "long" accounts. This practice is the correct 
 one, although it will be found that the one first described is 
 the more commoa 
 
 THE LEDGERS 
 
 43 
 
 Objections to the Hedged Account 
 
 Here the fictitious and misleading results of the mixed 
 or hedged account should "be pointed out. Besides the diffi- 
 culty in reading hedged accounts, another objectionable 
 feature is the complexity encountered in the computation of 
 interest. As an illustration of this, take the account of 
 Richard Ross. On September 1, his account shows a credit 
 balance of $11,073, with 100 shares of Union Pacific short 
 and 100 shares of Steel long. The purchase price of the 
 Steel is perhaps lost sight of, as well as the sales price of 
 the Union Pacific, if the transactions are of long standing. 
 On what balance is interest to be computed, since Ross' 
 account shows a false -credit ? 
 
 If Ross' account were analyzed, and the purchase cost of 
 Steel and the proceeds from the short sale of Union Pacific 
 were again established, it would appear, in effect, that the 
 broker had advanced money on the Steel piu-chase but 
 had received no benefit from the sale of Union Pacific except 
 his commission. Therefore, the account of Richard Ross 
 should be charged with such interest as will recompense 
 the broker for his outlay. But, how difficult is this opera- 
 tion, as compared with the ease of interest calculations when 
 the long Steel, upon which interest is chargeable, appears 
 in one account and the short Union Pacific, upon which no 
 interest is allowed, appears in another account? 
 
 Customers Ledger Not Subsidiary to General Ledger 
 
 It has probably been assumed that the customers ledger 
 is operated as a subsidiary to the general ledger, and that 
 somewhere in the latter appears the controlling accounts for 
 customers and creditors. This is not the case, however. 
 While the customers ledger (if employed) is in a sense sub- 
 sidiai^, it is not operated under that principle. The col- 
 umnarization of the blotters from which entries are posted 
 
44 
 
 STOCK BROKERAGE 
 
 THE LEDGERS 
 
 45 
 
 to the customers ledger, is such that no customers' or 
 creditors' controlling accounts in the general ledger are pos- 
 sible. So, to all intents and purposes the customers ledger 
 is in itself a part of the general ledger, and nothing more 
 than a device to make the general ledger less unwieldy, and 
 to make posting less difficult by distributing the bookkeep- 
 ing operations. The balance totals of the customers ledger 
 must find expression on the trial balance sheet before the 
 latter can be complete and in balance. 
 
 Definition of "Customers" 
 
 The term "customers," as employed in the Street, much 
 opposed to the usual interpretation, means a trader — a pur- 
 chaser or seller of securities for either investment or spec- 
 ulation. A customer's account may show a debit balance, 
 together with securities long. The value of the securities 
 at the market price should usually exceed the amount of 
 the debit balance. Thus, to the extent of his margin the 
 customer is a creditor. On the other hand, the account may 
 show a credit balance with securities short. Here, again, 
 the "cover" value of the securities should be considered in 
 order to determine the true status of the account. Generally 
 speaking, it is very difficult to class the customer as debtor 
 or creditor, for he may be either in the broad sense of the 
 term. 
 
 2. The Private Ledger 
 
 It is often advisable to keep from the minor clerks who 
 have access to the books, a knowledge of the income of the 
 concern, the capital accounts of the proprietors, and other 
 vital business accounts. When this is so, the "Private 
 Ledger" is adopted. 
 
 If a private ledger is kept, the balances contained in it, 
 or their totals, must appear in the trial balance. 
 
 «i 
 
 Notwithstanding the advantages of the private ledger, 
 the matters belonging to it are often incorporated in the 
 general ledger ; this in response to the present decided ten- 
 dency toward concentration of the records wherever pos- 
 sible. As in the case of the customers ledger, the private 
 ledger is merely a part of the general ledger, separated from 
 it for reasons of expediency, and the principle of control 
 cannot be operated. 
 
 3. The Securities Ledger 
 
 The securities or stock ledger, as the record is inter- 
 changeably called, differs in both use and form from the 
 ordinary stock ledger which is employed in mercantile and 
 corporate enterprises. This particular record is not in- 
 tended as one for summary purposes, nor is it a financial 
 book. It is used only for listing securities and to show their 
 places of deposit, or other disposition. 
 
 Many forms of this ledger are in use, but its one under- 
 lying purpose remains the same, despite the numerous elab- 
 orations. Its most common form is the loose-leaf device, 
 as that is best adapted to the increasing or decreasing vol- 
 ume of securities recorded. The security holdings are of 
 such a diversified nature that one sheet or more, as the case 
 demands, is allotted to each kind of stocks or bonds. 
 
 As far as it is possible, the sheets containing the indi- 
 vidual listings of a certain issue of securities should be 
 arranged. alphabetically. The advantages thus gained are 
 
 self-evident. 
 
 The longs on the left side of the ledger represent cus- 
 tomers' holdings or stocks borrowed from brokers in the 
 Street. On the right-hand side is a record of short securi- 
 ties, representing customers' short sales, together with a 
 list of stocks which might be "loaned" out in the Street 
 or which might be acting as collateral in bank loans. 
 

 46 
 
 STOCK BROKERAGE 
 
 Stock Loans 
 
 Here it may be well to explain that the distinction be- 
 tween collateral in the case of bank loans, and stock loans 
 in the Street, depends upon the intentions of the lender or 
 the borrower. Is it the intention of the borrower to use the 
 stock so borrowed, and for which money has to be parted 
 with, for the purpose of delivering the shares against short 
 sales of his customer? Or is it his intention to lend money 
 and hold the stock as collateral for the loan? These are 
 the questions to be answered in determining the intention 
 of the transaction. If the first question is answered affirma- 
 tively, then a true illustration of the stock loan is furnished. 
 If the second question is so answered, then an illustration 
 of the ordinary collateral loan is presented. Banks are in 
 the habit of making collateral loans. Brokers, on the other 
 hand, frequently borrow securities, but only as they are 
 necessary for the purposes of effecting delivery against short 
 sales. The borrowing and lending of stocks is more fully 
 discussed in Chapter VI. 
 
 The Ruling of the Securities Ledger 
 
 The page of this ledger is divided in the center by a 
 vertical line, as shown in Form 4. At the top of the leaf 
 is inserted the name of the security recorded. The left 
 side of the page is further subdivided into six columns, 
 which are headed from left to right with the descriptive 
 captions, "Date," "Number of Shares," "Certificate Num- 
 ber," "By Whom Owned," "For Whose Account Bor- 
 rowed," and "From Whom Borrowed." On the right half 
 of this page are six columns headed, "Date," "Number of 
 Shares," "Certificate Number," "For Whose Account 
 Short," "To Whom Loaned," and "Place of Deposit." 
 
 This record is one of the books of the cashier's depart- 
 ment or of the stock clerk. To a great extent it operates 
 
 \ 
 
 THE LEDGERS 
 
 47 
 
 as a check upon all securities which pass in the course of the 
 day. 
 
 Method of Keeping the Securities Ledger 
 
 At any given time it should be possible to balance the 
 securities by adding the number of shares of stock or bonds 
 represented on the left side of the sheet, and comparing this 
 with the number entered on the right side. These footings 
 should agree. As an illustration, if Fred Smith is long 
 100 shares of Amalgamated Copper, the date of receipt 
 will appear in the securities ledger with the number of 
 shares, the description of the stock — Amalgamated Copper 
 — and the name of Fred Smith as owner. (See Form 4.) If 
 the stock has been paid for and delivered to the customer, 
 the record would thereby be cancelled ; but if not delivered, 
 the right-hand side of the sheet should reveal the present 
 place of deposit. It will show that the stock has been loaned 
 in the Street, or that it is serving as collateral in some bank 
 loan ; or else it might appear as being in the transfer office 
 of the corporation awaiting re-registration, or in the vault 
 of the broker. In any case, excepting the delivery to Smith, 
 the shares of Amalgamated Copper on either side of the 
 record should balance. 
 
 Auditing the Securities Ledger 
 
 An auditor in checking the securities ledger should de- 
 mand positive proof that the stock represented in the various 
 customers* accounts tallies with the book under inspection. 
 Further, he should investigate and determine beyond doubt 
 that the stocks as reflected therein are in actual existence 
 in one of the four places mentioned. It is his duty to de- 
 termine this. 
 
 The securities ledger is not a permanent record. At best 
 it is a temporary memorandum which changes from day to 
 
48 
 
 STOCK BROKERAGE 
 
 I 
 
 day with the transactions of the customers or with the 
 change in place of deposit of securities. For instance, if 
 John Jones covers his short Steel, this change is reflected 
 by a total cancellation or erasure of the Steel sheet as far 
 as Jones affects it. Also, stock which is loaned in the Street 
 may find its way into a collateral loan the very next day; 
 stock which is loaned out might be called, or stock which 
 is borrowed might be returned. All this shifting changes 
 the stock record so that only through the medium of "throw- 
 ing back" or referring to the blotters, can the condition of 
 this ledger be determined for a period which has passed. 
 
 4. The General Ledger 
 
 The general ledger contains the usual nominal accounts, 
 the asset and liability accounts, and a record of the proprie- 
 tors' interests. The contents exclude the customers' and 
 the private ledger accounts, when these are contained in the 
 other ledgers. 
 
 The bound-book form is preferable for the general 
 ledger if a customers ledger is in operation; otherwise it 
 would be more practical to use a loose-leaf device. This 
 is so for two reasons : First, the accounts of the customers, 
 by reason of their voluminous transactions, must be carried 
 forward so often that the loose sheets afford the only prac- 
 tical means of keeping the respective accounts intact. 
 Second, the loose sheets are desirable because of the frequent 
 change in the clientele of a brokerage concern, making the 
 insertion or the withdrawal of sheets constantly necessary. 
 
 The ruling of the general ledger sheet does not differ 
 from the standard ledger ruling, except that the explanatory 
 column is more spacious in order that transactions may be 
 fully recorded. 
 
 CHAPTER VI 
 
 THE "BORROWED AND LOANED" BOOKS 
 
 i 
 
 Lending Stocks 
 
 In the course of his transactions the broker frequently 
 requifes money to meet stock purchases, and on the other 
 hand, frequently requires stock to make deliveries against 
 short sales. These needs are usually met by loaning or 
 borrowing stock as the case may be. 
 
 This borrowing and loaning of stock is something pe- 
 culiar to the Street. After Exchange hours, the loan crowd 
 assembles on the floor of the Exchange. This group is 
 composed of brokers or their clerks who have stocks to loan, 
 and brokers who seek to borrow stock to make delivery 
 against short sales, or for other purposes. 
 
 To illustrate the loan of stock, suppose a broker pur- 
 chases 1,000 shares of Steel common on margin for a cus- 
 tomer. As the customer has only put up 10% or such 
 other marginal amount as the broker may require — or in 
 the case of a credit customer, has put up nothing at all — 
 the responsibility of financing the transaction falls mainly 
 upon the broker. Under the rules of the Street the pur- 
 chased stock will be delivered the next day. In the case of 
 the Steel common, as it is a clearing house stock, delivery 
 will be made by the broker designated by the Clearing As- 
 sociation. If it were not a clearing house stock, delivery 
 would be made by the broker from whom it was purchased. 
 In either case the purchasing broker must be prepared to 
 give his check to the delivering broker the -same day the 
 delivery is made, i.e., the business day following the making 
 of the contract. 
 
 49 
 
50 
 
 STOCK BROKERAGE 
 
 U 
 
 If the broker has available funds, the question of paying 
 for his stock is merely a matter of drawing his check. If, 
 however, his own funds are not available, he has two courses 
 open to him : First, he can borrow the money from the bank 
 on collateral. Second, he can borrow the money on the 
 Street from one in need of the shares. 
 
 It is usually more expedient to borrow money by lending 
 stocks to the Street than it is to employ the bank for that 
 purpose through the means of a collateral loan. In the first 
 case full market value is received ; in the latter from 60 to 
 80% of the value is obtained, not to mention the ease of 
 lending stocks to the Street, and the inconvenience of bor- 
 rowing from the bank. 
 
 If it be a clearing house issue, then all the lending broker 
 does is to exchange tickets with the borrower of the stock, 
 and the transaction assumes the aspect of a sale and purchase, 
 and the Clearing House merely offsets the purchase of the 
 Steel in this case, against the loan of the Steel. The amount 
 involved in the transaction almost approximates the cost 
 price of the shares, so that the lender of the stock pays or 
 receives the difference between such cost price and the clear- 
 ing house price* — an arbitrary figure established each night 
 by the Clearing House to settle transactions of which lending 
 and borrowing stocks are typical. 
 
 However, if the stock to be loaned is ex-clearing house, 
 the matter is a little more difficult to arrange. Then the 
 loaning broker — who is the purchasing broker in the case of 
 the 1,000 shares cited — either makes his arrangements to 
 deliver the shares loaned upon the following business day, 
 or he endeavors to lend the stock before 2:15 p. m. on the 
 delivery day. If he cannot do either, he must arrange to 
 borrow the money through the medium of a collateral loan. 
 
 •See Chapter IX. 
 
 THE "BORROWED AND LOANED" BOOKS 
 
 51 
 
 
 \ 
 
 A question might arise as to how the broker is able to 
 receive the purchased securities in the last cited instance and 
 deposit the same as collateral in order to raise the funds to 
 pay the seller or the broker delivering such stocks or bonds. 
 The broker delivering does not wait for payment from the 
 receiving broker longer than the time necessary in which to 
 draw the check. How then is this question to be answered ? 
 Through an arrangement with the bank with which the 
 broker does business he is able to have his checks honored, 
 or what is equivalent to being over-certified; such over- 
 certification or overdraft to be made good by the broker with 
 the funds received from pledging his securities or lending 
 them to the Street. 
 
 At this point the broker has bought his stock but has 
 deposited it as collateral for the money with which it was 
 purchased. He may call for his stock at any time, but must, 
 of course, pay back the money borrowed on its security with 
 interest. On the other hand, the broker or bank which 
 loaned the money, may in turn call for its repayment, with 
 accrued interest, and when paid the collateral is returned. 
 In case of a call for the money, the broker on the opposite 
 side of the transaction can usually relend his stock or pledge 
 it as collateral in a bank loan, and thus, as far as he is con- 
 cerned, leave the whole matter in statu quo. 
 
 The matter is usually kept in this shape until the cus- 
 tomer orders the stock sold. Then the broker makes the sale, 
 and demands the return of the shares loaned, upon payment 
 of the amount borrowed thereon and interest. The stock so 
 redeemed is delivered to the purchaser and the transaction is 
 complete as between the brokers. 
 
 Borrowing Stocks 
 
 Another transaction usually handled through the loan 
 crowd is the short sale. The customer instructs his broker 
 
52 
 
 STOCK BROKERAGE 
 
 i 
 
 to sell short, which, were it not for the rules of the Stock 
 Exchange, would be nothing more or less than a sale at the 
 market price for future delivery, The Stock Exchange, 
 however, requires that when a sale is made, delivery of the 
 stock sold shall be made not later than the following day. 
 To meet this requirement — while still making the profit or 
 loss resulting from the "short" transaction — ^the customer 
 puts up a margin to protect the broker, and the broker then 
 makes an actual sale at the market, borrowing stock and 
 delivering it to the purchaser the following day against 
 payment of the purchase price. The borrowed stock stands 
 in this condition until the customer orders his short sale 
 covered. This means that the stock borrowed and sold on 
 his account is to be returned. The broker then buys the 
 stock in at the market and returns it to the party from whom 
 it w^as borrowed. If the price of stock has declined mean- 
 while, the customer reaps the profit between the price at 
 which the stock was sold and the price at the time the sale 
 is covered, less the broker's charges. If the price of the 
 stock has advanced, he loses the difference between the price 
 at which he sold and the price at the time of covering, plus 
 the broker's charges. 
 
 The Advantages of Borrowing and Lending 
 
 To repeat, lending stocks on the Street, which is equiva- 
 lent to borrowing money on collateral, is a very advan- 
 tageous arrangement for the broker who wishes money, 
 inasmuch as he then borrows to the full market value, 
 whereas if he pledged the same securities as collateral at his 
 bank, he would receive but from 60 to 80% of their value. 
 Further, the rate of interest on money loaned on stocks on 
 the Street is usually lower than the rate required by banks 
 for the use of demand money. 
 
 The rate of interest charged for money advanced on 
 
 THE "BORROWED AND LOANED" BOOKS 
 
 53 
 
 t 
 
 borrowed securities approximates the rate charged in the 
 call money market, but is really measured by the demand 
 for and supply of the particular stock. Thus the broker 
 seeking to borrow specified stocks for the purpose of making 
 delivery against a short sale of his customer, must primarily 
 consider the necessity of procuring the shares. Hence, he 
 is not in a position to bargain too closely as to the rate of 
 interest nor to object to advancing the full value in money, 
 because he must have the stock. This is advantageous for 
 the broker lending stocks, and particularly so when the 
 market is oversold, because he can then charge a premium 
 on the stocks loaned. Thus a year or so ago when the New 
 York, New Haven & Hartford shares developed such a 
 short interest in the market, those who held the floating 
 supply were in a position to charge a premium ranging from 
 1/64 to 1/16% per day to borrowers of this stock. 
 
 Mark-Down and Mark-Up 
 
 The "mark-down" (market down) and the "mark- 
 up" (market up) are transactions which are frequently 
 made in connection with stocks borrowed or stocks 
 loaned. It is the custom among brokers to keep all stock 
 loans at the market price; that is, the money advanced or 
 received for stocks borrowed or loaned must be kept at the 
 market value of the stock. For example, suppose that Jones 
 & Co. borrowed from Smith & Co. 100 shares of Steel at 
 60, and that subsequently the value of these shares declined 
 10 points. In such a case, Jones & Co. would request Smith 
 & Co. to send the former firm a check for $1,000 and also 
 interest on the loan from the time of borrowing until ad- 
 justed to the market value. This transaction is called a 
 "mark-down," and a new entry under this date is made in 
 the stocks borrowed and loaned book of Jones & Co., thereby 
 constituting a new transaction. The converse of this opera- 
 
THE "BORROWED AND LOANED" BOOKS 55 
 
 54 
 
 STOCK BROKERAGE 
 
 I 
 
 tion is known as a "mark-up," and would take place if the 
 price of Steel increased, say to 75, instead of declining to 
 50. This time, however. Smith & Co. would issue the 
 "mark-up" and request a check from Jones & Co. for 
 $1,500. 
 
 Stocks Borrowed and Loaned Book — Its Ruling and 
 Arrangement 
 
 The stocks borrowed and loaned book is an underlying 
 record supporting the ledger accounts "Stocks Borrowed" 
 and "Stocks Loaned." 
 
 The*book is usually a bound one. It is divided into two 
 sections, the one devoted to the record of borrowing transac- 
 tions (Form 5a), and the other to lending transactions 
 (Form 5b). The column headings from left to right of the 
 "Borrowed" section are as follows : "Date," "From Whom 
 Borrowed," "Number of Shares," "Description," "Price" 
 (at which borrowed, usually the market or clearing house 
 price), and "Date of Return." Then follow columns for 
 the days of the calendar month, in which appear the interest 
 rates from day to day on the stocks borrowed. The interest 
 rate is either renewed, increased, or decreased daily, de- 
 pending altogether upon the prevalent rates at which stocks 
 are lending or renewing. 
 
 The "Loaned" section of this record is identical in ar- 
 rangement with the "Borrowed" section, with the one ex- 
 ception that the second column is headed "To Whom 
 Loaned." 
 
 Checking the Record 
 
 As a check upon the stocks borrowed and loaned book, 
 recourse may be had to the securities ledger already de- 
 scribed. The money values involved in the stocks borrowed 
 and stocks loaned should be reconcilable with the general 
 
 ledger accounts bearing the captions "Stocks Borrowed," 
 "Stocks Loaned." 
 
 Money Borrowed and Loaned Book— a Record of Collateral 
 
 It has been observed that the stocks borrowed and loaned 
 book is intimately related to the financing of transactions 
 through the lending or borrowing of securities in the Street. 
 As has been illustrated, a broker can also obtain funds by 
 means of the ordinary bank loan, giving securities as col- 
 lateral. He can also lend his excess funds upon call or 
 demand, taking securities as collateral for the loan. 
 
 Borrowing money from the bank or from any other 
 source upon collateral securities, or loaning money upon 
 call gives rise to the need for another record which will give 
 expression to such transactions. The "Money Borrowed 
 and Loaned Book" (Forms 6a and 6b) fulfils this purpose. 
 The book is similar in arrangement to the stocks borrowed 
 and loaned book, which has just been explained. It shows 
 the date of the borrowing or lending, the amount involved 
 in the transaction, from whom borrowed or to whom loaned, 
 a list of the collateral given for the loan, the rate of interest, 
 date paid, ahd provides by means of a special column for the 
 record of any other stock substituted for that originally 
 pledged. As such loans are usually call loans upon which 
 the rates of interest fluctuate from day to day, provision 
 must be made for a reflection of such rate changes. A glance 
 at Forms 6a and 6b will show how this is done, the arrange- 
 ment adopted being the same as that used in the stocks bor- 
 rowed and loaned book. 
 
 Collateral Substitutions 
 
 The use of the "Substitution" column of the money bor- 
 rowed and loaned book is illustrated by the following trans- 
 action : 
 
t. 
 
 y 
 
 i!l 
 
 c5 STOCK BROKERAGE 
 
 Assume that the brokerage house of Smith & Co. pledges 
 500 shares of Steel common (market price 54) and 500 
 shares of Amalgamated Copper (market price 70) to secure 
 a loan of $50,000 ; and that the 500 Steel shares so pledged 
 really belong to a customer of Smith & Co. The customer 
 later sells his 500 shares of Steel common, and Smith & Co. 
 must then deliver the 500 Steel to the purchaser. In such 
 a case they will seek to substitute other securities, the value 
 of which approximates $27,000, as collateral, in order that 
 the Steel may be released for delivery against the sale. The 
 lender is usually willing to 'accept stock of approximate value 
 and rating, in place of the securities which the borrower 
 seeks to withdraw, and Smith & Co. having purchased 300 
 shares of Baltimore & Ohio common, valued at about 
 $28,000, will be enabled to effect a substitution of stock by 
 depositing the Baltimore & Ohio shares in lieu of the Steel. 
 In the event of a substitution, the stock withdrawn is 
 checked on the money borrowed and loaned book to indi- 
 cate such withdrawal, and the substituted shares are entered 
 in the "Substitution*' column. 
 
 Payment of Loan and Return of Securities 
 
 In the -case of payment of a money loan, the date of 
 liquidation is written across the face of the page, thus at- 
 testing to the fact that the loan has been cancelled and the 
 released securities returned. 
 
 Relation of Money Borrowed and Loaned Book to Other 
 Books 
 At this point reference should again be made to the 
 securities ledger (Form 4) to trace the connection between 
 it.and the money borrowed and loaned book. In speaking of 
 that ledger, it will be recalled that the position or place of 
 deposit of the securities was emphasized. Consequently, the 
 
 I 
 
 THE "BORROWED AND LOANED" BOOKS 
 
 57 
 
 \ 
 
 securities appearing in the "Money Borrowed" section of 
 Form 6 are traceable to the securities ledger. When sub- 
 stitutions are made, the fact will also be borne out by this 
 ledger. Taking the hypothetical case given above, the Bal- 
 timore & Ohio shares would probably have been taken from 
 the safe deposit vault and substituted in the bank loan ; while 
 the Steel shares, constituting part of the original collateral 
 in the loan and which were subsequently withdrawn, would 
 be erased from the securities ledger, and the blotter re- 
 cording the sale and a record of their delivery to the pur- 
 chaser would vouch for their final disposition. 
 
 However, taking the "Money Loaned" section of the 
 money borrowed and loaned book, the securities appearing 
 therein as collateral do not find expression in the securities 
 ledger, for, while they are in the pledgee's hands, in no way 
 is it intended that either their position or ownership shall 
 be recorded among the securities owned. The stocks or 
 bonds acting as security for a loan are the property of the 
 pledger, subject, of course, to the rights and equities of the 
 pledgee. 
 
 The accounts in the general ledger, under the captions 
 of "Money Borrowed" and "Money Loaned," exercise a 
 check on the money values representative of the borrowing 
 or lending operations. 
 
Ij 
 
 I 
 
 I 
 
 I 
 
 CHAPTER VII 
 
 CUSTOMERS STOCK MARGIN RECORD 
 
 Trading on Margin 
 
 Stock trading is for the most part done on margin; i.e., 
 the customer deposits with his broker a part of the purchase 
 cost. To gain a clearer idea of the margin system, this mar- 
 ginal deposit may be regarded as an instalment on the stock, 
 or as a payment on account of an option. The system of 
 margins allows the trader to carry a large line of securities 
 on a comparatively moderate cash capital, with the result 
 that his returns are much greater than they could be if he 
 were required to pay the whole purchase price. To illus- 
 trate, if he deposits a ten-point margin on a stock selling at 
 par, he can carry ten times as much stock as he could if he 
 had to pay the full purchase price, and his profits or losses 
 are correspondingly increased. 
 
 The Margin Record 
 
 The "Customers Stock Margin Record" is probably the 
 most carefully watched of all the broker's books. It should 
 show at all times the status of the customer's account, 
 whether it be long, short, or hedged. If stocks fall, it shows 
 when and to what extent more margin must be called. Or 
 if a customer is operating on a credit extension allowed him 
 by the broker, it shows just how far this has gone, and how 
 nearly the customer has reached his limit. If the margin 
 book is not closely watched, the neglect may cause the broker 
 heavy personal loss. 
 
 The record of margins in operation may be adequately 
 
 58 
 
 .7 
 
 CUSTOMERS STOCK MARGIN RECORD 
 
 59 
 
 kept either by means of a loose-leaf book, or by a card sys- 
 tem. Forms 7 and 8 show the usual style of margin card ; 
 while Form 9 gives the loose-leaf margin sheet, showing its 
 operation. 
 
 The margin record, whether it be the loose-leaf or card 
 system, should be arranged to show at a glance the name 
 of the account ; the number of shares, long, short, or hedged; 
 the description of such shares ; the net price (including com- 
 mission) ; the market price of such stocks; any losses or 
 gains thereon (by comparison of market price and cost 
 price) ; the margin deposit ; and, either in points or per- 
 centages, the margin remaining to carry such commitments. 
 It is essential that all these facts be presented, quickly, sys- 
 tematically, and logically. 
 
 The loose-leaf margin record, which is the more prac- 
 tical and convenient of the two methods in use, should be 
 so arranged that each section of accounts will be in alpha- 
 betical sequence. In a widely fluctuating market the merits 
 of the loose-leaf device will be evident. The card system 
 carries with it the usual liability of the destruction or mis- 
 placement of the cards when most needed. 
 
 Marginal Requirements 
 
 The usual marginal requirements are ten points on the 
 number of shares held. Frequently, a percentage of the cost 
 value will be required, but this depends altogether upon the 
 policy of the broker or the nature of the stock carried — 
 whether highly speculative or otherwise. In the event of a 
 hedged account, the requirements might be less. Thus, a 
 margin of $1,000, or ten points, would usually be required 
 on an account long 100 shares of Steel or short 100 shares 
 of Union Pacific. A margin of five points would, however, 
 more than cover the requirements of a hedged account long 
 100 shares of Steel and short 100 shares of Union Pacific. 
 
I 
 
 60 
 
 STOCK BROKERAGE 
 
 Operation on Credit Extension 
 
 When a customer is operating in the market upon a credit 
 extension allowed him by the broker, the amount of such 
 credit is in no way regulated by contract. The broker usu- 
 ally carries the account up to a point where a considerable 
 sum is owing, or until in his judgment he requires additional 
 funds with which to finance these holdings, when he will 
 make a demand upon the customer for a sufficient sum to 
 adjust the account to market values. 
 
 To illustrate, a wealthy client places an order with his 
 broker for 5,000 shares of Steel preferred, which are pur- 
 chased at 107. On this commitment no margin is required, 
 and it is incumbent upon the broker to finance the transac- 
 tion. The price of Steel preferred declines to 102. This 
 means a paper loss to the customer of $25,000. In some way 
 the broker must make up this difference, either by depositing 
 additional collateral if he has borrowed at his bank, or by 
 receiving a mark-down if he has made a stock loan. If he 
 has a sufficient supply of capital, it will not be necessary for 
 him to issue a margin call to his customer. On the other 
 hand, if the broker is short of capital, he will make a margin 
 call, receiving from his client securities whose market value 
 approximates $25,000 and which could be pledged, or else 
 he will be given a check to cover the difference in values. 
 
 Operation on a Cash Margin 
 
 All other accounts, including those of the operator, spec- 
 ulator, or small trader, must be carefully watched in order 
 to know when the calling point for additional margin is 
 reached, or to ascertain the standing of the account after 
 added lines have been taken on. In other words, it must 
 be determined if the account is well enough margined to 
 allow an increased interest in the market, either long or 
 short. 
 
 CUSTOMERS STOCK MARGIN RECORD 
 
 61 
 
 To illustrate, let it be assumed that a customer purchases 
 100 shares of Steel common at 56 ; that upon this transaction 
 he deposits the usual ten points, or $1,000. His margin 
 sheet would reflect this purchase. If the market price of 
 Steel remained unchanged, the customer would retain his 
 equity of $1,000 less commission on the transaction.* As- 
 suming, however, that the price of Steel declines to 51, the 
 account or condition of margin would reflect an equity of 
 only $500, since the loss at the market price consumed the 
 other portion of the margin deposited. On the other hand, 
 if the value of Steel had risen to 61, the equity or margin 
 would be increased to 15 points or $1,500. 
 
 Throughout the study of margins, it will be found that 
 for the most part it is one of constant watchfulness on the 
 part of the broker. When a decline occurs, the customer 
 must be asked for additional margin in order that the con- 
 dition of his account may be improved and the margin on 
 his securities be brought up to the proper percentage of the 
 market prices. The vital importance of this matter is illus- 
 trated in treating "Equity Tables" in Chapter XIV. 
 
 Selling at a price which will prevent loss to the broker 
 or his customer is called a "stop-out." Thus, if the customer 
 overlooks a call for margin, it frequently results in a loss 
 of the entire margin he already has up, and in such case he 
 is sold or "stopped out." This saves the broker, but if he 
 delays the sale too long it may result in a financial loss to 
 him. Thus, if the price of Steel bought on margin at 56, 
 declined to 44, it would be beyoiid the exhaust point, and not 
 only would all margin be lost, but the broker would himself 
 incur a two-point loss. The account would then be in a con- 
 dition of minus-equity — a true type of a "doubtful account 
 receivable" of the broker. 
 
 *A commission of 1/4% is immediately added to the cost, making the net 
 cost as reflected by the margin sheet, 56 1/4, this representing the commission 
 both ways — ^purchase and sale. 
 
 m 
 
I 
 
 CHAPTER VIII 
 
 MISCELLANEOUS STOCK RECORDS; ORDER 
 
 OF ENTRY 
 
 Stock Transfer Register 
 
 If a dividend on stock should be declared and the transfer 
 books be closed for a certain number of days before pay- 
 ment, as is usually the case, the broker purchasing such 
 stock meanwhile would be prevented from transferring it 
 to his own name or the name of his customer. The one in 
 whose name the stock is registered will then receive the divi- 
 dend check. Thus the "selling" broker, or holder of record, 
 becomes a collecting agent for the purchasing broker in the 
 matter of the dividend. For this service a collection charge 
 of 1% is frequently made. To escape this charge, and to 
 insure the prompt and proper receipt of dividends or interest, 
 it is considered good policy to transfer stocks or registered 
 bonds into the name of the holder, wherever possible. 
 
 The "Stock Transfer Register" (Form 10) serves to 
 record all stocks in the process of transfer. It also becomes 
 a subsidiary record of the securities ledger, giving detailed 
 information as to the date of deposit of securities with the 
 transfer office, the date of withdrawal, the certificate num- 
 bers of the shares deposited and received, and the list of the 
 securities in transfer. The securities ledger classifies by 
 means of an alphabetical arrangement, while the transfer 
 register groups the items under dates of deposit and with- 
 drawal. By its arrangement it reveals at a glance just what 
 stock has been transferred, what has been withdrawn, and 
 what is still on hand at the transfer offices. 
 
 62 
 
 MISCELLANEOUS STOCK RECORDS 
 
 63 
 
 The Vault List 
 
 In many of the brokerage offices a record called a "Vault 
 List" (Form 11) is kept to record the securities in the vault. 
 This record is also subsidiary to the securities ledger. 
 
 The auditor will find it convenient to have this vault list 
 when the point of reconciling the stocks on deposit is 
 reached. He should not, however, depend upon the vault 
 list, but should personally examine all securities in the safe 
 deposit box and keep record of all changes which take place 
 in the course of the day. 
 
 Revenue Tax Register 
 
 By the New York State law which became effective 
 June 30, 1905, all shares of stock sold or transferred were 
 made subject to a tax of 2 cents per share, regardless of par 
 value. This law was subsequently amended so that the 
 revenue at the present time is but 2 cents on each $100 par 
 value of stock transferred. The transfer offices, however, 
 seldom requested the production of the stamps in effecting 
 transfers, and the law was frequently evaded by using can- 
 celled stamps to cover more than one transfer. To remedy 
 this, an act was passed which made it compulsory for stock 
 brokers to record all transfers, either through sale or re- 
 registration. The face value of the stamps used therefor 
 must also be stated. The book in which these entries are 
 made is called the "Revenue Tax Register" and is shown in 
 Form 12. 
 
 The revenue tax register provides space for the date 
 of either sale or transfer of stock ; the name of the stock ; 
 the number of shares (the quantity rather than the serial 
 number of the certificate) ; face value (par value of the 
 shares) ; and name of purchaser or transferee. The latter 
 calls for the name of the purchasing broker or the person 
 to whose name the certificates are transferred. 
 
64 
 
 STOCK BROKERAGE 
 
 The special columns on the right of the revenue tax 
 register are for the statement of the number and face value 
 of the stamps used, and are designed to prevent the double 
 use of transfer stamps. 
 
 Petty thieving of revenue stamps was not uncommon in 
 the early days of the tax — something made possible by the 
 system then in use, as no record of a probing nature was 
 ever kept. The present revenue tax register — which is re- 
 quired by law — has overcome this tendency by providing 
 the data for a checking inventory of such stamps. The con- 
 sumed revenue stamps recorded by this register gives the 
 consumption figure. Adding this to the physical inventory 
 of stamps, the result should reflect the amount charged to 
 the Revenue Stamps account in the general ledger at the 
 beginning of the period. 
 
 Solicitors' Production Record 
 
 Where many solicitors are employed, it is necessary to 
 keep a memorandum book of some sort which will reflect 
 the margin of profit under which the solicitors are operat- 
 ing. Form 23 shows the form of solicitors' production 
 record commonly used. This record should be so kept as 
 to give a monthly review of each solicitor's commission- 
 producing activities. Opposed to the solicitor's earnings 
 for the house, is the amount of expense incidental to his 
 employment, such as salaries, entertainment, and traveling 
 expenses. As all contracts between a firm and a solicitor 
 cover at least the period of one year, the record of business 
 as shown by this memorandum book is valuable in consider- 
 ing the renewal of contracts. 
 
 ORDER OF ENTRY 
 
 Having examined into the books of account and the 
 underlying records used in brokerage accounting, it will 
 
 ORDER OF ENTRY gj- 
 
 be well to discuss for a moment the sequence or order in 
 which transactions are recorded. 
 
 Purchases and sales are passed first through the pur- 
 chases and sales book. At the same time the proper entries 
 are made in the customers margin record. These are but 
 pencil memoranda which trace the fluctuations on a given 
 stock following its purchase or sale. If this were entered 
 at a later time in the day, the chances are that some of the 
 customer's margin might be well spent, making further 
 call necessary before the close of the day. 
 
 The financial end of the transaction is now ready for 
 entry in the blotter. If the customer deposits his margin 
 upon the day of his commitment in the market, as is usually 
 the case, then the ex-clearing house blotter of that day will 
 evidence the fact by reflecting an appropriate credit. If, 
 however, the transaction is of a clearing house nature and 
 comes within the jurisdiction of the clearing house settle- 
 ment, the clearing house blotter will express the transaction 
 financially, and the item will be posted to the customer's ac- 
 count the next day. For instance, assuming that a purchase 
 of clearing house nature was made on Thursday, July 15, 
 then the clearing house blotter of Friday, July 16, will con- 
 tain a record of the transaction. On July 16, the stock 
 would be received through the Clearing House and funds 
 would be paid to the broker whom the Clearing House desig- 
 nated as the delivering broker. This would necessitate an 
 entry in the ex-clearing house blotter of July 16, attesting 
 to the receipt of the shares and the parting with money. 
 Of course, in this example it is supposed that the transaction 
 is entirely financed by the purchasing broker. 
 
 To carry the illustration further, assume that the stock 
 is taken to the vault and proper entry is then made on the 
 vault list and in the securities ledger. The latter record 
 recites the condition of the holdings, showing, say, that 100 
 
66 
 
 STOCK BROKERAGE 
 
 
 ^^^l^^ ^^ ^ certain named stock were bought for the account 
 of "X," naming the vault as the place of deposit. If the 
 stock had been transferred, the transfer stock register would 
 attest the fact. If the stock was pledged as collateral, then 
 the money borrowed book would show the place of deposit. 
 If the shares had been loaned out in the Street, then, under 
 the date of lending, the stock loan would be recorded in a 
 financial manner upon the ex-clearing house blotter, and, 
 for memorandum purposes, in the stocks loaned section of 
 the stocks borrowed and loaned book. 
 
 In following the hypothetical transaction through the 
 respective books which are affected by the transaction, the 
 close relationship of one book to another is clearly seen. 
 The records might be different, however, if for instance, the 
 stock was not a clearing house listing, or if a different 
 method of financing the transaction became necessary. 
 
 
 CHAPTER IX 
 
 THE CLEARING HOUSE SHEET 
 The Stock Clearing House 
 
 The discussion centering around methods of financing 
 or settling Wall Street transactions would not be complete 
 without a word as to the Clearing House system and the 
 service which it renders the broker. So important an in- 
 stitution is it that the daily voluminous Wall Street transac- 
 tions would be practically impossible without its aid. 
 
 As the Bank Clearing House facilitates the adjustment 
 and payment of the many millions of dollars of debits and 
 credits arising during a given day, so does the Clearing 
 House of the New York Stock Exchange assist in the ad- 
 justment and delivery of the many hundreds of thousands 
 of shares of stock purchased and sold daily among its 
 members. 
 
 Because of this enormous volume of trading in certain 
 securities, the Stock Exchange established its own clearing 
 house in 1892. To illustrate the importance of its work, 
 turn to the date of April 15, 1915, when over 318.000 shares 
 of stock were traded in four issues alone, as follows : 
 
 63,500 shares of Amalgamated Copper 
 60,400 shares of Reading 
 39,800 shares of Union Pacific 
 154,675 shares of Steel common 
 
 These transactions represented values . approximating 
 $28,000,000, to say nothing of the transactions in the other 
 issues on that same day. In about four hours on the fol- 
 lowing day, April 16, all settlements— deliveries and re- 
 ceipts—were effected. It can readily be seen how great is 
 the work of the Stock Exchange Clearing House. 
 
 ^7 
 
68 
 
 STOCK BROKERAGE 
 
 The following list gives the securities which come under 
 the jurisdiction of the Clearing House. They are known 
 as clearing house listings. Opposite each appears the abbre- 
 viation used to indicate that security on the ticker tape. 
 
 Clearing House Stocks 
 
 ' 
 
 THE CLEARING HOUSE SHEET 
 
 69 
 
 Amal. Copper (C) 
 
 Am. Beet Sug. Com (ABS) 
 
 Am. Can Com (CAN) 
 
 Am. Can Pr (CAN PR) 
 
 Am. Car & F. Com (AF) 
 
 Am. Cotton Oil (AO) 
 
 Am. Loco. Com (ALO) 
 
 Am. Tel. & Tel. Co (ATT) 
 
 Anaconda (ANC) 
 
 Atchison Com (A) 
 
 Atchison Pr (A PR) 
 
 Bait. & O. Com (BO) 
 
 Bait. & O. Pr (BO PR) 
 
 Brooklyn R. T (B) 
 
 Cal. Pet. Com (CPU) 
 
 Can. Pac (CA) 
 
 Cent. Lea. Com (CL) 
 
 Cent. Lea. Pr (CL PR) 
 
 Ches. & Ohio (CO) 
 
 Chi. & N. W. Com (NW) 
 
 Chino Copper (CY) 
 
 Col. Fuel Com (CF) 
 
 Consol. Gas (G) 
 
 Corn P. Ref. Com (CR) 
 
 Corn P. Ref. Pr (CR PR) 
 
 Del. & Hudson (DH) 
 
 Denver Com (D) 
 
 Dist. Sec (DR) 
 
 Erie Com (E) 
 
 Erie 1st Pr (EI PR) 
 
 Erie 2nd Pr (EI PR) 
 
 Gen. Electric (GE) 
 
 Gr. Northern Pr (GNR PR) 
 
 Gr. Nor. Ore Ctfs (ORE) 
 
 Great West (GW) 
 
 Great West. Pr (GW PR) 
 
 Ice Sec (IS) 
 
 111. Central (IL) 
 
 Inter. Met. Com (IB) 
 
 Inter. Met. Pr (IB PR) 
 
 Lehigh Val (LV) 
 
 Louis. & Nash (L) 
 
 Manhattan ( M ) 
 
 Mex. Pet. (MNP) 
 
 M. K. & T. Com (K) 
 
 M. K. & T. Pr (K PR) 
 
 Missouri Pac (MP) 
 
 Nat. Lead (LT) 
 
 Nevada Con. Cop (NV) 
 
 N. Y. Central (CEN) 
 
 N. Y., New H. & H (NH) 
 
 Norf. & W. Com (N) 
 
 Norf. & W. Pr (N PR) 
 
 Northern Pac (NP) 
 
 Ont. & West (OW) 
 
 Pacific Mail ( P) 
 
 Pennsylvania (PA) 
 
 People's Gas (PO) 
 
 Press. Steel Com (PRS) 
 
 Ray Consd. Copper (RC) 
 
 Reading Com ( RG) 
 
 Reading 1st Pr (RG I PR) 
 
 Reading 2nd Pr (RG II PR) 
 
 Rep. Steel Com (RBC) 
 
 Rep. Steel Pr (RBC PR) 
 
 Rock Isl. Com (R) 
 
 Rock Isl. Pr (R PR) 
 
 Rubber Com (RU) 
 
 Smelters Com (AR) 
 
 Southern Pac (SP) 
 
 South. Ry. Com (SR) 
 
 South. Ry. Pr (SR PR) 
 
 St. L. & S. W. Com (SS) 
 
 St. L. & S. W. Pr (SS PR) 
 
 St. Paul Com (ST) 
 
 Sugar Com (S) 
 
 Tennessee Cop (TC) 
 
 Texas Pac (T) 
 
 Third Ave (TAV) 
 
 Union Pac. Com ( U) 
 
 Union Pac. Pr (U PR) 
 
 U. S. Steel Com (US) 
 
 U. S. Steel Pr (US PR) 
 
 Utah Copper (UT) 
 
 Virginia (Them ( VC) 
 
 West. Un. Tel (W) 
 
 Westinghouse (WX) 
 
 The Methods of the Clearing House 
 
 Each member of the Exchange is entitled to clearing 
 house privileges. Each broker who avails himself of this 
 right, receives a number which appears on his "Clearing 
 House Ticket,'* and also on his other clearing house docu- 
 ments. 
 
 For every purchase made on the Exchange there must 
 be a bona fide sale, and both brokers — one buying for his 
 customer, the other selling — must intend to receive and de- 
 liver the shares involved in the transaction. Every time a 
 clearing house stock is dealt in, there is an implied agree- 
 ment that the trade is to be handled in the customary way 
 — namely, through the Clearing House. 
 
 One block of stock might represent a purchase of ten 
 thousand shares bought from fifty respective brokers. The 
 price of the stock might vary from one-eighth of a point to 
 several points, depending upon the condition of the market 
 at the time. It is a well-known fact that such huge pur- 
 chases are consummated by a nod of the head or a discordant 
 "bought" or "sold." In order to obviate any possible price 
 differences in such "offhand" trading, each transaction is 
 "compared" almost immediately after the close of the daily 
 business. In ex-clearing house transactions, comparison 
 may be made also before the opening of the market on the 
 succeeding day. 
 
 Clearing house transactions are compared in the follow- 
 ing manner: Slips called "Clearing House Tickets" are 
 exchanged between buyer and seller, these tickets evidencing 
 the quantity, description, and value of the shares sold. The 
 seller's ticket, i.e., the ticket given to the purchaser by the 
 seller, is a white one, the buyer's ticket, yellow. The seller's 
 ticket has a perforated bill of sale attached to it, upon which 
 the transfer tax stamp appears in cancelled form. 
 
 These tickets are in form and in fact orders on the Qear- 
 
70 
 
 STOCK BROKERAGE 
 
 THE CLEARING HOUSE SHEET 
 
 71 
 
 L) 
 
 ing House to deliver, in the case of the seller, or to receive 
 in the case of the buyer, 100 shares or multiples of 100 
 shares of a specified clearing house stock at the sale and 
 purchase price shown on the tickets, the value of the shares 
 being carried out in dollars and cents. It is obvious that 
 where buyer and seller exchange tickets, the quantity, price, 
 and money value should agree. If they do not, the matter 
 is either adjusted before 4:15 p.m. on the same day, or else 
 the shares are not passed through the Clearing House that 
 night. The item is then settled out of the Clearing House 
 or it may be treated on the following day's sheet. 
 
 The Clearing House Sheet 
 
 When the day's transactions have been completed, the 
 clearing house tickets are written up on a sheet which is 
 known as the ''Clearing House Sheet." As shown in Form 
 13, this is divided into two parts : to the left, or the "Receive 
 from" side, are five columns in which are entered the white 
 tickets held by the concern which is preparing the sheet. In 
 the first of these columns appears the broker's name ; then, 
 in order, the number of shares ; the description of the stock 
 which is to be cleared ; the price of the purchase as it appears 
 on the white ticket ; and the money value thereof. 
 
 To the right of the clearing house sheet— the "Deliver 
 To" side — information is listed from the yellow tickets 
 which the concern holds and which were given it in ex- 
 change for its white or "deliver" tickets. In other words, 
 the sheet when sent to the Clearing House by a broker, fur- 
 nishes information to the authorities concerning his pur- 
 chases and sales of the day, together with a list of stocks 
 borrowed or returned. Hence, in the column reading "De- 
 liver to," the broker compiling this sheet lists officially the 
 orders which he makes upon the Clearing House, directing 
 delivery of the shares involved. The other four columns 
 
 i 
 
 ■ I' 
 
 correspond to those on the left side, having the headings 
 "Shares," "Stock," "Price," and "Amount." 
 
 At the bottom of the clearing house sheet the following 
 directions appear : "Enter on this sheet only those transac- 
 tions for which tickets have been exchanged," and, "The 
 tickets must agree or both parties will be fined." This 
 means an agreement as to the quantity, money value, and 
 description. 
 
 Balancing the Clearing House Sheet 
 
 It will be remembered that the function performed by 
 the Clearing House is to facilitate transactions in clearing 
 house stocks between its members, by expediting the de- 
 livery and receipt of such stocks and by effecting settlement 
 when so doing. In case receipt and delivery of the same 
 kinds of shares appear on the clearing house sheet, the trans- 
 actions are set ofif against each other when the clearing 
 house sheet is balanced. This is done for the purpose of 
 determining what is to be received from, and delivered to, 
 the brokers whom the Clearing House may designate, the 
 receipt and delivery to be actually made upon the following 
 day. 
 
 Much in the same manner as a debtor or creditor bank 
 pays or receives a bank clearing house certificate in settle- 
 ment of its voluminous transactions, the broker receives or 
 delivers, through his clearing house, the net shares pur- 
 chased or sold, paying or receiving cash against them as the 
 circumstances may require. 
 
 On the "Receive from" side of the clearing house sheet 
 shown in Form 13, are listed : 
 
 100 shares of Amalgamated Copper 
 
 100 shares of Steel 
 
 100 shares of American Smelters 
 
•J2 STOCK BROKERAGE 
 
 On the "Deliver to" side are listed : 
 
 200 shares of American Smelters 
 100 shares of Union Pacific 
 
 The only set-off is the Smelters stock to the extent of 
 100 shares, leaving as the "Balance to Receive," 100 Steel 
 and 100 Copper. The "Balance to Deliver" is 100 Smelters 
 and 100 Union Pacific. 
 
 Clearing House Deliveries 
 
 The question may arise as to hov^r the Union Pacific and 
 Smelters are to be secured by the broker for delivery. 
 Probably he has the stock in his vault or elsewhere; or if 
 these sales represent short sales, he will very likely borrow 
 this stock the next morning to effect delivery. Wherever 
 one customer is long of stock which is carried in the broker's 
 vault or in bank loans, and another of the broker's clients 
 has made a short sale, the broker is at liberty to use the long 
 stock for the purpose of making delivery — in other words, 
 he need not borrow that which is already available, but may 
 hypothecate the securities of his customers. 
 
 Clearing House Delivery Prices 
 
 The question naturally arises when looking at the clear- 
 ing house sheet, shown in Form 13, as to the prices at which 
 the Copper and Steel are to be received, and as to the de- 
 livery price of the Smelters and Union Pacific. Let it be 
 supposed that 5,000 shares of Copper had been purchased 
 during the day at prices ranging from 16 3/4 to 78. What 
 price would then govern as the receiving price — 76 3/4 or 
 l^"^. If the broker elected 76 3/4 as the settlement price, 
 then the whole 5,000 shares could not be received at that 
 price; some of it was purchased at 1%. The same diffi- 
 culty and haggling over settlement price would be expe- 
 
 THE CLEARING HOUSE SHEET 
 
 73 
 
 nenced by each broker whose name appeared on the sheet. 
 To prevent this difficulty, the Clearing House prints a set 
 of prices on the stock ticker at about 3 :30 p.m. each day. 
 These prices, covering all clearing house issues, are known 
 as the "Clearing House Delivery Prices." All net receipts 
 or net deliveries, as evidenced by the clearing house sheet, 
 are settled at these prices. All fractions are eliminated 
 from the delivery prices, the price approximating the closing 
 bid or oflfer on each clearing house item. 
 
 Referring again to Form 13, the net deliveries of 100 
 American Smelters and 100 Union Pacific which appear on 
 the "Deliver to" side are carried^ over to the "Receive from" 
 side opposite the side-head "Balance to Deliver" ; while the 
 net receipts are carried over to the "Deliver to" side oppo- 
 site the side-head "Balance to Receive." When this is done, 
 the total number of shares including the "carry-overs" will 
 be 500 on either side. Furthermore, if the stocks are 
 checked as to description and quantity, it will be found that 
 they check by set-offs. 
 
 At this point the clearing house delivery prices are ap- 
 plied to the "Balance to Receive" and "Balance to Deliver" 
 stocks. On the date given in Form 13, price for Smelters 
 was 70; for Union Pacific, 162; for Steel, 67; and for 
 Copper, 77. Hence, the Steel is received at 67 or $6,700, 
 and the Copper at 77. or $7,700. The Smelters is delivered 
 at 70 or $7,000; and the Union Pacific at 162 or $16,200. 
 
 The next step is to foot the two "Amounts" columns. 
 In doing this it will be found that the credit side of the sheet 
 totals $44,650, and the debit side $44,450— a difference of 
 $200 in favor of the broker whose sheet is shown. This 
 excess represents the amount by which the Clearing House 
 is indebted to the broker, and according to the rules he 
 makes a draft on the Clearing House for this sum, the Man- 
 hattan Co. being the drawee. The draft will be bankable 
 
74 
 
 STOCK BROKERAGE 
 
 if, after the sheet goes through (cleared), the manager of 
 the Clearing House countersigns the instrument. If the 
 sheet showed a balance against the broker, then a check 
 made payable to the Manhattan Co. must be sent to the 
 Clearing House at the time that the sheet is deposited. 
 
 Receive and Deliver Tickets 
 
 Reverting to tlie "Balance to Receive" and "Balance to 
 Deliver" phases of the clearing house sheet, one other item 
 is necessary before the sheet is ready for deposit with the 
 Clearing House. To complete the sheet, there are attached 
 to it clearing house tickets, known as "Balance to Receive" 
 and "Balance to Deliver" tickets. The balance to receive 
 tickets are made out for the bulk of each kind of stock which 
 is to be received on net balance, and the balance to deliver 
 tickets are made out for the bulk of each kind of stock which 
 is to be delivered on the net balance. In the case of the sheet 
 shown in Form 13, only two balance to receive tickets are 
 necessary — one for 100 shares of Copper, and the other for 
 100 shares of Steel — while two balance to deliver tickets 
 are necessary to evidence the broker's net delivery obliga- 
 tion—one for 100 Smelters and the other for 100 Union 
 Pacific. 
 
 On the receive tickets the undersigned respondent broker 
 advises the Clearing House that he "will receive the follow- 
 ing balance of stock at the delivery price" : 
 
 100 Copper at 17 
 100 Steel at (i7 
 
 On the deliver tickets the broker states that he "will 
 deliver the following balance of stock at the delivery price" : 
 
 100 Smelters at 70 
 
 100 Union Pacific at 162 
 
 These four balance tickets are called for at the Clearing 
 
 THE CLEARING HOUSE SHEET 
 
 75 
 
 i 
 
 House the following morning — Saturday excepted — and the 
 face of the receive tickets will reveal the name or names of 
 the brokers whom the Clearing House has designated as the 
 delivering brokers, stating the number of shares which each 
 one is to deliver. On the deliver tickets will appear the 
 name or names of the brokers whom the Clearing House has 
 designated as the receiving brokers. Between 10 a.m. and 
 2:15 P.M. all these balances are either received or delivered, 
 thus settling the transactions. The smallest quantity of 
 stock which is received or delivered through the Clearing 
 House is 100 shares; no broker is called upon to settle 
 fractional lots. 
 
 The Broker's Clearing House Balance 
 
 Before departing from the subject under review — ^the 
 clearing house sheet and the balance tickets — let us consider 
 the $200 which was received from the Clearing House. 
 Does this represent profit to the broker? The answer, in 
 order to be well understood, must be given indirectly by 
 means of the following explanation : Let us again refer, in 
 Form 13, to the purchase prices of the Copper, Steel, and 
 Smelters and compare them with the delivery prices as stated 
 that day. The Copper was bought by X & Co. at $7,675. 
 By reason of the Clearing House price being stated at 77, 
 X & Co. will have to pay $7,700 instead of $7,675, as would 
 ordinarily be the case. The broker who sold this stock at 
 $7,675 would receive $25 more than he would be justly 
 entitled to. But he would, in switching his net delivery of 
 100 Copper to the receive side of his sheet, be compelled to 
 use 77 as his clearing house price also. Deducting the lesser 
 from the greater side, his sheet would reflect a debit to the 
 Clearing House of $25 ; while X & Co.'s would show a draft 
 for this amount, provided that the Copper transaction was 
 the only item cleared. There are, however, other transac- 
 
76 
 
 STOCK BROKERAGE 
 
 tions shown on the sheet. The Steel purchase at $6,662.50 
 is handled much in the same manner ; but here $37.50 is the 
 amount so adjusted. The 100 Smelters bought at 69 1/8 
 for $6,912.50 is offset on the opposite side by 100 Smelters 
 sold at 70 1/4 for $7,025, making a profit of $1 12.50. It is 
 quite obvious that X & Co. have a right to draw for this 
 amount, for the reason that it happens to be the only way to 
 collect the profit. Lastly, another 100 shares of Smelters 
 was sold at 70 1/4, which must be delivered at 70. In that 
 event X & Co. would be underpaid by the receiving broker, 
 but on this item also, the seller is entitled to collect from the 
 Clearing House the difference of $25. If the other trans- 
 actions are followed out in like manner, it will be seen that 
 the total of the four items aggregates $200 — the draft on the 
 Clearing House. 
 
 If the sheets of other respondent brokers were analyzed 
 with the purpose of determining the amount of X & Co.*s 
 collection, it is safe to say that a reconciliation could be had 
 very easily. In fact, the machinery of the Clearing House 
 does just this analytical work to prove the correctness of all 
 items appearing on the sheets. It must be emphasized again 
 that a draft on, or check to, the Clearing House is a matter 
 which is automatically adjustable and does not change by 
 adding to or deducting from the real purchase cost or sale 
 proceeds of transactions. 
 
 The two sides of the sheet are now in balance, for on the 
 lesser side the draft for $200 equalizes them. In preparing 
 the sheet for deposit, the shares are checked up and footed. 
 The clearing house tickets, balance tickets, and the draft all 
 accompany the sheet. 
 
 CHAPTER X 
 
 BALANCING THE BLOTTERS 
 
 Balancing the Clearing House Blotter 
 
 The clearing house blotter, as stated in Chapter IV, is 
 one of the two records from which purchases and sales are 
 posted to the individual customers' accounts, the ex-clearing 
 house blotter being the other. The clearing house blotter 
 will also be referred to in its relation to the clearing house 
 sheet. We shall now consider the method by which the 
 clearing house blotter is balanced. 
 
 In reviewing the columnarization of the record (Form 
 14), we find that the first five columns on either side are 
 practically identical with the first five columns of the receive 
 and deliver sides, respectively, of the clearing house sheet 
 (Form 13). That is to say, the column which provides for 
 the name of the selling broker, under the caption "Of 
 Whom Bought," corresponds to the column on the clearing 
 house sheet which is headed "Receive from." Thus the 
 name of the broker with whom tickets have been exchanged 
 against purchases, appears again in this blotter. In the 
 same way, in both forms the columns headed "Number of 
 Shares" or "Shares," "Description" or "Stock," "Price," 
 and "Amount," correspond and are self-explanatory. 
 
 In order that the clearing house blotter may operate as 
 a check upon the sheet, all the transactions— the number of 
 shares, nature of stock, and the amount involved, as evi- 
 denced by the sheet— must appear again upon the blotter. 
 In effect, a copy of the sheet is preserved in blotter form, for 
 in every detail the sheet and blotter agree. 
 
 The methods of balancing the clearing house blotter and 
 
1 
 
 78 
 
 STOCK BROKERAGE 
 
 the clearing house sheet are so much alike that very little 
 need be added to the discussion of the balancing of the clear- 
 ing house sheet, in Chapter IX, other than the treatment of 
 the information found in the blotter, not found on the clear- 
 ing house sheet. For the purpose, we will take the trans- 
 actions under the date of January 2, discussing them in 
 connection with the clearing house blotter of January 3 
 (Form 14). 
 
 On that day the purchases were: 
 
 100 Copper, at 76 3/4, for account of John Jones 
 100 Steel common, at 66 5/8, for Fred Smith 
 100 Smelters, at 69 1/8, for Richard Ross 
 
 The sales were : 
 
 200 Smelters, at 70 1/4, for Richard Ross 
 100 Union Pacific, at 162, for Fred Smith 
 
 Reviewing these in the blotter, we find that the first five 
 columns, as far as the purchases are concerned, express the 
 transactions fully up to the point of cost to the broker, but 
 the commission .on the purchases increases the cost to the 
 customers by $12,50 on each hundred shares. The "Com- 
 mission" column reflects this additional charge, and the 
 "Total Amount" column combines the "Amount" and 
 "Commission" columns. The broker's total commission on 
 the 300 shares purchased during the day is $37.50. 
 
 The sales, as far as the first five columns are concerned, 
 bring the transaction up to the point of the proceeds received 
 by the broker. From these the commission and tax must 
 be deducted in order to arrive at the proceeds which are to 
 be credited to the accounts of the customers. In the case of 
 the Union Pacific the net proceeds would be, $16,200 — 
 $12.50 — $2 = $16,185.50. In the same way, the proceeds 
 of the Smelters sale would be, $14,050 — $25 — $4 = 
 
 BALANCING THE BLOTTERS 
 
 79 
 
 $14,021. The "Commission" column totals $37.50, and the 
 "Tax" column $6. The total commission earned on the 
 600 shares bought and sold during the day is $75. 
 
 The first step in balancing the clearing house blotter is 
 to foot the individual monetary columns of the receive page, 
 which, if cross-footed, should equal the footing of the "Total 
 Amount" column and thus prove the correctness of the 
 work. In footing the deliver page, the correctness of the 
 work can be established by adding the "Tax" and "Commis- 
 sion" columns to the footing of the "Total Amount" 
 column, which should then equal the footing of the 
 "Amount" column. 
 
 As a second step, the total commission shown on the 
 receive page is carried into the "Commission" column on the 
 deliver page. The total of the two is then carried to the 
 "Total Amount" column, and the account to be credited with 
 this sum is that of Commission. The total in the "Tax" 
 column is treated in the same manner, the account credited 
 being Revenue Stamps account. 
 
 The next step in balancing the blotter is the adjustment 
 of the clearing house balances. The delivery prices are used 
 on both pages as shown in Form 14, the respective amounts 
 being entered in the "Amount" column and the grand total 
 of these amounts being carried thence to the "Total Amount" 
 column, the draft for $200 being included. Under the cap- 
 tion "For Whose Account" appears "Clearing House." If 
 all "Balances to Receive" and "Balances to Deliver" be car- 
 ried over to the "Total Amount" column as shown on Form 
 14, and if all the columns be footed properly, then the 
 "Amount" and "Total Amount" columns on the two pages 
 must agree. The total number of shares must also agree on 
 both pages and must agree with the footing of the shares 
 columns on the clearing house sheet as well. A glance at 
 Form 14 will show that such is the case with the transactions 
 
8o 
 
 STOCK BROKERAGE 
 
 BALANCING THE BLOTTERS 
 
 8i 
 
 given. The close relation between the clearing house blot- 
 ter and the clearing house sheet is also clearly seen. 
 
 Before leaving the subject, it should be noted that the 
 cross marks (x) appearing against the clearing house items, 
 indicate that these are not to be posted to the ledger. The 
 reason for this is quite apparent, if we but remember the rule 
 that all clearing house differences — whether debit or credit 
 — are self-adjusting. The balances appearing on the clear- 
 ing house blotter are treated finally in the ex-clearing house 
 blotter which is discussed below. 
 
 The Ex-Clearing House Blotter 
 
 One more record must be considered in its relation to the 
 remaining stocks which are to be received or delivered — the 
 ex-clearing house blotter (Form 16). All receipts of stock 
 are evidenced on the debit side of this blotter ; all deliveries, 
 on the credit side. Hence, when the broker is to receive 
 certain shares of stock through the Clearing House, he may 
 look with certainty to the receive page of the ex-clearing 
 house blotter to find the facts set forth. The same obtains 
 in the matter of deliveries of clearing house balance stocks. 
 
 Referring again to the transactions of January 3, on the 
 morning of January 5 the cashier enters on the proper page 
 of his ex-blotter (see Form 16) the expected receipt of: 
 
 100 Copper at 17 
 100 Steel at 67 
 
 He will also make entry for the proposed deliveries of : 
 
 100 American Smelters at 70 
 100 Union Pacific at 162 
 
 The draft of $200 which he made upon the Clearing 
 House will have been collected and entered as a credit on the 
 "Deliver" page. The customers for whom stock was re- 
 
 ceived against purchases, or those for whom delivery was 
 made against sales, have already been charged with such 
 purchases or credited with such sales through the clearing 
 house blotter. Then the item in the ex-blotter, which attests 
 to the receipts or delivery of clearing house balances, is 
 entered as "Clearing House" account. No posting will be 
 necessary to evidence the receipt or disbursement of cash for 
 the charge or credit to the customer in the clearing house 
 blotter, presupposing the exchange of cash in the trans- 
 actions. 
 
 Further Uses of the Ex-Clearing House Blotter 
 
 Odd lots of stock, issues which are not listed on the 
 Exchange, bonds of every description, and shares which do 
 not come under the jurisdiction of the Clearing House, are 
 all passed through the ex-blotter. When comparisons are 
 made of purchases or sales, the delivery rules of the Ex- 
 change stipulate that all such transactions be settled upon the 
 next delivery day. The securities are received and paid for, 
 or delivered and collected upon. The customers' accounts 
 are treated through this record. If a selling broker fails to 
 deliver at the proper time, the item so failed upon is carried 
 to the next delivery day, and the customer's account is 
 charged when the stock is settled and paid for. 
 
 Balancing the Ex-Blotter 
 
 After the close of business, the ex-blotter in use that day 
 is ready for balancing. The procedure is as follows : Foot 
 the "Total Amount" columns, which comprehend cash ex- 
 changes of each page, after having treated the commission 
 and tax items in the usual manner. These two items appear 
 on the credit page. Then deduct from the credit footing the 
 debit footing. The difference will represent the balance of 
 cash in the banks at that time. A reconciliation is made by 
 
82 
 
 STOCK BROKERAGE 
 
 
 proving the balance with the check books. Carry the baliances 
 to the "Receive" page, itemizing the respective balances in 
 banks. Each bank is charged with the balance on deposit 
 and credited in the succeeding day's blotter by a credit to it. 
 Each day the new balance is debited to the bank account in 
 the ledger. In this way a chain of balances exist which are 
 always reconcilable with the check book and which can 
 always be traced to the preceding day's blotter. That is, the 
 ex-blotter of the succeeding day will contain, as a first item 
 on the "Deliver" page, the bank balances of the previous 
 night. As a last consideration in balancing the blotter, carry 
 down the footings of the two "Total Amount" columns. 
 These must be in agreement. The postings of the "Amount" 
 columns need not necessarily agree, because they are not con- 
 cerned with cash exchanges, the cash being received and 
 disbursed in the "Total Amount" columns (see Form 16). 
 
 
 r- 
 
 *4t 
 
 CHAPTER XI 
 
 TRANSACTIONS OF A STOCK BROKERAGE 
 HOUSE— METHODS OF OPERATION 
 
 In order that the principles of brokerage accounting may 
 be clearly understood we will now give a series of trans- 
 actions representative of the average brokerage house, 
 showing entries from the opening to the closing of the 
 books of account. 
 
 Typical Transactions 
 
 Transactions typical of the business and occurring almost 
 daily, may be summarized as follows : purchases and sales ; 
 borrowing; lending; returning; calling; renewal (of stocks 
 borrowed and loaned). 
 
 The following transactions have a direct bearing upon 
 purchases and sales, from the point of either financing or 
 delivery : collateral bank loans ; clearance loans ; money loans 
 (for financing transactions). 
 
 Other matters to be considered are as follows : interest 
 and premiums in connection with money borrowed or loaned 
 and stocks borrowed or loaned, which reflect costs and earn- 
 ings pertaining to the general finances; commission and 
 interest on customers' transactions which are additional fac- 
 tors affecting earnings ; "mark-ups" and "mark-downs," as 
 they affect stock loans; dividends credited or charged to 
 customers ; the interest on bond purchases or sales ; and the 
 custom of rendering monthly statements to clients and the 
 computation of interest on such accounts. 
 
 83 
 
84 STOCK BROKERAGE 
 
 Inception of a Brokerage Partnership 
 
 January 3, 1915, D. S. Hand, Carlyle Bird, and C. W. 
 Boswell form a partnership under the firm name of Hand, 
 Boswell & Co., for the purpose of conducting a stock broker- 
 age business. Boswell contributes capital in the form of a 
 stock exchange seat valued at $50,000, and $50,000 in cash. 
 Bird contributes $100,000 in cash. Hand contributes 
 $200,000 in securities, having an accepted value of $190,000, 
 it being the intention of the parties to regard the latter 
 amount as Hand's contribution. The securities so given 
 are as follows : 
 
 $100,000, Union Pacific 1st 4% bonds, market value $95,000 
 
 50,000, United States Steel 5% bonds, valued at. .........* .'.' 50,000 
 
 50,000, Southern Pacific refunding 4% bonds, valued at 45^000 
 
 Total value of Hand's contribution $190,000 
 
 -All profits and losses are to be distributed equally among 
 the partners. Books of account are to be kept, all partners 
 having access thereto. The depository is to be the Man- 
 hattan Co. 
 
 Opening Entries 
 
 The salient factors to be recorded in the opening entries 
 relate to the capital contributions, and the first book of entry 
 is the ex-clearing house blotter (Form 15). In this, under 
 date of January 3, the following entries are made : 
 
 C W. Bosweirs capital account is credited with $100,000, 
 made up of $50,000 in cash and $50,000 as the accepted 
 value of the stock exchange seat. On the debit side of the 
 blotter, Stock Exchange Seat account is charged with a like 
 sum, full details being given in connection therewith. 
 
 D. S. Hand's capital account is credited with $190,000 
 and Securities account is charged with a like sum, the de- 
 scription of the securities received being given in detail. The 
 
 TRANSACTIONS— METHODS OF OPERATION g" 
 
 values as expressed on the debit side of the blotter are en- 
 tered in the "Amount" column, in which are brought all 
 transactions involving no cash exchange. Boswell's cash 
 investment of $50,000, together with any other cash items, 
 is listed in the "Total Amount" column on the credit or 
 "Deliver" page of the ex-clearing house blotter. The $100,- 
 000 cash contributed by Bird is likewise entered in this 
 "Total Amount" column. The ex-blotter at this point is 
 balanced in the manner prescribed in the preceding chapter, 
 and will show a cash balance of $150,000 — the amount for 
 which the bank account is charged. (See Form 15.) 
 
 Customers* Purchases and Sales 
 
 On Saturday, January 3, the purchases for customers 
 were as follows : 
 
 500 Steel, at 66, for account of J. Jones 
 100 Union Pacific, at 162, Fred Smith 
 200 Penn., at 119, R. Ross 
 100 Copper, at 67, A. Jessup 
 
 The sales of the day were: 
 
 2,000 Reading, at 167, account of A. Haskins 
 500 Smelters, at 70, B. Brown 
 800 Copper, at 71, John Rich 
 200 American Beet Sugar, at 22, J. Jones 
 
 The odd-lot purchases were: 
 
 10 American Can preferred, at 91, E. A. Clancy 
 30 Copper, at 70, E. P. Delano 
 
 The odd-lot sales were : 
 
 10 Union Pacific, at 164, E. Samuels 
 
 25 Brooklyn Rapid Transit, at 91, A. Baskin 
 
 The cash receipts for the day were : 
 
86 
 
 STOCK BROKERAGE 
 
 $2,500 from J. 
 
 Jones 
 
 1,000 
 
 (t 
 
 F. 
 
 Smith 
 
 1,000 
 
 u 
 
 R. 
 
 Ross 
 
 4,000 
 
 it 
 
 John Rich 
 
 100 
 
 ti 
 
 E. 
 
 A. Clancy 
 
 250 
 
 it 
 
 A. 
 
 Baskin 
 
 The purchase of 100 shares o 
 Jessup will be taken up by him. 
 of 30 shares of Copper will be 
 hvered to him. E. Samuels will 
 Pacific against his sale. All the 
 on Monday, January 5, so that 
 made for receipt and delivery. 
 
 f Copper for the account of 
 The purchase by Delano 
 paid for and the stock de- 
 deliver 10 shares of Union 
 transactions will be settled 
 proper provision must be 
 
 Financing the Transactions 
 
 It is now necessary to figure the cost of the day's trans- 
 actions for the purpose of determining what stocks, if any, 
 must be loaned out or what securities the broker is able to 
 carry on the strength of his own cash condition. It should 
 always be borne in mind that conservative practice requires 
 a comfortable balance to be retained at the bank. It would 
 obviously be contrary to good business practice to allow the 
 entire amount of cash on hand to be expended for the pur- 
 pose of carrying customers^ holdings. The value of all 
 purchases of January 3 amounts to $70,810. The bank 
 balance, therefore, can easily provide this sum, so that it will 
 not be necessary to lend stocks for the purpose of raising 
 additional funds. 
 
 Borrowing Stocks against Short Sales 
 
 Let us now consider the stock-borrowing demands in 
 order to enable the delivery against short sales. The pur- 
 chases and sales book reveals a shortage of : 
 
 TRANSACTIONS— METHODS OF OPERATION gj 
 
 2,000 Reading 
 
 500 Smelters 
 
 800 Copper 
 
 200 American Beet Sugar 
 
 As these issues are all clearing house stocks it is expe- 
 dient to borrow the shares from the "loan crowd" which 
 assembles on the floor of the Exchange after the close of 
 daily business. Assuming, then, that this is done, and that 
 all the clearing house purchases and sales have been written 
 up in the proper blotters, the next steps will be the prepara- 
 tion of the clearing house sheet and, simultaneously, the 
 balancing of the clearing house blotter. Besides this, it will 
 be necessary to note the borrowing transactions in the stocks 
 borrowed and loaned book, giving full account of the name 
 of the lender and the rate of interest on the stocks so bor- 
 rowed. The securities ledger will contain a record of the 
 purchased and borrowed securities, giving at once all neces- 
 sary information. 
 
 On Monday, January 5, this being the day upon which 
 the transactions of the 3rd are settled, the receipts from the 
 Clearing House will be : 
 
 500 Steel 
 
 100 Union Pacific 
 
 200 Pennsylvania 
 
 100 Copper 
 
 Mr. Jessup, for whom 100 shares of Copper were pur- 
 chased, remits $6,712.50, against which is delivered a Street 
 certificate for 100 shares of this stock. The receipt of cash 
 from Jessup, together with the receipts from the Clearing 
 House and the "odd-lot" transactions, are to be found in 
 the ex-clearing house blotter of January 5. 
 
88 
 
 STOCK BROKERAGE 
 
 l9i 
 
 
 I 
 
 
 Odd-Lot Transactions 
 
 A word is necessary here to explain the manner in which 
 short sales in odd lots are treated. According to the pur- 
 chases and sales book in which such listings are recorded, 
 the broker will be called upon to deliver 25 shares of 
 Brooklyn Rapid Transit. These shares are not available 
 for delivery, owing to the fact that A. Baskin sold short and 
 the stock could not be borrowed. Hence, unless demand is 
 made, the seller will "fail" thereon. Usually such short 
 sales of odd lots are covered, or bought in within a day or 
 two, so that the failure for that length of time is often 
 tolerated by the purchasing broker. 
 
 The 10 shares of Union Pacific sold at 164 for the account 
 of E. Samuels, have been received, thereby allowing their 
 delivery. The 30 shares of Copper purchased at 70 have 
 been transferred to the name of E. P. Delano, he having 
 paid $2,103.75. ^ 
 
 Routine Records 
 
 The stock transfer register is necessarily called into use 
 at this point, to evidence the deposit of stocks with the 
 transfer office. The customers' and other accounts found 
 m the clearing house blotter are posted to the ledger or 
 ledgers. If a customers ledger be operated, then only the 
 Stock Borrowed, Commission, and Revenue Stamps accounts 
 will be posted to the general ledger. If only one ledger is 
 m use, then all the transactions are posted to the general 
 ledger. This obviates, of course, the introduction of a 
 private ledger, which if used, would contain the nominal 
 accounts, such as "Commission" and "Interest." 
 
 The Revenue Stamps account is credited with the amount 
 of tax stamps consumed in the process of stock delivery. 
 This presupposes an expenditure for revenue stamps which, 
 when purchased, are charged to this account. The revenue 
 
 ; 
 
 TRANSACTIONS-METHODS OF OPERATION gg 
 
 Stamp register is also called into operation, expressing the 
 transfer of stock by sale of the securities dealt in on Jan- 
 uary 3. "^ 
 
 ^ The vault list further evidences the deposit of the stocks 
 m the vault, the securities being in possession of Hand, Bos- 
 well & Co. These securities are being carried by them for 
 account of their clients. 
 
 Customers Margin Book 
 
 The customers margin book is the only record which has 
 not been treated in connection with the transactions of 
 January 3. Turning to the margin sheet of B. Brown it 
 will be found that he is short of 500 shares of Smelters at 
 70. If, for purposes of illustration, we assume that the 
 closing price of Smelters was 75 (this being the last price of 
 the day), then the account will reflect a market debit ap- 
 proximating $2,500. This debit is arrived at in the follow- 
 ing manner: B. Brown will at one time or another be 
 compelled to purchase this stock against his shortage. If 
 75 was the price at which he could have covered then he 
 would have lost 5 points on 500 shares, or $2,500. To 
 this paper loss must be added the amount of commission and 
 tax. Very obviously, Brown has been extended a credit 
 upon which he is operating in the market. If in the judg- 
 ment of his brokers he is not sufficiently strong to carry his 
 commitments further, then a request for market margin will 
 be made. This market margin will tend to adjust the dif- 
 ference between the price at which Brown sold and the 
 present market price. 
 
 The account of John Rich is an "original" margin 
 account and the treatment diflFers somewhat from credit 
 accounts Rich is short of 800 Copper at 71 , against which 
 he has deposited $4,000, or 5 points on each 100 shares 
 If the broker has reason to believe that the margin is ade- 
 
"\ 
 
 I 
 
 90 
 
 STOCK BROKERAGE 
 
 quate, then no call for further margin is made. On the other 
 hand, let it be assumed that Copper had risen to 73. Rich 
 would have but 3 points and a request might be made for 
 $5,600 or 7 points additional on each 100 shares. Then the 
 account of Rich will be well margined, for a margin of ten 
 points is considered ample. 
 
 The account of A. Haskins does not require comment as 
 it is similar to the account of B. Brown. 
 
 J. Jones is long of 500 Steel and short of 200 American 
 Beet Sugar. From the standpoint of margins, the one 
 sheet is all that is necessary to determine his standing in the 
 market. Assuming that the price of neither Steel nor 
 American Beet Sugar has changed, the net interest in this 
 case is 300 shares long. Since an original margin deposit 
 of $2,500 has been made on this account, Jones will have an 
 equity of approximately 8 points, or $2,400, to margin the 
 300 shares. 
 
 In the case of Fred Smith the price of Union Pacific has 
 advanced 3 points so that the account has a margin of $1,300 
 or 13 points on 100 shares. 
 
 As Pennsylvania stock is of the par value of $50, it is 
 commonly referred to in the Street as *'half stock." A pur- 
 chase of 200 shares at 119 would therefore amount to 
 $1 1,900. For marginal purposes 200 shares of "half stock" 
 is considered as 100 shares of stock whose par value is $100. 
 Thus R. Ross* account would have a margin of 10 points, 
 it being assumed that the market price is unchanged. The 
 margin accounts of Clancy and Baskin are comparatively 
 simple and require no comment. 
 
 The entry of the foregoing completes the record of trans- 
 actions of January 3. The work involved in the entries 
 described is usually distributed over the various departments 
 in the office so that it is completed at about noon of each 
 day. 
 
 ' 
 
 I 
 
 TRANSACTIONS-METHODS OF OPERATION gj 
 Call Loans 
 
 The ex-clearing house blotter of January 5 reflects a suf- 
 ficient surplus of cash to warrant lending a part of it on 
 "call." The floor member of the firm is therefore instructed 
 to lend, say, $50,000 at the prevailing interest rate. The 
 name of the borrower and the nature of the securities by 
 which the loan is secured are now entered on the receive 
 page of blotter, and the amount loaned out is shown in the 
 "Total Amount" column. The account charged is "Money 
 Loaned." ^ 
 
 These demand loans, or call loans as they are sometimes 
 designated, are never made for a less amount than $5,000. 
 The interest is usually paid at the time the loan is liquidated, 
 and when paid is charged to Interest on Money Borrowed 
 account if funds had been borrowed, or credited to Interest 
 on Money Loaned if funds had been loaned. 
 
 Final Entries 
 
 The final operation in the day's work is the balancing 
 of the blotter, bringing down on the receive page the balance 
 of cash with which the bank is at once charged. It is evi- 
 dent, therefore, that the bank accounts appearing in the 
 general ledger, together with any petty cash, comprise the 
 usual cash account. The bank balance is immediately car- 
 ried to the deliver page of the next day^s ex-blotter, so that 
 the amount charged to the bank on the 3rd will be credited 
 to the bank account on the 5th, and the new bank balance of 
 the latter day is charged as heretofore. 
 
 The bookkeeper posts all entries to the respective ledger 
 accounts under the date of January 5. The purchases and 
 sales of January 3, together with the cash transactions 
 appearing under that date, are now fully settled. 
 
I 
 
 TRANSACTIONS-PURCHASES AND SALES 
 
 93 
 
 CHAPTER XII 
 
 TRANSACTIONS OF A STOCK BROKERAGE 
 HOUSE^PURCHASES AND SALES 
 
 The Daily Routine 
 
 The following purchases and sales were made by Hand, 
 Boswell & Co., January 5: 
 
 Purchases : 
 
 25 Brooklyn Rapid Transit, at 88, A. Baskin 
 500 Smelters, at 66, B. Brown 
 3,000 Copper, at 68, John Rich 
 500 Steel, at 65 3/8, J. Jones 
 200 American Beet Sugar, at 19, J. Jones 
 10,000 Reading, at 165, A Raskins 
 600 Penn., at 118 1/4, R. Ross 
 5,000 Union Pacific, at 158, B. Dick 
 600 Anaconda, at 36, I. Eakan 
 
 Sales : 
 
 500 Distillers Securities, at 19, C Ridge 
 400 Illinois Central, at 110, R. Ross 
 700 New Haven, at 67, B. Brown 
 200 Penn., at 117, B. Axel 
 600 Rubber, at 59, A. Jessup 
 
 A review of the above transactions will show that the 
 25 shares of Brooklyn Rapid Transit sold January 3 by 
 A. Baskin were "covered" or bought back. Thus, while 
 the broker failed to deliver this stock within the delivery 
 time, he is now prepared to make delivery. When he re- 
 ceives the shares he will send them to the broker who is 
 awaiting receipt. 
 
 92 
 
 Turning now to the 100-share transactions, we find 
 that B. Brown covered his shortage of 500 Smelters. By 
 purchasing 200 American Beet Sugar, J. Jones has cov- 
 ered his shortage. We also observe that John Rich pur- 
 chased 3,000 shares of Copper, covering the 800 shares of 
 Copper which appeared in his short account and thereby 
 reversing his position in the market to the extent of 2,200 
 shares of the same stock. This makes Rich's account, 
 technically speaking, long. The same holds true in the 
 case of A. Haskins who purchased 10,000 Reading. Being 
 formerly short of 2,000 shares he has reversed his position 
 in the market, going long 8,000 shares. In the cases of 
 both Haskins and Rich, new ledger accounts showing the 
 present longs will be necessary. Their short accounts will 
 be charged with the number of shares representing the 
 shortage, and the long accounts will be charged with the 
 remainder. 
 
 Borrowed Stock 
 
 On January 3, in order to make possible the delivery 
 against short sales. Hand, Boswell & Co. were compelled 
 to borrow: 
 
 2,000 Reading 
 500 American Smelters 
 800 Amalgamated Copper 
 200 American Beet Sugar 
 
 It is quite apparent that when the brokers' customers 
 cover their shortages, the brokers will, upon receipt of the 
 shares so purchased, be in a position to return this bor- 
 rowed stock. Accordingly, Hand, Boswell & Co. having 
 no further use for the stock, inform the respective lending 
 parties that they will "return on the sheet of today," the 
 above-listed borrowed stock. 
 
94 
 
 STOCK BROKERAGE 
 
 Stock Returns 
 
 At this point a digression is necessary in order to 
 explain the means by which stock returns are made pos- 
 sible. Stock loans in general are both "returnable" and 
 "callable," provided reasonable notice is given to the 
 other broker. Loans involving clearing house issues are 
 settled on the clearing house sheet. Thus a return of a 
 clearing house stock necessitates an exchange of clearing 
 ■ house tickets. On the sheet the returns are treated in 
 the same manner as a sale, for the reason that an order is 
 therein given to the Clearing House to deliver certain 
 shares. 
 
 Whenever stocks are borrowed, cash is paid; and con- 
 versely, whenever stocks are loaned, cash is received. As 
 the broker loaning the stock profits from the use of the 
 money which he receives against such loans, he should 
 pay interest at the agreed rate. Taking a concrete case, 
 let it be supposed that the 500 shares of American 
 Smelters mentioned in the foregoing transaction, were 
 borrowed at 2 1/2%; that the clearing house price that 
 day for Smelters was 68 (the clearing house prices being 
 those which govern all stock loans cleared on the sheet), 
 and $34,000 the amount involved. If the stock were bor- 
 rowed on the sheet of January 3, the transaction would 
 go through on the 5th. If returned on the sheet of Jan- 
 uary 5, then the transaction would be settled January 6, 
 and one day would measure the time on which interest at 
 the rate of 2 1/2% is chargeable on $34,000; the interest 
 in this case being $2.36. The amount on the clearing 
 house ticket and hkewise on the sheet would then read 
 $34,002.36. 
 
 On the other hand, let us suppose that this same loan 
 extended over a period of 20 days and that the rate varied; 
 the range being from 2 to 4 1/2%. In that case, when 
 
 TRANSACTIONS-PURCHASES AND SALES 95 
 
 the Stock was returned, the amount of interest would be 
 arrived at in this manner (provided, of course, that these 
 are the rates at which the stock was lending on the various 
 days): 2 1/2% for 4 days + 2% for 5 days + 3% for 8 
 days + 4 1/2% for the balance of the time. The interest 
 on the above transaction would amount to $59.03, so that 
 the clearing house ticket would read $34,059.03. 
 
 Short Sales 
 
 Returning to the subject proper, we find by consulting 
 the purchases and sales book that it will be necessary to 
 borrow: 
 
 500 Distillers Securities 
 400 Illinois Central 
 700 New Haven 
 
 all representing short sales. Notice is served on the floor 
 broker, or the clerk in charge, to do the necessary borrow- 
 ing. ■ , 
 
 On this day 200 shares of Pennsylvania were sold for 
 the account of B. Axel, but the sale is offset by the pur- 
 chase of 600 shares of the same security for R. Ross. If 
 no Pennsylvania had been so bought, delivery against the 
 short sale could have been made by using the 200 shares 
 of Pennsylvania which were deposited in the vault on 
 the 3rd. 
 
 Cash Items 
 
 On the sale of 600 shares of Rubber by Jessup, de- 
 livery was promised by the customer, making this transac- 
 tion one which* is commonly referred to as a "cash item." 
 This term, as used here, means in the case of a purchase 
 that the customer will buy the stock outright, and that 
 in the case of a sale he will actually deliver the shares to 
 the broker. 
 
96 
 
 STOCK BROKERAGE 
 
 Financing the Purchases 
 
 The next step is a consideration of the cash necessary 
 to finance the customers' purchases. It would be almost 
 impossible, in a work of this nature, to trace the daily 
 margin deposits of customers in connection with their 
 cash condition. It is sufficient to restate the general rule 
 that on speculative transactions, credit customers are not 
 called upon for original margins, but other clients are re- 
 quired to make adequate marginal deposits. In the set 
 of hypothetical transactions of Hand, Boswell & Co., it is 
 always to be inferred that a proper margin system is in 
 operation and that all the usual margins have been re- 
 ceived. If, as in the transactions of the 5th, the total of 
 all purchases amounts to approximately $1,500,000, and 
 the cash condition of the firm makes it necessary to lend 
 stocks to strengthen the finances, then the order will be 
 given to lend a sufficient quantity of securities to secure 
 the required cash. In regard to the money loaned out on 
 call, the custom is that all such loans can be called before 
 1 P.M. on the day of demand. Needless to say, the money 
 which was loaned out on demand will have been called the 
 night previous, and be paid to Hand, Boswell & Co. the 
 day after call. The element of interest in this case has 
 already been touched upon. 
 
 For immediate needs in the case in question, it is found 
 necessary to lend: 
 
 2,200 Copper 
 800 Reading 
 5,000 Union Pacific 
 
 All the stock loans will be passed on the clearing house 
 sheet and in that way offset a certain amount of pur- 
 chase, making the cash needs less urgent. 
 
 TRANSACTIONS— PURCHASES AND SALES 
 
 97 
 
 The following stocks can be received and paid for out 
 of the cash balance remaining in the bank: 
 
 500 Steel 
 
 400 Pennsylvania 
 
 600 Anaconda 
 
 Premium and Interest on Stock Loans 
 
 In order to bring out the principle of premiums and 
 interest on stock loans, let it be supposed that the 2,200 
 shares of Copper were loaned at 1/64 premium, which 
 means that not only is no interest paid on the money re- 
 ceived on the security of this stock, but that the borrow- 
 ers of the stock actually pay the lenders a premium of 
 1/64 of 1% on the face value of the stock. Let us further 
 suppose that the Reading was loaned ''flat," which means 
 that the stock is in great demand and therefore no interest 
 is charged thereon, and that the Union Pacific was loaned 
 at 2% interest. 
 
 Recording the Day's Transactions 
 
 The transactions of the day are now all passed through 
 the customary books, the clearing house blotter being 
 balanced in conjunction with the sheet. In this particular 
 instance, the Stocks Borrowed account would appear on 
 the credit page of the clearing house blotter to evidence 
 the return of stock borrowed the night previous. The 
 item of interest on the stocks returned would be entered 
 in the "Interest" column; and in carrying the total of 
 interest to the "Total Amount" column, the Interest on 
 Stocks Borrowed account would appear under the appro- 
 priate heading. The Commission account will be credited 
 with the commission earned, and Revenue Stamps account 
 with the revenue stamps consumed by reason of the sales. 
 
98 
 
 STOCK BROKERAGE 
 
 The stocks borrowed and loan book will evidence the 
 return of the borrowed stocks, and the loaned section of 
 the same record will state in detail the facts concerning 
 the lending of securities. 
 
 The stock ledger, vault list, and customers margin 
 book, together with the revenue stamp register, will ex- 
 press the changes in the condition of securities, the 
 changes in customers* accounts, and the consumption of 
 revenue stamps. 
 
 The ex-clearing house blotter will, in the case of the 
 25 shares of Brooklyn Rapid Transit, show the delivery 
 of that stock. It will also record all subsequent trans- 
 actions, such as the receipt of margin from customers, the 
 calhng in of the money loaned, and the interest thereon. 
 In this case the interest account to be credited is that of 
 "Interest on Money Loaned." This blotter is now bal- 
 anced in the usual way and sent to the bookkeeping de- ' 
 partment for posting. 
 
 The Day's Transactions 
 
 Purchases on January 6 were: 
 
 500 Distillers Securities, at 21, C. Ridge 
 800 Illinois Central, at 112 1/8, R. Ross 
 700 New Haven, at 68 3/8, B. Brown 
 
 The sales in the same day were: 
 
 2,200 Copper, at 70, J. Rich 
 
 8,000 Reading, at 167 3/8, A. Haskins 
 
 5,000 Union Pacific, at 160 5/8, B. Dick 
 
 On the previous day, stocks borrowed against shorts 
 were: 
 
 500 Distillers Securities 
 400 Illinois Central 
 700 New. Haven 
 
 
 TRANSACTIONS-PURCHASES AND SALES 
 
 99 
 
 A return of all these borrowed items is made possible 
 this day by the covering thereof. 
 
 The brokers, in order to raise funds on the previous 
 day, faced the necessity of lending: 
 
 2,200 Copper 
 8,000 Reading 
 5,000 Union Pacific 
 
 The Call and Return of Stocks Loaned 
 
 Subsequently, the brokers are called upon to deliver 
 like quantities of these same shares by reason of the day's 
 sales. Then, in order to make a delivery, they will call 
 the stocks which were loaned (these being cleared on the 
 sheet); that is to say, they will request the return of the 
 2,200 Copper, 8,000 Reading, and 5,000 Union Pacific. 
 
 As these are clearing house listings, there is the usual 
 inference that they are to be passed through the Clearing 
 House. In that event, the sales of the day would be op- 
 posed on the receive side of the sheet by stocks similar in 
 quantity and nature, which are being returned to the 
 house by various other brokers. 
 
 On both the call and return of stocks, interest is com- 
 puted for the length of time that the money has been 
 used. In the case of the called stocks, three distinct con- 
 ditions may exist — the stocks may have been loaned at a 
 premium, a flat rate, or at interest. Turning to the loaned 
 section of the stocks borrowed and loan book we learn 
 that the Copper was loaned at a premium of 1/64, i.e., 
 1/64 of 1% on the face value of shares, or, as the rate per 
 day per hundred shares, $1.56, always excluding Saturdays 
 and Sundays. Therefore, the premium on the 2,200 shares 
 of Copper for one day would be $34.32. The broker who 
 is returning the money will deduct $34.32 from the prin- 
 
lOO 
 
 STOCK BROKERAGE 
 
 cipal of the loan. In other words, the Copper shares 
 having been loaned at 70, his clearing house ticket would 
 read: 2,200 Amalgamated Copper, $153,965.68. 
 
 The premium on these 2,200 shares of Copper repre- 
 sents an earning, and in order to effect a credit to the 
 Premiums account, the sum must be carried to the credit 
 side of the clearing house blotter under the appropriate 
 heading. The Stocks Loaned account which is charged 
 in this case, will apparently contain a discrepancy to the 
 extent of $34.32. This point may perhaps be more clearly 
 expressed by saying that the "Amount" column on the 
 receive page of the clearing house blotter, will contain a 
 charge of $153,965.68. If to this sum is added $34.32 and 
 the total thereof carried into the "Total Amount" column, 
 then the Stocks Loaned account will be properly charged 
 with $154,000, representing the loan value of 2,200 shares 
 of Copper. 
 
 In the case of the Reading, the stock was loaned flat; 
 hence it will be returned without the introduction of the 
 usual interest factor. The stock was loaned for $660,000 
 and is returned against the same amount of money. 
 
 The Union Pacific stock was loaned on January 5 and 
 called on January 6. One day is the elapsed time on which 
 interest at the rate of 2% is charged. The principal being 
 $790,000, the interest thereon would be $43.89. This 
 interest is charged to Interest on Stocks Loaned account. 
 
 Interest on Stocks Loaned 
 
 If stocks which have been borrowed or loaned are 
 neither returned nor called for a considerable period, then 
 the interest rate might vary from day to day, depending 
 upon the prevailing loaning rates of stocks. It is to the 
 advantage of the lender to reduce the interest rate wher- 
 ever possible. The converse is true in the case of the 
 
 TRANSACTIONS— PURCHASES AND SALES 
 
 lOI 
 
 borrower. In the one instance a lower rate means a 
 smaller payment for the use of money obtained on the 
 stocks loaned, while the borrower of the stocks will earn 
 more if he renews the loan at a higher rate of interest. 
 
 On some days call money is higher; on other day§ 
 lower. Unless there be a short interest in the market 
 (which in turn means a great demand for stock borrow- 
 ing), the rate at which stocks will loan will be governed 
 largely by call money conditions. If the original loaning 
 rate on Steel was 4%, and it falls to 3 1/4%, then in 
 order for the lender of stocks to reap the benefit, he must 
 notify the borrower that the rate on his Steel is renewed 
 at 3 1/4%. If, on the other hand, the loaning rate of Steel 
 rises to 5%, then it is necessary for the borrower to serve 
 notice on the lender that the renewal rate has increased 
 to 5%. Unless such notice is given by the borrower or 
 the lender, neither has the right to change the rate from 
 that which prevailed on the last renewal day. These mat- 
 ters of renewing, etc., are attended to each day after 
 
 3 P.M. 
 
 It should be stated here that the borrowing and lend- 
 ing of securities, and therefore the rate of interest, have 
 absolutely no bearing on the customers' accounts other 
 than that they control the interest with which customers 
 are charged at the end of each month. 
 
 Collateral Bank Loans 
 
 Frequently there exists no borrowing demand for 
 securities. More often, inactive issues are in no demand 
 whatever. Under such circumstances, money cannot be 
 had on the usual stock loan. Bonds are very rarely sold 
 short, and seldom, if ever, figure prominently in the activi- 
 ties of the loan crowd. How then are the purchases of 
 inactive issues and bonds to be financed? Relief is to be 
 
I02 
 
 STOCK BROKERAGE 
 
 found in the collateral bank loan. The banker or broker 
 who lends on collateral security generally desires a high 
 grade of collateral, i.e., securities having a ready and avail- 
 able market. Industrial stocks usually will lend at a 
 slightly higher rate than will railroad stocks or first-class 
 bonds. Sometimes a mixture of the two is acceptable, 
 while at other times the money lender will refuse the loan 
 unless a better kind of security be given. Some industrial 
 stocks will loan at 60% of the market value, while rail- 
 road stocks and bonds will command 80%. If a pur- 
 chase of a poor class of security be made, the marginal 
 requirements should be gauged by the amount of money 
 which that particular security could realize if it were 
 pledged in a collateral loan. 
 
 It is to be observed that most collateral demand loans 
 are of short duration, most of them running under 30 days. 
 The call money rate on these loans varies. Here again, 
 the lender is charged with the duty of notifying the bor- 
 rower when he wishes to increase the rate. Likewise, the 
 borrower, when the rate decreases, must notify the bank 
 and arrange with it for the lower rates. 
 
 Time Loans 
 
 Collateral loans are made also on time, the usual period 
 being 30, 60, or 90 days. Time loans are made at a stated 
 and permanent rate of interest. The interest is generally 
 settled at the time of payment, but in some cases the 
 lender will request the payment of such accrued interest 
 at the end of each month. The point in connection with 
 accruals from the borrower's standpoint, will again be 
 treated under the income statement (Chapter XIV). 
 
 Coupons 
 
 When coupon-bearing bonds are deposited as collateral 
 
 TRANSACTIONS— PURCHASES AND SALES 
 
 103 
 
 » 
 
 security, maturity coupons belong to the owner of the 
 bonds; and whenever a coupon day arrives, the borrower 
 should request the bank to cut the matured coupons from the 
 bonds and deliver them to him or collect them for his 
 account, as he may desire. 
 
 Equity in Collateral Loans 
 
 In a rising market the equity which the borrowing 
 broker has in his securities is increased, and sometimes to 
 such an extent that he may withdraw some of the col- 
 lateral. In a declining market the equity is decreased and 
 the broker is very often called upon to deposit additional 
 security. 
 
 Clearance Loans 
 
 Brokers in general have excellent banking connections. 
 The relation between banker and broker is so close that 
 usually the former is kept well apprised of the latter's busi- 
 ness conditions and stability. Where this is the case, the 
 "clearance loan" is a common method of meeting the 
 broker's financial needs.* 
 
 On some days the receipts of securities assume large 
 proportions. The broker knows before 10 o'clock each 
 morning the amount he will need to carry him through 
 the day. His balance is seldom large enough in itself to 
 cope with a day of extremely large business. To meet 
 such a condition he will perhaps give his bank a note for 
 a sum large enough, in connection with his own balance, 
 to pay for all securities to be received by him, that day. 
 He, then, during the day arranges for a demand or a time 
 loan to provide more permanently for the securities paid 
 for through the medium of the "clearance loan." At the 
 
 *For an interesting discussion of the clearance loan, and the Hockine Coal 
 12 1913° *^^"^'°" affecting these loans, see the New York Mail for November 
 
 
I 
 
 104 
 
 STOCK BROKERAGE 
 
 end of the day he deposits a sufficient amount of money 
 to liquidate the clearance loan, and the transaction is 
 complete. At least 50% of all stock purchases by brokers 
 are financed by means of these temporary clearance loans. 
 
 The Mark-Up and Mark-Down 
 
 The "mark-up" (market up) as explained briefly in 
 Chapter VI, is a notice of an increase in the price of stocks 
 issued by the lender of these stocks to the borrower. If 
 the market rises very rapidly, such adjustments will be 
 frequent. In fact a given stock, in a widely fluctuating 
 market, might be adjusted to market value several times 
 during a day. 
 
 The mark-up operates in favor of the lender because 
 it gives him a greater amount of money on his stock. On 
 the other hand, it works against him from the standpoint 
 of interest, for the larger the principal borrowed, the 
 greater the amount of interest to be paid thereon. 
 
 The "mark-down" (market down) is a notice of a fall 
 in the price of stocks given by the borrower of such stocks 
 to the lender. The mark-down is a feature of a declining 
 market and operates in favor of the borrower by reason of 
 his receiving back part of the principal which he has 
 given in exchange for the borrowed stocks. But the 
 mark-down also operates against him from the standpoint 
 of interest, for the reason that while the principal is being 
 continuously decreased by the mark-downs issued by him, 
 the interest received is also being decreased in like pro- 
 portion. 
 
 Both mark-ups and mark-downs are issued between 
 10 A.M. and 3 p.m. From the standpoint of the blotter, 
 they are handled in the following manner: 
 
 In the case of the mark-up, the broker who is lending 
 the securities will charge "Stocks Loaned" (regardless of 
 
 
 \ 
 
 TRANSACTIONS— PURCHASES AND SALES 
 
 105 
 
 the nature of the stock) with the amount of the old prin- 
 cipal, making due allowance for interest charges, and will 
 credit Stocks Loaned with the new principal which repre- 
 sents the increased market value. 
 
 The mark-down is treated in practically the same way. 
 But here, the broker issuing it is borrowing securities." 
 The Stocks Borrowed account will therefore be credited 
 with the old principal, making due allowance for all in- 
 terest charges, while the same account is charged with an 
 amount representing the new market value of the issues. 
 
 In the case of a mark-up, the borrowing broker gives 
 the lender a check for the difference between the old prin- 
 cipal less the interest to which the former is entitled, and 
 the new market value of the stock. This interest, on the 
 books of the broker "marking up" is charged to the ac- 
 count of "Interest on Stocks Loaned." The same inter- 
 est, from the standpoint of the borrowing broker, repre- 
 sents an earning, and is credited to Interest on Stocks 
 Borrowed account. 
 
 All changes due to a mark-up or a mark-down must 
 be reflected in the corresponding sections of the stocks 
 borrowed and loaned book. Either has the effect of a 
 new transaction and is treated as such. 
 
 Interest on Bonds Purchased or Sold 
 
 Bonds are traded in on the Exchange — "and Interest" — 
 the purchasing broker paying interest on the principal from 
 the last coupon date. To illustrate, let it be assumed that 
 a $1,000, 5% bond, with interest payable January 1 and 
 July 1 of each year, is purchased July 31 at 99 7/8. The 
 amount which the broker will pay on this purchase is 
 $998.75 plus the interest at the rate of 5% for 30 days 
 on the principal of $1,000. The broker's customer is 
 charged with the total of these two amounts plus the com- 
 
 
 I 
 
 J 
 
io6 
 
 STOCK BROKERAGE 
 
 / 
 
 / 
 
 mission of $1.25 on each $1,000 bond. The same method 
 of calculation is used in the case of a sale, but here the 
 customer receives the total of the first two amounts less 
 his broker's commission. There is no charge for revenue 
 stamps on bond sales. 
 
 Dividends on Stocks 
 
 Only stockholders of record are entitled to dividends. 
 That is, only such stockholders as have had their stock 
 registered in their own names will receive payment of 
 dividends direct from the corporation which issues the 
 stock. To meet this condition, it is customary for the 
 broker to transfer into his own name all stocks carried by 
 him. For instance, a broker holding 500 shares of Steel 
 common for various speculative accounts, would cause a 
 transfer to be made which would make him the registered 
 holder of 500 shares of common stock on the transfer and 
 stock books of the United States Steel Corporation. The 
 shares in this form are considered a good delivery. By 
 good delivery is meant that certificates bearing a "stock 
 exchange" indorsement are more readily acceptable in the 
 Street than are non-stock exchange indorsements. 
 
 Whenever a stock is about to sell ex-dividend, notice 
 thereof is printed on the ticker. All transactions thence- 
 forth are made with the dividend off. The price of such a 
 stock frequently reflects a decrease to the extent of the 
 dividend. For example, if Steel were marked ex-dividend, 
 John Jones could then buy 100 shares at 55 instead of 
 56 1/4, but he would not be given credit for the dividend 
 when it was subsequently paid. 
 
 Customers carrying "long" stock before declaration 
 of dividends, and who do not dispose of their holdings be- 
 fore the time that the stock sells ex-dividend, receive 
 credit for the dividend on the day that it becomes payable. 
 
 TRANSACTIONS-PURCHASES AND SALES 107 
 
 Thus, if a customer is long of 500 shares of Steel on which 
 the quarterly dividend of 1 1/4% is declared and payable, 
 his account is credited with $625, representing the quar- 
 terly dividend of 1 1/4%, or $1.25 per share. The cashier's 
 department keeps a dividend memorandum book containing 
 the names of customers entitled to dividend credit. 
 
 The effect which a dividend declaration has on stocks 
 —if sold ex-dividend— is a depression in price. Any cus- 
 tomer who is short at the time a stock sells ex-dividend, 
 is charged with an amount representing the dividend. 
 That this is equitable is quite apparent, for, unless the 
 charge be made, the customer could cover his shorts at 
 the decreased price, thereby gaining in the operation. The 
 converse of this gives the reason for crediting dividends 
 to ''long" customers. If the latter dispose of their hold- 
 ings while the dividend is off, they will lose in the transac- 
 tion. 
 
 To illustrate, the broker's books might contain both 
 long and short accounts in Steel. The credits on such 
 longs and the charges against such shorts will be made 
 by journal entry through the blotter. For example, if 
 Brown is long of 100 Steel, and Jones is short of the same 
 amount, then Brown receives credit in the "Amount" 
 column for $125, while Jones is charged the same amount. 
 
 A question might be raised here concerning the divi- 
 dend on the 100 shares long. If the broker registered 
 this stock in his name, then he would receive any dividend 
 paid on it while the stock was so registered. If, however, 
 sales were made necessitating the delivery of these shares,' 
 and such delivery was made to the purchasing broker 
 while the books were still open, it is safe to say 
 that an immediate transfer by the purchaser would follow, 
 whereby the dividend would be sent to the latter. If the 
 sale were made before the stock sold ex-dividend, and no 
 
io8 
 
 STOCK BROKERAGE 
 
 
 time remained for a transfer, then the check would be sent 
 to the broker in whose name the shares were registered. 
 In such case, this latter would give a due bill for the 
 amount of the dividend to the broker who purchased the 
 Steel. 
 
 Due Bills 
 
 The "due bill," mentioned above, is a form of note 
 wherein the person receiving the dividend from the cor- 
 poration promises to pay its amount to the person who is 
 entitled thereto, and at such time as the same becomes 
 payable. 
 
 The "Due Bills Receivable" account represents items of 
 this nature that will be received whenever the dividend pay- 
 ments are made. It is supported usually by a schedule which 
 for each item gives the names of the brokers from whom 
 payment is expected, the description of the stock, the number 
 of shares, and the name of the customer who is to be credited 
 with the dividend. The Due Bills Receivable account is 
 charged with each item, and the customers credited with 
 the sum to which each is respectively entitled. Also, a 
 "Due Bills Payable" account appears on the books to 
 evidence any similar liability to other brokers for unpaid 
 dividends. 
 
 When stocks are borrowed against short sales of cus- 
 tomers, such securities represent the long interests of the 
 lending broker. If the stock were loaned before ex-divi- 
 dend time, the chances are that the certificates have been 
 transferred into the name of some other broker in the 
 Street. Nevertheless, the lender has a right to any divi- 
 dend declared on such stock, and looks to the borrower 
 for the payment thereof. For the borrower, on the other 
 hand, such stock represents a short interest. The cus- 
 tomers short of the stock are very frequently charged 
 
 TRANSACTIONS— PURCHASES AND SALES 
 
 109 
 
 with the amount of the dividend as soon as it is declared, 
 for the reason that the liability is established at the time 
 of declaration. The Due Bills Payable account is credited 
 with these dividends in a lump sum, and is supported by a 
 schedule as in the previous case. This underlying state- 
 ment recites the name of the broker who is to be paid, 
 the description of the stock, the number of shares, and the 
 customer who is charged therewith. Usually the broker 
 issuing the due bill charges 1% for collection. 
 
 All dividend stocks appearing in the securities ledger 
 should be kept in sight, so that when notice of a dividend 
 on any stock is received, the long and short accounts in 
 that security may be segregated and the proper action be 
 taken in regard to the dividend. 
 
* 
 
 CHAPTER XIII 
 
 TRANSACTIONS OF A STOCK BROKERAGE 
 HOUSE— CUSTOMERS' ACCOUNTS AND 
 
 STATEMENTS 
 
 Monthly Statement 
 
 It is the practice among brokers to render monthly state- 
 ments to all customers. This statement is not to be con- 
 founded with the memorandum of purchase or sale, which is 
 sent to the customer after the execution of an order. 
 
 The ruling of the monthly statement (Forms 17, 18, 
 and 19) provides for the date, explanation, amount, and 
 total amount; also a column for the number of days for 
 which interest is charged, and a column for the amount of 
 interest on each transaction. The debit and credit sides are 
 alike in form. 
 
 After the net interest to be charged or the customer's 
 credit is arrived at, it is journalized through the blotter and 
 posted to the customer's account. From there, it is carried 
 to the statement. At the top of the statement a space is 
 provided for recording the interest rate at which the charges 
 and credits have been figured. 
 
 Interest Charges 
 
 The rendering of monthly statements involves two im- 
 portant operations : ( 1 ) the determination of the items on 
 which interest is to be charged; and (2) the computation of 
 interest. 
 
 These operations can best be illustrated by taking con- 
 crete cases. For the purpose, let us take the account of John 
 Jones, who, on January 2, purchased on credit 100 Union 
 
 no 
 
 TRANSACTIONS— CUSTOMERS' STATEMENTS 
 
 III 
 
 Pacific at 168, and sold the stock on January 9 at 169 3/8 
 (see Form 17). For 7 days this was a long account. It 
 was a simple account for the reason that it contained no 
 facts of opposite tendencies. If on January 10, Jones re- 
 quested a check in settlement, then the interest charge would 
 be determined that day. Supposing the rate to be 6%, the 
 the interest in this case would amount to $19.61, i.e., the 
 interest for 7 days at 6% on $16,812.50; and Jones would 
 be charged with this amount. The interest period is ob- 
 tained by taking the elapsed number of days between the 
 date on which the Union Pacific purchase is charged and 
 the date on which the proceeds of the sale are credited. As- 
 suming that January 2 was Monday, the day of settlement 
 would be Tuesday, January 3. The date on which the pro- 
 ceeds were credited was the 10th, consequently seven days 
 is the interval for which interest is chargeable. 
 
 Interest charges against customers are credited to an 
 account known as "Interest on Customers' Accounts." As 
 customers are not usually in the habit of settling their ac- 
 counts at irregular times, the lump sum of interest charges is 
 usually credited at the close of each calendar month. This 
 total amount of interest is the result of many different opera- 
 tions performed in connection with the customers' state- 
 ments. 
 
 When we come to interest allowances to the customer, 
 we find that at times he is long, while at other times he is 
 either short or hedged. If on his long transactions he 
 deposits margin, then the account is entitled to a credit for 
 the interest on this margin. Thus, if John Jones made a 
 payment of $1,000 on January 3 (as assumed in Form 18), 
 he would be allowed 7 days' interest on this amount at 6%, 
 and his credit balance January 10 would amount to $1,092.06 
 (debits, $16,812.50 + $19.61 interest; credits, $1,000 H- 
 $16,923 + $1.1 7 interest). 
 
112 
 
 STOCK BROKERAGE 
 
 
 Suppose further, that on January 15 Jones purchased 
 100 shares of Copper at 68. The time between the last 
 transaction and this one would cover a period of 6 days. 
 During this time Jones' credit balance would remain un- 
 changed, and according to the custom which prevails, he 
 would be allowed interest at the rate of 2% on this balance 
 ($1,092.06) for a period of 6 days. Then, if the Copper 
 purchase were carried to the end of the month or longer, the 
 bookkeeper would compute and enter the interest against 
 Jones up to January 31. 
 
 To review the case in point as to both debit and credit 
 charges, computation would be, first, $16,812.50 for 7 days 
 at 6%; then the credit of $1,000, representing the margin 
 deposit for 7 days at 6% ; then 6 days' credit at 2% on the 
 new credit balance of $1,092.06; and last a charge for 15 
 days on $5,702 at 6%. In other words, the interest charges 
 are arrived at by considering the daily balances. On all 
 debits a fair rate is charged, based on the call money condi- 
 tions, i.e., upon the average **call money" rate which the 
 broker pays for the use of funds. On credits 2% is allowed ; 
 this upon the theory that the customers' money is worth only 
 2% to the broker, since small amounts cannot be loaned out 
 at a greater earning. 
 
 No interest is usually allowed on "short accounts," ex- 
 cepting on deposits treated as margin. In this case a nomi- 
 nal rate of 2% is allowed. Where a customer is long and 
 short at the same time — a hedged account — he is charged 
 with interest on his long commitments ; and allowed no con- 
 sideration on his short transactions unless they are mar- 
 gined. This presupposes separate long and short accounts 
 in the ledger. 
 
 One feature peculiar to short accounts must be mentioned 
 here. The very large speculative accounts containing heavy 
 short interests are a source of earning to the broker from the 
 
 TRANSACTIONS-CUSTOMERS' STATEMENTS 113 
 
 interest received on borrowed stocks. It is quite conceivable 
 that no personal outlay is made in the case of a short sale, for 
 with the money which the broker receives against delivery, 
 he finances his borrowing operations. On this borrowed 
 stock, interest is earned in such quantities that some concerns 
 make it a practice of dividing it with the customer. This, 
 however, is not effected by the methods explained, but rather 
 by a distinct journal entry, charging "Interest on Customers' 
 Accounts" and crediting the short account of the customer. 
 
 Relation between Accounts and Statements 
 
 Referring again to the account of John Jones (Form 
 18), the balance brought down under date of January 31 is 
 a debit of $5,734.33, and on the line below appears "Long, 
 100 Copper." If this customer did not trade again until 
 March 1, then 28 days of interest at the prevailing rate 
 would be charged on the debit balance. Thus interest is 
 really compounded. The same method of balancing the cus- 
 tomers' accounts obtains in the case of short accounts, but the 
 balance brought down appears on the credit side and a list of 
 the short stocks is given. 
 
 Coming back to the customer's monthly statement, it 
 might be added that an account is rendered stating all short 
 transactions, and also one reflecting all the long commit- 
 ments. The ledger account and the statement must agree in 
 every particular, which means that the long stocks carried 
 down together with the balance must agree with the state- 
 ment. The agreement between statements and accounts 
 will be seen if the three monthly statements. Forms 17, 18, 
 and 19, are compared with the three customers ledger ac- 
 counts shown in Forms 20, 21, and 22, 
 
CHAPTER XIV 
 
 TRANSACTIONS OF A STOCK BROKERAGE 
 HOUSE— CLOSING THE BOOKS 
 
 Income 
 
 Income in a brokerage business is derived from: 
 
 Commissions 
 
 Interest on customers' accounts 
 
 Interest on stocks borrowed 
 
 Premiums 
 
 Expense 
 
 The expense items in a brokerage business may be 
 divided into general expense and solicitors' expense. 
 General expense embraces the following: 
 
 Rent 
 
 Office salaries 
 Telephone 
 Telegraph 
 Ticker service 
 Stationery 
 Printing 
 , Postage 
 
 Stock Exchange dues 
 
 Qearing house fees 
 
 Purchase of manuals 
 
 Market reports 
 
 Financial systems* 
 
 Advertising (in periodicals and trade journals) 
 
 TRANSACTIONS-CLOSING THE BOOKS 
 
 115 
 
 *Systcms such as supplied by Babson or Dow Jones. 
 
 114 
 
 Solicitors' expense includes: 
 
 Entertainment of customers 
 Salaries of solicitors or agents 
 Traveling expenses 
 
 Very often, in the conduct of branch offices, the keeping 
 of separate income and expense accounts is required, to 
 measure the productivity of business coming from them. ' 
 
 Omitted Expenses 
 
 One important consideration in closing the books of a 
 brokerage concern is the accounting for certain liabilities not 
 usually evidenced by the books. The care which is exercised 
 m accounting in other businesses does not mark the broker's 
 office, and it is not usually a place where scientific methods 
 are followed in connection with the peculiar accounting sys- 
 tem employed. Often the broker does not enter at all the 
 many invoices which he receives for miscellaneous services 
 and supplies, such as stationery, printing, telephone, tele- 
 graph service, and the like ; nor is he apt to accrue interest, 
 salaries, or rent. Under these circumstances, the great ma- 
 jority of financial statements prepared by brokers contain 
 nothing but cash factors. This practice is wrong and is 
 badly in need of correction. 
 
 The broker is engaged in business for the purpose of 
 making a fair return on his capital. It would be of interest 
 and of value to him to know the cost incidental to the pur- 
 chase or sale of each 100 shares of stock ; what the volume of 
 business was, and how much was made during the year. 
 Such information, if available to the administrative head of 
 a business, determines his future business policy, thus 
 making for efficiency and increased profits. For this reason 
 special attention is given here to the so frequently neglected 
 items of cost referred to above. 
 
\ 
 
 ii6 
 Accruals 
 
 STOCK BROKERAGE 
 
 ' 
 
 Many concerns overlook the importance of accruals, be- 
 cause the business, for the most part, is conducted strictly 
 on a cash basis. This, however, does not justify the neglect 
 of accruals, for in the face of all statements in the Street to 
 the contrary, the true condition of any concern cannot be 
 determined without the aid of certain and absolute account- 
 ing principles, and these require the proper consideration of 
 accruals when the books are to be closed. 
 
 Interest on interest-bearing notes receivable should be 
 accrued, and these earnings be reflected in the period's 
 profits. The same rule should govern in the case of interest 
 from stocks borrowed, money loaned, or the earnings from 
 stocks loaned at a premium. 
 
 Also, in connection with income factors, it might be 
 added that all interest on bonds owned should be accrued 
 and brought into the income statement. The interest on 
 customers* accounts should also be given proper con- 
 sideration. 
 
 Salaries should be accrued and the corresponding lia- 
 bility accounts set up. Rent, and interest on stocks loaned 
 and money borrowed should be treated in a similar manner. 
 Any interest arising in connection with notes payable which 
 the broker may have outstanding, should also be included. 
 
 Reserve Accounts 
 
 Usually the capital contributions of a brokerage concern 
 will include securities whose value changes one way or the 
 other during the accounting period. If the securities have 
 risen in value, conservative practice does not permit the 
 writing up of the asset for the purpose of increasing the 
 earnings. If, on the other hand, the value has depreciated, 
 then ample provision should be made for such depreciation, 
 the usual reserve account being credited for the purpose. 
 
 TRANSACTIONS— CLOSING THE BOOKS 
 
 117 
 
 I 
 
 Reserves should also be set up for the estimated amount 
 owing to sundry creditors, and for traveling expenses of 
 solicitors on the road. Too often, the bills which should 
 have found expression on the books as audited vouchers 
 unpaid, are allowed to burden the period following that of 
 closing. 
 
 As the broker on the floor of the Exchange might have 
 occasion to distribute some of his business to floor specialists, 
 the commission payable thereon should not be overlooked.* 
 The books should show very plainly whether any business 
 has been so distributed, and if so shown, ample provision 
 should be made in an account called "Floor Brokerage Com- 
 mission Payable." 
 
 THE INCOME STATEMENT 
 
 1. Income from Operation 
 
 In a brokerage business the most important source of 
 income is "commissions." The broker receives a commis- 
 sion for his services to customers, and he enters business 
 with the purpose of earning such commission uppermost in 
 his mind. Hence, this item will practically measure the 
 amount of money which has been made in operating. An 
 independent commission account might well be set up, if for 
 no other reason than for statistical purposes. 
 
 All other items of income, as interest on customers' ac- 
 counts, premiums, etc., are brought in under heading 5, 
 "Secondary Income." 
 
 2. General and Administrative Expenses 
 
 This section should contain all expenses incident to the 
 operation of the business, save solicitors' and branch office 
 expenses. 
 
 •$2 is the usual charge to a fellow broker for buying or selling 100 shares of 
 stock of the par value of $100, or $10,000 of bonds. 
 
ii8 
 
 STOCK BROKERAGE 
 
 3. Solicitors* and Branch Office Expenses 
 
 Solicitors* expenses, and those incidental to the conduct 
 of branch offices, are usually kept under separate and distinct 
 accounts for statistical purposes. The items usually in- 
 cluded in these accounts are : 
 
 Rent of branch office or offices 
 
 Salaries of branch office managers and clerks 
 
 Advertising of branch office 
 
 Entertainment of branch office customers 
 
 News ticker service 
 
 Traveling expense of solicitors 
 
 The expense items under headings 2 and 3, represent all 
 the expense usually incident to the general operation of the 
 business, and they might properly be grouped under the one 
 caption "Total Expense." 
 
 4. Net Income from Operation 
 
 This is the resultant figure arrived at by deducting 
 Total Expense" from "Income from Operation." 
 
 5. Secondary Income 
 
 Under this heading should be listed interest earned in 
 financing customers' transactions. The usual items oi 
 secondary income are : 
 
 Interest on customers' accounts 
 
 Interest on notes receivable 
 
 Interest on stocks borrowed 
 
 Premiums on stocks loaned 
 
 Interest earned on bonds held as investment 
 
 Dividends on stocks held as investment 
 
 6. Deductions from Income 
 
 This heading embraces such items as : 
 
 (( 
 
 TRANSACTIONS— CLOSING THE BOOKS 
 
 119 
 
 f- 
 
 Interest on stock loans equivalent to borrowed money 
 Interest on money borrowed 
 Interest on notes payable 
 
 Premiums on stocks borrowed are chargeable to the 
 customer short of such stock. 
 
 7. Net Income from All Sources 
 
 The difference between "Secondary Income" and "De- 
 ductions from Income" gives the addition to, or deduction 
 from, "Net Income from Operations," and gives the total 
 net income from all sources. 
 
 8. Profit and Loss Charges 
 
 These charges should include a reserve provision for 
 doubtful accounts receivable, wherever such accounts exist; 
 a reserve provision for depreciation of furniture and fix- 
 tures (and in large banking offices this is an important 
 item) ; a reserve provision for expenses in connection with 
 the business in general ; and provision for any loss incurred 
 on the sale of securities which were held for investment. 
 
 g. Distribution of Profit 
 
 The distribution of any remaining profit would be a 
 last factor in connection with the income statement. 
 
 THE BALANCE SHEET 
 
 Balance Sheet Items 
 
 The arrangement of the assets and liabilities on the 
 balance sheet of a brokerage house does not differ from 
 the arrangement usually employed by accountants. There 
 are items, however, appearing in the broker's balance sheet 
 which do not mean the same as they would on the ordi- 
 nary balance sheet, but present apparent contradictions in 
 
^ 
 
 I20 
 
 STOCK BROKERAGE 
 
 that they do not take into account the equity arising in cus- 
 tomers' accounts or in collateral loans. 
 
 Assets 
 
 The asset side of the balance sheet is subdivided into : 
 
 1. Capital Assets 
 
 2. Current Assets 
 
 3. Deferred Debits to Income 
 
 Under the first heading, "Capital Assets," appear such 
 items as exchange seats, investment in securities, and furni- 
 ture and fixtures. 
 
 The second heading, "Current Assets," embraces cash, 
 accounts receivable, notes receivable, stocks borrowed, and 
 all accrued interest items. The accounts receivable recite 
 no definite financial truth unless read in connection with 
 the table of equities, a table showing the amount of 
 margin which each customer maintains on his commitments 
 (Form 24). 
 
 The third subdivision of assets, "Deferred Debits to 
 Income," includes such items as rent paid in advance; 
 advertising paid in advance; Stock Exchange dues paid 
 in advance ; and all similar items which have to be analyzed 
 for the purpose of determining the portion applicable to 
 the accounting period. 
 
 Liabilities 
 
 All liabilities are current in nature. There are no 
 deferred credit items nor capital liabilities. Stock loans, 
 accounts payable (which usually are deposit accounts or 
 open credit accounts), interest accruals, and salaries ac- 
 crued, all appear under the single caption, "Liabilities." 
 
 Proprietors' Accounts 
 
 The proprietorship section of the balance sheet, com- 
 
 TRANSACTIONS-CLOSING THE BOOKS 
 
 121 
 
 I 
 
 I 
 
 I 
 
 prising reserves and partners' capital accounts, is self- 
 explanatory. 
 
 Table of Equities 
 
 The table of equities (Form 24) sometimes referred 
 to as the "Equity Statement," "Statement of Margins," 
 or "Statement of Equities," is a most important supple- 
 ment to the balance sheet. Its purpose is to present the 
 status of each account into which might enter the considera- 
 tion of margin in favor of, or against, the customer. 
 
 It will be recalled that some accounts operate under a 
 credit arrangement. Suppose such an account is long of 
 5,000 Steel at 65, the purchase price, and that the present 
 market price is 60. How does this affect the balance sheet ? 
 The ledger balance in this case shows approximately a debit 
 of $325,000, the securities appearing as 5,000 Steel. It 
 is obvious that this does not reflect the true condition of 
 the account, but as all the stock accounts receivable are 
 grouped together in the balance sheet, it is practically im- 
 possible to segregate any particular account from the mass. 
 From the broker's point of view, the statement of the 
 account is correct, as the stock accounts receivable are 
 considered absolutely good. But would the bank cashier 
 who has occasion to review the balance sheet (that being 
 the basis for future loaning operations), so consider them? 
 Surely the facts are confusing— even misleading. But, as 
 a corrective, the table of equities discloses the true condi- 
 tion of this and every other account .carried on the books 
 of the broker. On this the true condition of the account 
 IS shown, and the amount representing the accounts re- 
 ceivable is thereby modified by at least $25,000. 
 
 The arrangement of the table of equities is such as to 
 show, in each case, the name of the account receivable; 
 the number of shares long and short; market price and 
 
122 
 
 STOCK BROKERAGE 
 
 market value; the ledger balance, debit or credit; and the 
 margin, debit or credit. If it be an open credit account, 
 then the ledger credit and the margin credit would be the 
 same. If it were an open debit, considered perfectly col- 
 lectible, then the amount appearing in the ledger debit 
 column would again appear in the margin debit column. 
 
 By this "refining ' process, the accounts receivable, as 
 represented on the balance sheet and as shown on the 
 equity statement, are contrasted as to money values. This 
 is done by footing the two margin columns, the difference 
 between the debit and credit sides representing the equity 
 due to customers or due the house from customers. 
 
 Every account is treated on this statement in such a 
 way that the ledger columns really present the balance 
 sheet accounts, while the equity columns reveal the bal- 
 ance and margins of each individual account as assets or 
 liabilities. 
 
 Combination Equity Statement and Balance Sheet 
 
 Very often, instead of the standard form of balance 
 sheet, a combination of the equity statement and balance 
 sheet is employed. On such a combination statement, the 
 facts and figures are thrown into contrast, and the result 
 is a true presentment of the broker's affairs. 
 
 In the preparation of this combined sheet it may be 
 said in brief that, as each balance is struck in the ledger, 
 the amount of equity which the broker or the customer 
 retains in the asset or liability is listed. For example, in 
 his cash account, the broker would have 100% equity. In 
 a stock account receivable, the customer's equity would be 
 shown in his margin statement. The amount of margin 
 which a broker retains in collateral loans is shown on the 
 liability side of the balance sheet in the debit column. 
 
 • m 
 
 CHAPTER XV 
 FAILURE AND DISSOLUTION 
 
 Voluntary Dissolution 
 
 Brokerage houses are usually partnerships, and their 
 voluntary dissolution is easily accomplished by the mutual 
 consent of the partners. ' c 
 
 Under the law of partnership, dissolution may also be 
 brought about by : 
 
 1. The expiration of the term as stated in the articles 
 » of copartnership. 
 
 2. The death of a partner. 
 
 3. The insanity of a partner. 
 
 4. The assignment of a partnership interest to third 
 
 persons. 
 
 Very often the Street enters upon a period of depres- 
 sion, and usually before it ends, a number of brokerage 
 firms tire of the inactivity it entails. Rents are high and 
 other business expenses are heavy, and the losses are cor- 
 respondingly large. Recourse is then had to voluntary 
 dissolution. In that case the customers are notified of the 
 firm's intention to discontinue, and a request is made for 
 the settlement of all open accounts. This is made possible 
 either by "taking up" the accounts or transferring them 
 to some other broker. The assets remaining are distributed 
 among the partners, and the business is dissolved. 
 
 Involuntary Dissolution 
 
 Involuntary or forced dissolution, on the other hand, 
 is a more troublesome proposition. Sometimes, this con- 
 dition is an outgrowth of untoward influences such as 
 
 123 
 
124 
 
 STOCK BROKERAGE 
 
 FAILURE AND DISSOLUTION 
 
 125 
 
 panics or business depressions. In most instances, how- 
 ever, it arises through speculation on the part of the firm 
 itself, which endangers its clients' funds by taking "fliers" 
 in the market. If insolvency or bankruptcy does not result 
 directly from such speculations, the Stock Exchange may 
 intervene in the "private operations" of the firm, and ex- 
 pulsion or suspension result. What is more, the offenders 
 are liable to their customers in actions for conversion. 
 
 When, in such a case, bankruptcy proceedings are in- 
 stituted against the brokerage firm, several nice legal ques- 
 tions enter the case, the essence of which is the status of 
 the customers as creditors of the firm, and the relation 
 of other brokers to the bankrupt. 
 
 Release of Securities Held by Bankrupt 
 
 When a brokerage firm goes bankrupt, the most im- 
 portant question to be answered, and one which, no doubt, 
 concerns the customer most, is how can he "lift^* the ac- 
 count or, in other words, release the equity in his securities. 
 There are several cases in law which cover this point.* In 
 the matter of Meadows, Williams & Co., 177 Fed. 1004, 
 it was held that where the identical certificates of stocks 
 or other evidences of ownership purchased in execution 
 of a customer's order are traceable, he can, by payment of 
 his debit balance, have his securities released to him. If, 
 perchance, the securities have not been pledged, but are 
 carried by the broker, the customer may succeed in his 
 claim for the securities, although it is impossible to estab- 
 lish the identity of the certificates. 
 
 It was also held in this case that wherever the securi- 
 ties carried by the broker represent the holdings of several 
 customers in the same stock — although the certificates be 
 not possible of identification — each customer has a just 
 
 ♦See Douglas Campbell's "Law of Stock Brokers" for these and other cases 
 •*• point* 
 
 Ui 
 
 claim to his pro rata share upon payment of an amount 
 sufficient to release the securities. Also, if, at the time of 
 failure, the broker has in his possession all the securities 
 represented by customers' accounts, each customer may re- 
 lease his equity by paying the amount of his book balance 
 to the assignee or trustee in bankruptcy. 
 
 In the case of Chamberlain v. Greenleaf, 4 Abb. N. C. 
 178, it was held that, if the securities be pledged to a third 
 party to secure a loan to the bankrupt, and these securi- 
 ties be distinct and separate from all other securities, the 
 customer may release his equity upon payment to the pledgee 
 of the amount secured by such stock, and payment of any 
 differences in the account to the legal representative of the 
 bankrupt. 
 
 In the case of Gould v. Central Trust Companv, 6 Abb. 
 N. C. 381, it was held that when customers' securities have 
 been mingled in one bulk and pledged, the customers can 
 release their holdings by paying their pro rata shares so 
 that the total will equal the amount covered by the pledge ; 
 and any differences are to be paid to the estate of the bank- 
 rupt. The court further ruled that, if a part of the securi- 
 ties shall have been sold in satisfaction of a prior lien of 
 the pledgee, the balance t)f the securities may be disposed 
 of, and the funds realized therefrom distributed on a pro 
 rata basis among the various customers whose securities 
 made up the loan, without the necessity of first determining 
 which set of customers owned the securities which were sold 
 in satisfaction of such lien. 
 
 Of course, the principles of equity as well as the doc- 
 trine of marshalling in the case of bankruptcy, would require 
 that the broker's securities (which together with the cus- 
 tomers' securities constitute the collateral in a loan) be first 
 disposed of before any of the customers' shares be disposed 
 of to satisfy a lien. 
 
126 
 
 STOCK BROKERAGE 
 
 Customers* Equity in Deposited Securities 
 
 In the matter of Mills, 125 App. Div. 730; 193 N. Y. 
 626 (1908), a situation arose where a customer deposited 
 with his broker securities as margin on a running account. 
 These securities were pledged in order to raise funds, and 
 subsequently it was contended that such stocks and bonds 
 had no priority over securities that were purchased origi- 
 nally on margin. The court ruled that there was no dis- 
 tinction between securities deposited as margin and securi- 
 ties which found their way into a loan through purchase on 
 margin. 
 
 It would appear, however, that if the securities were 
 deposited for safe keeping and pledged without the knowl- 
 edge or consent of the owner, such owner could insist upon 
 the sale of securities bought on margin before any disposi- 
 tion could be made of his holdings. If it occurred that 
 his securities were sold before the others, he could demand 
 the disposition of the remaining securities in order that 
 restitution be made to him to cover the fair value of his 
 stocks or bonds. 
 
 If it be evidenced that collusion existed between the 
 pledger and the pledgee, and because of this the securities 
 owned by an innocent third party were disposed of to sat- 
 isfy a lien, then such innocent third person would be sup- 
 ported in his claim to recover full value. 
 
 Equity in Clearance Loans 
 
 In the case of the Mechanics* National Bank v. Ernst, 
 it was decided by the United States Supreme Court No- 
 vember 3. 1913, that clearance loans carried with them 
 no superior equities in securities which such loans helped 
 to procure. It was ruled that the bank was only a general 
 creditor and was entitled to share as such. 
 
 Generally speaking, the National Bankruptcy Act gov- 
 
 FAILURE AND DISSOLUTION 
 
 127 
 
 erns almost exclusively all actions for the recovery of securi- 
 ties when the broker has been adjudicated a bankrupt. 
 
 Disposal of Broker's Stock Exchange Seat 
 
 In regard to the bankrupt broker's membership on the 
 Exchange, Sections 1 and 3 of Article XVI of the consti- 
 tution of the New York Stock Exchange, provide as follows : 
 
 "A member who fails to comply with his contracts or 
 is insolvent, or who is a partner in a firm registered upon 
 the Exchange which fails to comply with its contracts or 
 is insolvent, shall immediately notify the President, in 
 writing, that he or his firm is unable to meet their engage- 
 ments, or prompt notice thereof shall be given to the Ex- 
 change. He shall thereby become suspended from mem- 
 bership until, after having settled with his creditors or the 
 creditors of his firm, he has been reinstated by the Com- 
 mittee on Admissions. If a member suspended under this 
 article fails to settle with his creditors and apply for rein- 
 statement within one year from the tijme of his suspension, 
 his membership shall be disposed of by the Committee on 
 Admissions." 
 
 Before the customers may share in the funds realized 
 from the sale of the Exchange seat, all the claims of mem- 
 bers of the Exchange shall have first been paid. Any 
 surplus remaining thereafter is distributable among the 
 respective creditors of the firm and of the partners 
 individually. 
 
 In summing up it may be said that there are many 
 other features and conditions of the broker's bankruptcy 
 which are too technical for discussion here. Only a few 
 cases have been cited as illustrative of the more important 
 phases of the question and as indicating the status of cus- 
 tomers in the capacity of creditors. Almost daily, prob- 
 
128 
 
 STOCK BROKERAGE 
 
 lems are met in which a knowledge of the law is invaluable 
 to the accountant whose duty it is to ascertain the equities 
 of customers of a defunct brokerage concern, and for such 
 accountants a fair knowledge of the law and procedure in 
 such cases is essential. 
 
 Part II — Cotton Brokerage 
 
 CHAPTER XVI 
 
 THE COTTON FUTURES MARKET 
 
 The Market 
 
 The cotton* futures market plays an important role in 
 the disposition of the annual cotton crop. It is the medium 
 for distributing approximately 15,000,000 bales yearly, 
 which, resolved into terms of money, gives $1,050,000,000, 
 figuring the average price of cotton at 14- cents per pound. 
 The system of "Futures" facilitates the movement of cotton 
 from planter to spinner and thence to consumer. 
 
 Cotton brokers are engaged in trading for either "spot" 
 delivery or "future" delivery. The former involves but 
 very little accounting, and is treated in Chapter XXV. 
 The accounting requirements of the futures market are, 
 on the other hand, peculiar, and the mechanism of its ac- 
 counts and the relations between them are intricate. 
 
 Expressed briefly, the futures market is a system of 
 trading in cotton options, the commodity itself being either 
 potentially or actually existent, but not deliverable until the 
 time specified in the contract. The active issues or options 
 traded in are those of January, March, May, July, August, 
 October, and December. An option for any of these months 
 may be traded in up to the last "tender day" of the pre- 
 ceding month, this last tender day being the time set by 
 the Cotton Exchange for the expiration of the options for 
 a certain month and the ceasing of trading in such com- 
 mitments. For example, January, 1916 cotton may be 
 
 129 
 
I30 
 
 COTTON BROKERAGE 
 
 bought or sold up to the last tender day in December, 1915 ; 
 or May, 1916 cotton may be traded in up to the last' tender 
 day in April, 1916. 
 
 If January, 1916 cotton is purchased, the commodity 
 would be tendered on or about December 31, 1915, and 
 the purchaser would be called upon at that time to make 
 payment against the delivery to him of a warehouse receipt. 
 On the other hand, if the buyer wishes to dispose of his 
 holdmgs of January cotton, he might do so at any time 
 before the last tender day. 
 
 Most of the buying and selling of cotton futures is for 
 speculative purposes, i.e., the customer does not wish to 
 buy cotton and has none to sell. In such case, when his 
 commitment falls due, settlement must be made in some 
 other way than by the actual receipt or delivery of cotton, 
 and this must be done on or before the last tender day. 
 
 A customer having a long interest in the market will 
 usually sell his cotton for the outgoing month, and if he 
 wishes to retain his long interest, will purchase in lieti 
 thereof futures for some other months. For example 
 assume that John Doe is long of March. Being compelled 
 to sell out his "longs," he sells March cotton, thereby satis- 
 fying his March contract; and, wishing to retain his long 
 interest in the market, buys May. Or suppose that John 
 Brown IS short of March. Being compelled to buy in by 
 reason of the approaching expiration, he buys March and 
 sells May, thereby retaining his short interest. In these 
 cases It IS tak^n for granted that Brown did not intend 
 dehvering his March contracts, and that Doe did not con- 
 template the actual receipt of his March commitments • and 
 not intending to deliver or receive the cotton, it becomes 
 compulsory for them to settle the contract by sale or pur- 
 chase of the maturing options. 
 , Mills which sell a good deal of their output on contract 
 
 THE COTTON FUTURES MARKET 131 
 
 at a certain price, use the futures market for hedging pur- 
 poses. If the price of raw cotton rises after a mill sells 
 its product and before the goods are manufactured, the 
 mill will lose the difference between the increased price and 
 the price of raw cotton at the time it entered into the 
 contract of sale. To prevent such losses on advance sales, 
 the mills, as stated, will usually hedge by purchasing a suffi- 
 cient number of bales of futures to protect themselves 
 against any increase in the price of the raw material. When 
 this is done, if the price of cotton rises, the loss incurred 
 by the increased price of the raw material is offset by the 
 profit reflected in the cotton bought on futures. If, on 
 the other hand, cotton falls, the additional profit this ^ves 
 them on the manufactured product offsets the loss on the 
 futures. Thus the "futures'* purchase serves the purpose 
 of a stabilizer or insurance against loss. Spot cotton dealers 
 use the futures market much in the same manner. 
 
 An additional function which the futures market per- 
 forms is the maintenance of a ready market for cotton 
 having as a measure for its prices the effective demand fori 
 and the real supply of, "classified raw" cotton. It elimi- 
 nates the very wide and arbitrary fluctuations of prices 
 that would otherwise occur. 
 
 Customs of the Futures Market 
 
 According to the rules set down by the New York 
 Cotton Exchange, cotton is traded in for future delivery 
 in quantities of not less than 100 bales, each 100 bales, in 
 technical terms, constituting "one contract." On this basis 
 1,000 bales of cotton are equivalent to 10 contracts. Fur- 
 thermore, the Exchange has specified the weight per bale 
 as 500 pounds. Therefore, one contract, or 100 bales is 
 of the approximate weight of 50,000 pounds. The price 
 of cotton is quoted in terms of cents and hundredths of a 
 
132 
 
 COTTON BROKERAGE 
 
 cent per pound. One cent on 100 bales is equivalent to 
 $500. One one-hundredth of a cent on the contract equals 
 $5. A fluctuation of 1/100 of a cent is known as a point, 
 so that a point is equivalent to $5 per contract. 
 
 The only cash transactions in the futures market are 
 those in spot cotton. All other transactions are settled by 
 means of the "differences" system which has as its chief 
 features a cash payment, or receipt, for the difference be- 
 tween the price paid for the cotton and the price which it 
 yields upon sale. Thus, if a customer purchases 100 bales 
 of cotton at 13.08 cents per pound, and sells it at 13.20 cents 
 per pound, he will gain the difference of 12 points, or $60, 
 as a result of the deal. Figuring this by the ordinary 
 method of calculating, the contract of 50,000 pounds at 
 13.08 cents per pound would cost $6,540. At 13.20 cents 
 it would yield $6,600, or a profit difference of $60. 
 
 Books of Account 
 
 Two distinct sets of books are kept by the cotton broker, 
 the one dealing with the transactions of the customers and 
 the other with the same transactions from the Street end, 
 i.e., the dealings between brokers. Only by a system of 
 interlocking between the two sets of books is a check upon 
 the Street books made possible. Reference to this point 
 will be made later (Chapter XXI). 
 
 The Customers' Records 
 
 The books used for the record of transactions with 
 customers are as follows : 
 
 Purchases and Sales Book 
 Customers Margin Book 
 Customers Contract Book 
 Customers Ledger 
 
 THE COTTON FUTURES MARKET 
 
 133 
 
 General Journal 
 
 General Ledger 
 
 Cash Book 
 
 Account Sales Register, or Contract Analysis Journal 
 
 The Street Records 
 
 The transactions between brokers arcf sr reflection of 
 their customers' dealings, and the purchases and sales book 
 is the basis for transferring the contracts traded in to the 
 Street records. Nothing should appear in any of the Street 
 books which cannot be traced either to the purchases and 
 sales book or to the Street blotter. The purchases and 
 sales book therefore enters into both the customers' and 
 the Street records. The complete set of Street records is 
 as follows: 
 
 Purchases and Sales Book 
 
 Street Blotter 
 
 Street Ledger 
 
 Street Margin Ledger 
 
 Street Settlement Book, or Brokers' Statement 
 
i 
 
 CHAPTER XVII 
 
 CUSTOMERS' RECORDS 
 
 Purchases and Sales Book 
 
 The ruHng and arrangement of this record (Form 25), 
 does not vary in any material way from the similar book 
 used in the stock brokerage business. The headings of the 
 columns are practically the same, though the caption of 
 the column on either side of the book changes from 
 "Number of Shares" to "Bales." 
 
 Customers Margin Book 
 
 The principles underlying the system of margins in the 
 cotton market are the same as in the stock market, so that 
 the same card system or loose-leaf device can be installed 
 with good results. Form 26 shows a typical loose-leaf 
 margin sheet employed by cotton brokers. Custom has 
 dictated 40 points, or $200, as a safe margin on one con- 
 tract, and conservative brokerage concerns call for addi- 
 tional margin when, at the market price, one-half of the 
 existing margin is consumed by paper losses. For instance, 
 if the customer, John Brown, purchased 100 January at 
 13.08, 4 points for commission are immediately added, 
 making the price to him 13.12. If the price of January 
 declines 11 points, or $55, this potential or paper loss is 
 subtracted from the margin which Brown deposited on 
 account of his purchase. Assuming, then, that Brown had 
 originaUy a ledger credit of $200, the remainder of his 
 margin is $145, or 29 points, and is still sufficient to carry 
 the account. If, however, the price for January declined 
 to 12.92, Brown would be called on for $100 additional 
 
 134 
 
 CUSTOMERS' RECORDS 
 
 135 
 
 margin. If he failed to respond after a reasonable time 
 (depending altogether upon the condition of the market 
 to gauge the expression "reasonable"), an order would be 
 entered to sell 100 January at 12.72 on "stop," this mean- 
 ing that when the price of January fell to 12.72, the order 
 would be executed at that price for the option. Having 
 purchased the contract at 13.12 (including commission), 
 and sold it at 12.72, Brown's loss thereon would be 40 
 points, or $200. 
 
 It should be noted here that an entire contract cam- 
 prises both the purchase and sale of a commitment, and 
 that the commission of $20 covers both purchase and s^e 
 or deliverv. 
 
 Customers Contract Book 
 
 Form 27 shows a sheet from the customers "contract 
 book. This book is entered from the purchases and sales 
 book. Each customer has one page allotted to him, and 
 the ruling provides for the classification of the options 
 bought and sold, the date of each transaction, and the prices 
 paid and received. There is also a column providing for 
 the insertion of an "Account Sales" number. Each con- 
 tract is entered on a separate line. Thus, the record of 
 10 contracts purchased is expressed by 10 separate entries, 
 even though the entire purchase was made at one time. 
 This is done to obviate any error in closing or setting off 
 such purchases, and to make possible the recording of 
 account sales numbers. These account sales may be ren- 
 dered at ten different times, depending upon the manner 
 in which the purchases are disposed of, or the short sales 
 covered. They may be closed all at once or at intervals 
 of days. 
 
 All transactions are classified according to the options 
 involved. Thus, any dealings in the option, May, 1915, 
 
iill 
 
 M- 
 
 \i 
 
 136 
 
 COTTON BROKERAGE 
 
 would be classified in the column headed May, 1915. Simi- 
 larly, all purchases or sales of other months would be classi- 
 fied in their respective columns. 
 
 A loose-leaf device gives the best service in this particular 
 book. Since it is tabbed alphabetically, the customers' ac- 
 counts can also be arranged in that manner. Furthermore, 
 the book can be expanded or contracted — sl most convenient 
 and desirable feature in this line of business, since "dead" 
 accounts can be removed to the transfer binder, while the 
 active accounts are allowed to remain. 
 
 As will be noted (Form 27), no monetary column 
 appears other than that for entering the price per pound. 
 As may be inferred from this, the customers' accounts in 
 the ledger are not charged with the cost of purchases nor 
 with the proceeds of sales, but, as will be seen later, reflect 
 only the profit or loss difference. For example, if John 
 Jones purchased 100 January at 13.08 and sold 100 at 13.20, 
 his account would not be charged with $6,540 nor credited 
 with $6,600, but is credited with his profit of $60. There- 
 fore, this customers contract record contains only the options 
 of customers, having no regard for the money values in- 
 volved beyond the mere record of the price per pound. 
 
 This characteristic of the cotton futures business em- 
 phasizes the "diflFerence" method employed in charging or 
 crediting accounts by reason of purchase or sale of futures. 
 All the commodity futures markets are operated in the 
 same manner, i.e., through the ''differences" method out- 
 lined above. The system is employed because it is con- 
 venient, accurate, and wholly in line with the custom of the 
 business. 
 
 Opposed to this method of accounting, is that of charg- 
 ing the customer with the amount of his purchase, and 
 crediting simultaneously the Contract Differences account. 
 This is correct in principle, perhaps even more so than the 
 
 / 
 
 CUSTOMERS' RECORDS 
 
 137 
 
 method in vogue, for the reason that it shows the actual 
 debt by the customer who, it is always supposed, will pay 
 for his contract at the time of delivery. By crediting the 
 Contract Differences account, the liability with the Street 
 is set up, and at delivery time is discharged by payment. 
 The same result is accomplished as in the first case, with 
 the additional advantage that the contracts or options find 
 expression in a financial way. The first method, however, is 
 supported by the two very logical reasons stated in the 
 following paragraphs : 
 
 1. The contract is purely an option for the receipt or 
 delivery of a specified month's cotton. This cotton may or 
 may not be received or delivered by the contracting parties. 
 In view of the doubt which exists on the part of the cus- 
 tomer as to his intention of effecting receipt or delivery, 
 no charge should be set up against him. If eventually he 
 means to avail himself of the option he holds, and expresses 
 this intention, then it would seem that a charge for the pur- 
 chase and a corresponding liability to the Street would be 
 warranted. 
 
 2. In case of a sale, the planter or the speculator making 
 commitments may not intend to make delivery against the 
 sale. It might be that the sale was made for hedging pur- 
 poses or as a short "flier" in the market. Or the purchaser, 
 say a spot man, may have entered the futures market 
 merely to avoid any possible loss from a rise in the price 
 of spot cotton after contractual relations have been entered 
 into between the spot man and the mill. If the credit to 
 the customer and a corresponding charge in the Street 
 records were set up, it would reflect entries which at best 
 would express but contingencies. 
 
 For such reasons, it is obvious that nothing is lost or 
 misstated by treating option transactions by the first method 
 of accounting. 
 
 II 
 
 j' 
 
I 
 
 138 COTTON BROKERAGE 
 
 Customers Ledger 
 
 The customers ledger is an underlying ledger, and does 
 not vary in principle from the ordinary customers or credi- 
 tors ledger. Hence it does not require further comment. 
 The "Boston" or three-money-column ledger is used. (See 
 Form 28.) 
 
 General Journal 
 
 For thepurposes of cotton brokerage, the general journal 
 remains unchanged as to the uses to which it is put. How- 
 ever, as seen in Form 29, two frequently recurring items 
 will be found therein. One is "Cash in Sundry Banks" 
 charged with deposits, wired *by other banks as margin 
 from customers out of town. The other item is the credit 
 entry, in the Customers' Controlling, account, specifying 
 which individual account is to be credited. As an example, 
 Frederick Jones of Sumter, South Carolina, deposits for 
 the credit -of his broker in New York, $500. Upon receipt 
 of the bank advice, the broker debits Cash in Sundry Banks 
 with $500, and credits the Customers* Controlling account 
 with a similar amount. 
 
 General Ledger 
 
 The general ledger contains all real and economic ac- 
 counts, including, of course, the controlling accounts for 
 customers' and Street margins. A bound book better 
 answers the purposes of this ledger. 
 
 Cash Book 
 
 The cash book, as shown by Forms 30a and 30b, has 
 special columns conforming to the needs of the cotton 
 brokerage business. On the cash receipts side of the book 
 are found columns for net cash, exchange and collection, 
 contract differences. Street margins, interest on margins, 
 
 V 
 
 f 
 
 THE COTTON FUTURES MARKET 
 
 139 
 
 customers' controlling account, and a general ledger Column. 
 On the cash disbursements side the columnarization pro- 
 vides for the same factors with the exception that there is 
 no column for exchange and collection or for interest on 
 Street margins. In addition, there are general and sundry 
 expenses columns. 
 
 Balancing the Cash Book 
 
 The cash book is balanced monthly. The various 
 columns are footed and posted to the respective ledger 
 accounts as follows : 
 
 On the cash receipts side, the total appearing in the 
 * customers column is posted to the controlling account in 
 the general ledger, it being assumed that the cash payments 
 by customers have been credited daily in the underlying 
 ledger. The total of the "Contract Differences" column 
 represents cash received through the clearing house as settle- 
 ments by other brokers, and hence is credited to the Con- 
 tract Differences account." The "Street Margins" column 
 is posted in bulk to the Street margins controlling account 
 in the general ledger, it being again assumed that the 
 respective credits, representing released margins, have been 
 posted to the underlying Street margin ledger (Form 31) 
 in the regular course of the month. "Interest on Margins" 
 represents an earning, since that interest is earned on 
 margins which were released. The total of this column is 
 posted to an account in the general ledger called "Interest 
 on Margins." The accounts appearing in the "General 
 Ledger" column have already been posted, making further 
 comment unnecessary. 
 
 The disbursements side of the cash book is treated in a 
 similar manner, paying due regard to the posting of the 
 totals in the respective columns. The Cash account in 
 the general ledger is charged with the receipts and credited 
 
 I 
 
I40 
 
 COTTON BROKERAGE 
 
 !| 
 
 it' 
 
 it 
 
 with the disbursements for the month. Finally, the balance 
 appearing in the cash book is carried down and the opera- 
 tions for the next month are continued as before. 
 
 The difference between the amount paid out to the Clear- 
 ing House and the amount received therefrom, as shown 
 by the "Contract Differences" column, should be reconcilable 
 to the net sum paid or received, as shown by the brokers* 
 statement or settlement book (see Chapter XX), in which 
 recapitulation of payments and receipts is made at the end 
 of each month. 
 
 I 
 
 CHAPTER XVIII 
 
 CUSTOMERS^ RECORDS— THE ACCOUNT SALES 
 
 REGISTER 
 
 The Contract Differences Account 
 
 The account sales register or analysis journal (Form 
 37) is a journal in both form and principle. It records 
 financial facts, reflecting losses or gains in the respective 
 customers' accounts. When the customer incurs a loss, 
 the broker, who is acting as an agent for his principal, 
 will be called upon to settle for it eventually. At this 
 point one fact is certain — the customer must be charged 
 with the loss incurred and also with the commission on 
 the transaction as a whole. It is also certain that an ac- 
 count payable with the Street has been created. This 
 liability account receives the technical designation of 
 "Contract Differences." 
 
 If a gain is to be journalized, the customer must re- 
 ceive credit for his net profit, the Commission account 
 also receiving credit for the amount due. Also, in the 
 case of a profit, an account receivable is created, for surely 
 this profit difference will be received from the Street either 
 directly or indirectly; at least, it can be said that the asset 
 account is evident. The same technical designation, "Con- 
 tract Differences," is given to the asset account.. 
 
 The Street custom has possibly adopted a wrong prin- 
 ciple in accounting in merging accounts receivable with 
 accounts payable, reflecting as a resultant a balance figure 
 which is sadly in need of analysis. Examining more 
 deeply into this matter, however, it will be found that the 
 
 141 
 
 
142 
 
 COTTON BROKERAGE 
 
 } 
 
 violation is less to be condemned when we consider the 
 system under which the Street end of this business is con- 
 ducted. What may be an account receivable, considering 
 the option months separately in the customers' division, 
 might result in an accounts payable to the Street. The 
 identity of the customers and their individual profits and 
 losses are lost in the Street books. 
 
 Factors Affecting the Contract Differences Account 
 
 Without entering into the question of settlement be- 
 tween brokers, it may be stated here that two factors of 
 settlement in the Street have direct bearing upon the 
 Contract Differences account. One is a receipt of cash 
 from brokers through the Clearing House; the other, pay- 
 ments to the Clearing House for the accounts of brokers. 
 The former indicates that the broker has a claim on the 
 Clearing House by reason of profits in the process of col- 
 lection. The latter carries with it the implication that 
 losses of the customers are being liquidated through the 
 machinery of the Clearing House. Also, the Contract 
 Differences account is charged or credited with the re- 
 spective profits or losses incurred or realized on customers* 
 transactions. 
 
 Four factors then enter into the Contract Differences 
 account: (1) charges as offset entries to customers' profits; 
 (2) losses of customers indicated by a credit to the Con- 
 tract Differences account; (3) receipts from brokers 
 through the Clearing House, attesting to payment on ac- 
 count of customers' profits; (4) payments to the Street 
 against losses on customers' contracts. 
 
 The purpose of conducting a set of Street records is 
 to make possible the immediate Hquidation against closed 
 or completed contracts. In view of this, no case could 
 be conceived of where the contracts with the Street would 
 
 THE ACCOUNT SALES REGISTER 
 
 143 
 
 be settled in the same order as are the contracts of cus- 
 tomers. Take as illustrations a purchase of 100 January 
 at 12.10 for the account of John Brown, and a subsequent 
 sale at 12.40 for the same account; also a purchase of 
 100 March at 12.00 and a subsequent sale at 11.96 for the 
 account of L. Smith. Assume, for convenience, that all 
 these transactions were made with Hamlin & Co. In 
 the first case, the Contract Differences account would be 
 credited with $150, representing 30 points profit on the 
 January trade. On the March transactions 4 points, or 
 $20, would be lost. The Contract Differences account 
 would show a debit balance of $130, being composed of 
 an account receivable and an account payable. The opera- 
 tions of the Street books contemplate, at best, the receipt 
 of $130, regardless of the broker from whom receivable, 
 or of the customers with whom profits and losses are set- 
 tled. This emphasizes the statement that no cognizance 
 is given to the customers' losses or gains as soon as the 
 transactions reach the point of entry in the records of the 
 Street. 
 
 Arrangement and Operation of Account Sales Register 
 
 The account sales register or analysis journal is entered 
 from an account sales rendered to the customer, which in 
 turn is made up from the customers contract book. 
 
 The columnar arrangement of this journal, as shown 
 by Form 37, is as follows : the account sales number ; the 
 date ; customer's name ; folio ; number of bales, and option 
 months covered by the account sale; a debit and a credit 
 column for entering losses or gains (always including 
 the commissions) of the customer; a debit and a credit 
 column under the caption ''Contract Differences," where, 
 in the case of a debit or a credit to the customer, a cor- 
 responding credit or debit, less the commission, will be 
 
144 COTTON BROKERAGE * 
 
 found. Finally, there is a column for the commission 
 alone. 
 
 The following illustrations will serve to show the 
 working of this journal. Taking the transactions of John 
 Brown who purchased 100 January at 13.08 and sold at 
 13.20, the following entry would appear: 
 
 Debit Contract Differences $60.00 
 
 Credit John Brown 40.00 
 
 Credit Commission 20.00 
 
 Taking the case of a loss of $60 by John Jones, the 
 entry would be: 
 
 Debit John Jones $80.00 
 
 Credit Contract Differences 60.00 
 
 Credit Commission 20.00 . . 
 
 If a customer bought 100 January at 13.04 and sold at 
 13.08, the entry would be expressed: 
 
 Debit Contract Differences $20.00 
 
 Credit Commission 20.00 
 
 In this case no entry whatever would be made in the 
 customer's columns, as the trade, so far as he is concerned, 
 reflects an even settlement. 
 
 Or assuming a purchase of 100 January to have been 
 made at 13.05 and to have been sold at 13.05 for the same 
 customer, the entry would appear as follows: 
 
 Debit Customer $20.00 
 
 Credit Commission 20.00 
 
 No entry would be made in the "Contract Differences" 
 columns for the reason that no accounts receivable or 
 payable are created with the Street, since the transaction 
 from the Street end is a flat or even settlement. 
 
 ' 
 
 THE ACCOUNT SALES REGISTER 
 
 145 
 
 The contract analysis journal is of the type of a special 
 journal, or a complex-type book of original entry. Being 
 columnarized, it presents the possibility of allowing con- 
 trolling accounts in the general ledger, and this is the 
 case in actual practice. The debit and credit items re- 
 sulting from either losses or gains of the customers, are 
 posted daily to the respective customers' accounts in the 
 underlying customers ledger. At the end of the period, 
 which is most frequently the end of each month, a re- 
 capitulation of the debits and credits is made, and this 
 summary is posted to the respective accounts affected, 
 including the posting to the Customers' Controlling 
 account. 
 
 To illustrate this point, let it be assumed that the 
 total debits in the customers debit column is $18,000; 
 that the total credits in the customers credit column is 
 $25,000; or a net difference between the two columns of 
 $7,000 credit. If the total in the contract differences 
 debit is $26,000 and the total of the credits is $18,000, 
 or a net difference of $8,000, the "Commission" column 
 must total up to a credit of $1,000. To recapitulate, there- 
 fore, the following summary would appear: 
 
 Debit 
 Contract Differences... 
 
 $8,000.00 
 
 $8,000.00 
 
 Credit 
 
 Customers $7,000.00 
 
 Commissions 1,000.00 
 
 $8,000.00 
 
 The Contract Differences account would be charged 
 in the general ledger with $8,000, the Customers' Con- 
 trolling account credited with $7,000, and the Commis- 
 sion account credited with $1,000. 
 
 The recapitulation of the account sales register, or 
 
146 
 
 COTTON BROKERAGE 
 
 analysis journal, is necessary before a trial balance of the 
 general ledger can be taken. 
 
 Customers' Accounts Payable 
 
 In the ordinary sense, a customer is looked upon as 
 one who purchases, and, on account of the purchase, is 
 charged. When he pays, the account is credited and bal- 
 anced. Vice versa, a creditor is looked upon as a person 
 from whom goods are purchased or who has yielded any 
 other benefit. But, in the brokerage business something 
 difTerent arises. The customer deposits margin for which 
 his account receives credit. As no other offsetting entry 
 appears, the account becomes an account payable or cred- 
 itor's account. Any losses which might be subsequently 
 charged to the account, still keep it as a creditor's ac- 
 count, for only infrequently is a debit balance account 
 allowed to remain on the books. Thus an invariable rule 
 is dictated, that the only accounts kept with customers 
 or clients are accounts payable. For the foregoing reason, 
 no other controlling account with customers would be 
 kept than accounts payable. A practice of charging all 
 debit accounts to profit and loss prevents the possibility 
 of any accounts receivable appearing beyond a reasonable 
 length of time. In auditing accounts this rule should be 
 remembered. 
 
 Customers' Statements 
 
 Unlike the stock business, in the cotton brokerage 
 business, no interest is charged or allowed on customers' 
 balances. Each customer receives a monthly statement 
 of his account, showing the profits and losses arising out 
 of his transactions during the month. When the account 
 in the customers ledger is balanced, a statement is ren- 
 dered to the customer, similar to that shown in Form 33. 
 
 THE ACCOUNT SALES REGISTER j^^ 
 
 Statement of Open Trades 
 
 Besides receiving a statement of settled transactions, 
 each customer receives a statement of open or unliqui- 
 dated trades, similar to that shown in Form 34. This 
 statement is made out in duplicate, thus furnishing a basis 
 for the compilation of the 'Toint Balance," which is ex- 
 plained in Chapter XXI. 
 
 Account Sales Statement 
 
 Form 35 shows the account sales statement which is 
 sent to each customer as soon as a transaction is closed 
 by either purchase or sale against open commitments, and 
 gives the customer's loss or gain. It will be observed that 
 the transactions are not carried out into dollars, but that 
 only the difference in points is considered. The gross 
 profit or loss is the same as the amount treated in the 
 Contract Differences account through the medium of the 
 analysis journal. 
 
CHAPTER XIX 
 
 THE STREET RECORDS 
 
 Purchases and Sales Book 
 
 The purchases and sales book (Form 25) appears 
 among both the customers' and the Street records. While 
 its most important feature is the record of purchases or 
 sales for the customer, and this information is the basis of 
 entry for the customers' records, the same purchases and 
 sales book also supplies information for Street purposes. 
 In the Street division the names of contracting brokers 
 and the number of bales contracted for are the essentials; 
 the customers' identity is wholly lost. 
 
 Cotton Contract Blotter 
 
 The "Street Blotter," or ''Cotton Contract Blotter" 
 (Forms 36a and 36b), is written up from the purchases 
 and sales book. Its arrangement is such that each current 
 option month is allotted a separate section. There are 
 commonly found eight sections providing for the follow- 
 ing options: January, March, May, July, August, Octo- 
 ber, December, and sundry months. Each ''contract" 
 is entered separately and the purchase of 1,000 bales, 
 whether signed up or contracted with one or ten broker- 
 age houses, necessitates ten separate entries. 
 
 Unlike the blotter used in the stock brokerage business, 
 the book as used here is not a financial record. Its pur- 
 pose is to gather information for the further posting of 
 the Street ledger, and the eventual settlement of accounts 
 among the brokers concerned in any given transaction. 
 The "sign-up slips" or forms of contract, bearing the 
 
 148 
 
 THE STREET RECORDS 
 
 149 
 
 names of the contracting parties, are used for the purpose 
 of making the blotter record complete. Thus, the ruling 
 of the book must allow for the following information: 
 the number of bales listed in single hundreds; the con- 
 tracting broker's name; the price at which purchased or 
 sold; and the name of the customer so purchasing or 
 selling. 
 
 Street Ledger 
 
 Strange to say, while the Street ledger (Form 32) is 
 a book of secondary or summary entry, it is not, strictly 
 speaking, a financial record. While it shows the settle- 
 ments on various contracts, this information being of a 
 financial nature, the results of the settlements cannot be 
 classified or collated for either trial balance purposes or 
 for any other financial information. 
 
 The Street ledger is so arranged that the contracts 
 are classified under sections, one section being devoted 
 to each contracting broker. Each section is further di- 
 vided into current option months, one page being allotted 
 to each month. The brokerage houses are alphabetically 
 arranged and tabulated so that each individual account 
 stands out conspicuously. If occasion arises to turn to 
 an account, it can be done with the least amount of 
 effort, and, direct from that section, any information re- 
 garding the particular account is readily available. 
 
 Arrangement of Street Ledger 
 
 Being posted from the blotter, this ledger contains 
 all the facts relating to the Street end of transactions. 
 Thus, for example, the account of B & Co. on the page 
 recording January options (Form 32) contains the follow- 
 ing facts: To the extreme left of the page is given the 
 actual date of purchase. As each contract of 100 bales 
 
I50 
 
 COTTON BROKERAGE 
 
 ;** 
 
 is written up separately, one line represents one contract, 
 or 100 bales. The second column provides for the price; 
 while the third column, which is used for remarks, is not 
 filled in until later. Following this is a double rule which 
 separates the purchase side of the record from the sales 
 side. This second division of the ledger contains columns 
 for the date of sale, price, and remarks. The folio shows 
 the purchases of customers of the concern keeping the 
 books, and not, as might be imagined, purchases for the 
 account of the contracting broker whose name appears 
 at the head of the section. To illustrate this point, any 
 contracts in B & Co.'s account on the purchase side of 
 A & Co.'s Street ledger, would mean that B & Co. had 
 sold the stated number of bales to a customer of A & Co., 
 and a corresponding construction is to be given to the 
 sales division of the Street ledger folio. 
 
 As settlements are inevitable, suitable provision must 
 be made somewhere in the arrangement of the Street 
 ledger for a record of such payments or receipts. Hence, 
 if by chance, or by expiration of the contract, an offset 
 with B & Co. should be made, it would result either in a 
 payment to, or a receipt from B & Co. To accomplish 
 this end, the Street ledger shown in Form Z2 contains 
 two monetary columns to the extreme right, one for pay- 
 ments to B & Co. which would be reflected in the debit 
 column, and the other for receipts from B & Co. which 
 would find expression in the credit column. In the case 
 of a credit it would mean that money had been received 
 on the closed trade from the individual broker; in the 
 case of a debit, that money had been paid to him. As 
 an example, if A & Co. purchases from B & Co. 100 Jan- 
 uary at 12.00, and the settlement or sale price was 12.50, it 
 follows that B & Co. would owe A & Co. 50 points ot 
 $250 (see Form Z2), 
 
 THE STREET RECORDS 
 
 151 
 
 The Street Margin Book 
 
 The fourth book of the Street records is the Street 
 margin ledger (Forms 38a and 38b). The name of this 
 book is indicative of its contents. It is a record from 
 which the condition of margins between brokers can be 
 read. In principle it is similar to the customers' margin 
 system. The only difference which exists between the 
 two is to be found in the purposes for which such memo- 
 randa are kept. 
 
 The by-laws of the Cotton Exchange contain certain 
 regulations relating to margins between brokers. The 
 reason for such regulations is traceable to the fact that 
 a contractual relationship exists between the brokers con- 
 cerned from the time that a contract for futures is en- 
 tered into until such contract is terminated. More ex- 
 plicitly, the relation of the broker to his customer is ex- 
 tended to a third party — the other broker— thereby im- 
 posing the same duties upon the brokers involved in the 
 transaction as devolve upon such brokers by reason of 
 their relation to their customers. 
 
 Unlike the stock business, a contract arising out of 
 the sale or purchase of cotton is not consummated upon 
 the next business day. With stock transactions, the third 
 party broker has no further right or duties beyond the 
 point of delivering or receiving stock against payment. 
 On the other hand, a cotton contract might be made 
 which could extend over a period of almost a year. For 
 instance, a purchase made in February of the present year, 
 of 100 bales of next year's January cotton, might be car- 
 ried along until December 31 of the present year. It is 
 obvious, then, that a very wide difference in price might 
 be reflected between the date of purchase and the date 
 upon which the contract is finally closed. 
 
 To illustrate, let it be assumed that the customer pur- 
 
152 
 
 COTTON BROKERAGE 
 
 n 
 
 chasing the 100 bales of January, holds the contract up 
 to the very last tender day. It is apparent that he must 
 keep his contract well margined. The same demand is 
 made of the brokers in order that the open contracts be 
 kept at market prices until they are closed. This shows the 
 threefold character of an open transaction. 
 
 Ruling and Arrangement of the Street Margin Book 
 
 Forms 38a and 38b show respectively a left-hand and 
 a right-hand page of a typical Street margin book. Two 
 facing pages are allotted to each broker with whom con- 
 tracts have been made. The left-hand or "long" page is 
 divided into eight main sections, each headed by a caption 
 indicating an option month. All purchases made from 
 the broker whose name appears at the head of the page 
 are represented on this left-hand page. The respective 
 month columns are subdivided to show the date of pur- 
 chase, number of bales, and the cost price. At the top of 
 the page, space is left for ''Margin up by them." On 
 the right-hand or ''short" page, a similar ruling is to be 
 found. The captions are the same with the exception 
 that the space at the top for margin information is headed 
 "Margin up by us." 
 
 Relation between Margin Book and Street Ledger 
 
 As purchases and sales are made from day to day in 
 the Street ledger, the entries are duplicated in the Street 
 margin book. Thus, all facts, save those which are ex- 
 pressed in the monetary columns of the Street ledger, are 
 transferred to the margin book. If a contract be settled, 
 a line is drawn through that particular entry in the Street 
 margin book. At all times, then, if comparison be made 
 of the open contracts with the Street, the information 
 which is furnished by the Street ledger should be pos- 
 
 THE STREET RECORDS 
 
 153 
 
 sible of reconciliation with its companion record — the 
 Street margin ledger. 
 
 As an illustration, let us consider the following trans- 
 actions: On February 5, 500 bales of March were sold by 
 broker A to broker B. Without regard to the other 
 Street books, the record of sale would be found in A's 
 Street ledger. The same transaction would also be found 
 in A's margin book on the right-hand page allotted to 
 B. If, by a subsequent purchase of 300 March, a direct 
 settlement with B were effected, the Street ledger would 
 attest to the settlement by showing only 200 March open. 
 Simultaneously, B's account in A's margin book would 
 be made to show the same number of contracts open. 
 Needless to say, the price of such open contracts as shown 
 by these two records would be similar. 
 
 Margin Call and Release 
 
 It is imperative that a constant review of the contents 
 of the Street margin book be made with the purpose of 
 either calling on brokers for market margin due, or of 
 releasing such margin deposits as are free and clear. To 
 illustrate the operation of the margin call, suppose that, 
 on February 15, broker A purchased for the account of 
 his customer from broker B, 100 January at 12.90. On 
 March 6 the market price rose to 14.00. In that case B 
 would owe A the difference of 110 points, or $550. Fur- 
 chasing broker A would then send a "market margin call" 
 (Form 39) to B, who upon receipt thereof would respond 
 (Form 40) by depositing with the Superintendent of the 
 New York Cotton Exchange an amount of money sufficient 
 to bring the contract with A up to the new market price. 
 Conversely, if the price should operate against the pur- 
 chaser and fall below 12.90, then B would have the right 
 to demand market margin from A. 
 
 • • 
 
! 
 
 154 
 
 COTTON BROKERAGE 
 
 When margin has been deposited and the changing 
 market price nears a point where the difference between 
 the contract price and the market price is very small, or 
 where the two prices approximate each other, the party 
 who deposited the margin is entitled to its release. Thus 
 in the foregoing example, if after B deposits margin in 
 response to A'? call, the price of January again drops to 
 12.90, B's contracts at this price reflect no market loss. 
 Hence, the margin which he put up, which is on deposit 
 with a trust company, is releasable. Upon demand, broker 
 A then indorses the margin certificate held by B, who 
 thus obtains a release of his money. 
 
 The margin certificate referred to is an instrument 
 issued by virtue of the Exchange, as evidence that money 
 has been deposited in response to a margin call. The 
 certificate may be made payable to either broker, as the 
 Superintendent of the Exchange may direct. In the fore- 
 going illustration, the certificate would be issued to B 
 when he deposits margin in response to A's call. If 
 thereafter the market price for January goes back to 
 12.90, B no longer owes A any money on open contracts, 
 and he is required to release by indorsement of the margin 
 certificate B's funds tied up in margins. The Superin- 
 tendent of the Exchange also attests to this release by 
 indorsing his name on the back of the certificate. (See 
 Form 41b.) Thus the margin certificate becomes a ne- 
 gotiable instrument, which may be deposited by B for its 
 face value. 
 
 Interest on Margins 
 
 Another phase of the system of margin deposits is the 
 interest allowed by the trust company with which the 
 funds are deposited. In drawing his check, B makes it 
 payable to some bank designated by the Cotton Exchange 
 
 THE STREET RECORDS 
 
 155 
 
 as a depository for margins. This check is certified, and 
 to it is attached a notice to A (Form 40), stating that in 
 response to the margin call a stated sum has been de- 
 posited by B in some specified bank or trust company. 
 When the Superintendent of the Exchange receives both 
 the check and the notice, he stamps *Taid" on the face 
 of the latter and causes it to be delivered to A, as his 
 notice of B's response and deposit. Interest on margins 
 at the rate of 2% to 3 1/2% is allowed by the bank or 
 trust company, so that if a margin of $2,000 were released 
 after 35 days' time, the interest would, assuming the in- 
 terest rate to have been 3%, amount to $5.84; and this 
 interest would be paid with the principal. 
 
 Original Margins 
 
 A word may be added here in reference to another 
 form of margin. Brokers doing a customers' commission 
 business may be divided into two classes. The first em- 
 braces the strong financial houses; the second the medium 
 and weaker houses. In no other line, perhaps, does credit 
 play such an important part in the relationship between 
 contracting parties. 
 
 The Exchange has designated certain rules and regu- 
 lations in regard to market margins, as already explained. 
 The by-laws of the Exchange also provide for what are 
 called ''Original Margins." A broker, who has reason to 
 believe that a party with whom he has contracted belongs 
 to the second class, may send a margin call demanding 
 an original margin of $200 to $500 for each contract. 
 These originals are also frequently demanded from the 
 larger houses with whom many contracts have been made. 
 In any event, all calls for original margin must be made 
 within 24 hours after the contract has been entered into. 
 The broker "called" for margin of $5 a bale or $500 on a 
 
156 
 
 COTTON BROKERAGE 
 
 I 
 
 contract, must deposit that sum with the Superintendent 
 of the Exchange; and this should be done as soon as the 
 call is received. 
 
 Time for Deposit of Market Margins 
 
 All calls received before 10:30 a.m. on days excepting 
 Saturday must be deposited before 11 :30 o'clock of the same 
 day. Calls which are received after 10 :30 a.m., and before 
 12 o'clock, must be deposited before 2 p.m. of the same day. 
 Calls coming in after 12 o'clock must be deposited before 
 11:30 A.M. the next business day — Saturday excepted. 
 Calls received after 12 o'clock on Friday must be de- 
 posited before 11 a.m. on Saturday. Calls received on 
 Saturday before 10:30 must be deposited before 11 a.m.; 
 those received after 10:30 must be deposited before 11:30 
 A.M. the following Monday. 
 
 CHAPTER XX 
 
 SETTLEMENTS BETWEEN BROKERS 
 
 Conditions Affecting Settlements 
 
 In all futures business, contracts may be sold short and 
 eventually covered, or they may be sold for actual delivery. 
 In the latter case the producer might ship his cotton to New 
 York for delivery against his sale. On the other hand, 
 cotton may be purchased with the purpose of making profit 
 on an advancing market, or it may be purchased with the 
 actual intention of receiving the commodity. Such a state 
 of affairs permits of short selling or long buying. This con- 
 dition might be further reflected by a sale being posted in the 
 contract ledger with no offset on the purchase side. A simi- 
 lar condition arises again in the case of "long" cotton being 
 sold to a broker with whom no "long" contracts were held. 
 
 As an example, suppose A & Co. buy 100 bales of 
 January from B & Co. for the account of Jones. When 
 Jones gives his selling order, 100 bales of January might be 
 sold to C & Co. This illustrates two points : 
 
 First, that open contracts can exist with the Street 
 brokers without having a corresponding interest in the 
 market for the account of customers, though the net interest, 
 or the result after considering all the contracts, must, of 
 course, be similar to the result obtained after treating the 
 customers' holdings. In the case cited, A & Co. had no 
 interest in the market for the account of the customer ; yet 
 the Street ledger reflects a condition totally different from 
 the one mentioned. But if the net difference of the con- 
 tracts, long and short, were taken into account, the Street 
 ledger would also reflect such interest in the market. 
 
 157 
 
158 
 
 COTTON BROKERAGE 
 
 SETTLEMENTS BETWEEN BROKERS 
 
 1 
 I 
 
 Second, that the Street books are kept in total disregard 
 of the customers' division ; that is, so far as the memorandum 
 facts are concerned. A reconciliation with the customers' 
 books is not even attempted, and under the system employed 
 It could not be successfully made. Only after careful 
 compilation and an understanding of the construction of the 
 accounts, can proof be had attesting the correctness of the 
 Street books. 
 
 From this it may be seen that settlements with the indi- 
 vidual brokers cannot be expected at the same time that 
 settlements with customers are made. 
 
 Methods of Settlement 
 
 Generally speaking, there are four methods employed for 
 setthng outstanding Street contracts between brokers. 
 These are : 
 
 1. 
 2. 
 3. 
 4. 
 
 Direct settlement 
 Ringing method 
 Street let-out 
 Tender of notice 
 
 I. Direct Settlement 
 
 The method of settling contracts between brokers by way 
 of direct payment or an oflFset by either purchase or sale is 
 so obvious as to require no discussion. But, suppose that a 
 broker purchases options from sundry brokers, and sells 
 them at some subsequent time. In order to liquidate the 
 outstanding Street contracts, one of the three methods, other 
 than direct settlement, may then be employed. 
 
 2. Ringing Method 
 
 The first indirect method of settling contracts in the 
 Street is by "ringing." By this is meant the matching of 
 names of buyers against sellers of the same options, with 
 
 159 
 
 the purpose of literally "getting out" of the contract and 
 thus eflfecting a settlement. The term "pair-off" aptly de- 
 scribes the ringing method— a system of settlement encour- 
 aged by the authorities on the Exchange, for it greatly 
 relieves the burden on the last day of tender, or, as it is 
 commonly called, "Notice Day" or "Transfer Day." 
 
 To illustrate the ringing method of settlement, assume 
 that broker A sold to' broker B 500 bales of May, and pur- 
 chased from broker C the same quantity (price does not 
 enter into the ringing method nor into any other indirect 
 method of settlement among brokers). If B should sell to 
 C 500 bales of May, A could "ring" these contracts and the 
 result would be a transfer to C of A's contracts with B. B 
 could also settle his contracts with A and C, and C. could 
 settle with B and A, and in this manner an offset could be 
 had and a settlement of all the transactions effected. 
 
 To make this clear, let the Street ledgers of A, B, and C 
 be taken, in which appear these hypothetical purchases and 
 sales. 
 
 A. Street ledger shows a sale to B of 500 May, and a 
 purchase of 500 May from C. 
 
 B. Street ledger reflects a purchase from A of 500 May, 
 and a sale to C of 500 May. 
 
 C. Street ledger reflects a purchase from B of 500 May, 
 and a sale to A of the same quantity. 
 
 Hence the following offsets would be made in the three 
 books : 
 
 A, in offsetting the account of B, would do so by entering 
 500 May on the left-hand side of the folio, and placing the 
 name of C in the "Remarks" column. This will constitute 
 a cross-reference to C, whose account in A's books will be 
 offset by an entry on the credit side with B's name appearing 
 in the "Remarks" column. 
 
 On B's books the names of C and A will appear respec- 
 
!i 
 
 i6o 
 
 COTTON BROKERAGE 
 
 lively as offsets against the purchases and sales made with 
 C and A. Thus the same result will be accomplished as on 
 C's books. 
 
 On C's books the names of A and B will establish a 
 cross-reference and set-off against the contracts bought and 
 sold. 
 
 10:30 A.M. Bids 
 
 At 10:30 each morning prices known as the "10:30 
 Bids'' appear on the cotton ticker. These bids are used as 
 an arbitrary settlement price on "rings." I'aking the fore- 
 going hypothetical transactions between A, B, and C, it can 
 be readily seen that in the offsets one factor is missing— the 
 price of settlement. 
 
 Assume that A's 500 May were sold to B at 12.60 and 
 purchased from C at 12.40. In the offset columns in the 
 accounts of B and C, there will now appear 500 May at 
 12.10, and in the "Remarks" column the letter "R," indi- 
 cating that this price is the ring or settlement price oi that 
 particular option on that day. Disregarding for the moment 
 the principle involved in these transactions, A will receive 
 $500 in settlement of the difference between 12.40 as the 
 purchase price and 12.60 as the sale price, on 500 May 
 cotton. Employing now the 10:30 bid price of 12.10, the 
 amount received by A should be the same. 
 
 In proving this statement, it will be found that $1,250 
 was received from B in settlement, and that a payment of 
 $750 was made to C, or a net difference received by A of 
 $500. This is derived in the following manner : It will be 
 remembered that the contract was sold to B at 12.60 and 
 offset at 12.10. This results in a difference in A's favor of 
 50 points on 100 bales, or 250 points on 500 bales. Resolved 
 into terms of money, this is $1,250. It will also be recalled 
 
 I 
 
 SETTLEMENTS BETWEEN BROKERS 
 
 161 
 
 that A purchased from C 500 May at 12.40. Using the 
 same settlement price of 12.10, a difference of 150 points 
 exists in C's favor which, in terms of money, contemplates a 
 payment to C of $750, leaving a balance of $500 to A's 
 credit. 
 
 Ring Clerks and the Clearing House 
 
 A word of explanation may be given here as to how the 
 ringing method is carried out in practice. The New York 
 Cotton Exchange has established a clearing house of its own, 
 where the ring clerks of the various cotton brokerage houses 
 assemble each morning. Each clerk has in his possession a 
 slate book containing the names of purchasing and selling 
 brokers, and the number and classification of options which 
 each broker has open on the Street ledger. A's clerk makes 
 it his business to see B's clerk, or vice versa. An exchange 
 of names then goes on until A calls the name of C. Imme- 
 diately the possibility of ringing the 500 May presents itself. 
 The ring is called off by the party making it. Thus, if A 
 makes a ring with C, the names in the ring run as follows : 
 A sold to B, B sold to C, C sold to A ; A being the first and 
 the last name. The same course is gone through by the ring 
 clerks until as many rings have been made as are possible. 
 Rings made on one day are settled the next business day, 
 together with any direct settlements which may have been 
 made between brokers. 
 
 3. Street Let-out 
 
 Very often ringing becomes difficult by reason of the 
 inability to get buyer and seller to pair off their contracts. 
 Thus, A who sells to B and buys from C, cannot set off B's 
 name against C, owing to the fact that B and C have no 
 immediate relationship between themselves. Only when 
 B and C have such a relationship is ringing possible. Such 
 
t62 
 
 COTTON BROKERAGE 
 
 a condition is met by the third method of settlement known 
 as the "Street Let-out." 
 
 This system contemplates the giving up of names on 
 either purchase or sale, upon the request of the broker seek- 
 ing the "let-out." The following case will illustrate the 
 method: A sells to B 1,000 January and purchases from C 
 the same quantity of contracts. A is unable to ring with 
 either B or C, because they do not trade with each other. 
 In order, therefore, to effect a set-off in B's account, A must 
 secure 1,000 January en the opposite side of the Street 
 ledger. B does not sell to any broker from whom A buys. 
 But if B should sell 1,000 January at any time, the names 
 of the brokers purchasing from B are given to A in substitu- 
 tion for B's name. This would have the effect of an offset 
 in B's account, and would further place upon the books of 
 A the names of brokers which B substituted for his own. 
 
 The settlement price used in this case is the price 
 obtained by B on his sale of the January contracts. In other 
 words, what B really does is this : He exchanges the names 
 of the purchasers in that transaction for the name of A. In 
 this way the original purchase by B from A would be offset 
 by this later sale by B. For example, B in this sale sells to 
 four other brokers, D, E, F, and G. B then notifies D, E, 
 F, and G that he "gives up" A in the transaction, thereby 
 effecting a change in the name of the principal. A then 
 offsets the contracts in B's account with the names and prices 
 given by B. Where formerly there was one single name 
 with which to ring, in this case there are four. An abun- 
 dance of names is conducive towards easier ringing. 
 
 To further explain the settlement price used in this trans- 
 action, the following illustration will serve: A sells the 
 original contracts to B at 12.60. This will appear in the 
 Street ledger on the right-hand side of B's account. If B 
 should then sell 1,000 January at 12.40 and in effect give up, 
 
 SETTLEMENTS BETWEEN BROKERS 
 
 163 
 
 or eliminate himself as the principal in the transaction, the 
 name of A would appear as the seller. A would then open 
 accounts for D, E, F, and G, stating the account, the date of 
 let-out, the number of bales, and the price, with the addi- 
 tional information in the "Remarks" column that the entries 
 appear by reason of a let-out. B accepts A's name in lieu of 
 the names of D, E, F, and G. The account of B therefore 
 will contain an entry on the left-hand side of the folio re- 
 flecting the offset by 1,000 January at 12.40, with cross- 
 reference in the "Remarks" column alluding to the accounts 
 of D, E, F, and G. A would then "bill" B for 20 points on 
 1,000 bales, or $1,000. 
 
 Thus, by the let-out system, A can substitute the names 
 of D, E, F, and G, for B's name. He then substitutes the 
 sale price of 12.60 for 12.40, and collects the difference 
 from B. 
 
 This entry can be traced to the Street blotter (see Forms 
 42a and 42b) but does not go beyond that record. The 
 purchases and sales book is not concerned in this transfer, 
 and furthermore, as the offset on either side of the Street 
 ledger was made at 12.40, the eventual financial result would 
 not be altered. 
 
 4. Tender of Notice 
 
 The fourth and last means of settlement is the transfer- 
 able notice or tender of delivery. It is the simplest method 
 in operation, resembling very much the principle behind the 
 ringing system. 
 
 At the expiration of the current option month, the pur- 
 chasing broker of a contract — 100 bales— receives a notice 
 from the broker issuing the same, stating that the latter 
 is prepared to deliver 50,000 pounds of cotton at a price 
 stated in the notice. 
 
 If A sold to B and bought from C, the latter might issue 
 
164 
 
 COTTON BROKERAGE 
 
 or transfer this notice to A, who in turn would transfer it 
 to B. A relationship is then created between A, B, and C, 
 which resolves itself into a ring. Thus, A tenders to B, and 
 C tenders to A; or, leaving A out of the transaction, C 
 tenders to B on account of A. 
 
 The same method of offset is used here as in the pre- 
 ceding method of settlement, except that in the "Remarks" 
 column appears the information that the contract was ten- 
 dered, and cross-reference is made to the transferee and 
 transferor. 
 
 The settlement price will, of course, be the price men- 
 tioned in the 'Transferable Notice," and is treated in the 
 same manner as the 10 :30 bids, or the ring prices. 
 
 Clearing House Payments on Settlements 
 
 In the foregoing discussion mention has been made of 
 payments and receipts between the various brokers on the 
 Exchange. To facilitate such settlement, the New York 
 Cotton Kxchange has established a clearing house in charge 
 of which is a representative from a prominent New York 
 bank. 
 
 Each morning a clearing house sheet is filed by the mem- 
 bers availing themselves of the clearing house privilege. 
 (See Form 43. ) It contains a list of the brokers from whom 
 balances are claimed or to whom balances are owed. The 
 net difference between the two sides will result in either a 
 payment to, or draft on, the Clearing House. 
 
 The accuracy of this system is aided by the established 
 custom among brokers of depositing with the clearing house 
 clerk the bills (Form 44) arising out of any of the four 
 methods of settlement already described. Only such items 
 as are stated on the bills are entered on this clearing house 
 sheet. Thus the clerk of each brokerage house is in a posi- 
 tion to check the accuracy of the bill which he receives. If 
 
 SETTLEMENTS BETWEEN BROKERS 165 
 
 nothing be said to the contrary, the bill is presumed to be 
 correct and the item is listed on the sheet. 
 
 The Clearing House receives as much money as it pays 
 out against clearing house drafts. Only money balances are 
 listed, no attention whatsoever being paid to the source of 
 issuance. In effect, the Cotton Clearing House resembles 
 the Bank Clearing House more than does the Stock 
 Clearing House. 
 
 Brokers' Statement or Settlement Book 
 
 The clearing house settlements discussed above are 
 entered in a "Brokers' Statement" or "Settlement Book," 
 shown in Forms 45a and 45b. The first of these presents 
 the payment side of the book, corresponding to the "We 
 Owe to" shown in the clearing house sheet (Form 43). 
 The second shows the collection side, which corresponds to 
 the "We Claim from" column of the clearing house sheet. 
 
 The purpose of the settlement book is to record the 
 receipts and payments on settlements, stating the name of 
 the broker from whom settlement is received or with whom 
 settlement is made. Besides this information it gives the 
 source of receipt or payment by reflecting in special columns 
 the respective months on which payment is made or settle- 
 ment received. It is the basis for making up the clearing 
 house sheet. 
 
 The date appears at the top of the page, and on the debit 
 or payment side are columns for the name of the broker ; the 
 number of bales settled with each broker ; eight special mone- 
 tary columns for the respective option months on which 
 payment is made ; and a "Total Amount" column. In this 
 last column appears the cross-footing of all the other 
 coltunns. 
 
 The same arrangement obtains on the credit or collection 
 side. The difference between the two "Total Amount" 
 
i66 
 
 COTTON BROKERAGE 
 
 columns will result in either a cash receipt from, or a cash 
 payment to, the Clearing House. This difference should be 
 identical with that appearing on the clearing house sheet. 
 
 I 
 
 CHAPTER XXI 
 
 CONTRACT DIFFERENCES AND THE POINT 
 
 BALANCE 
 
 Requirements as to Records 
 
 The records of the cotton brokerage business must be 
 kept up to the mark. This is even more necessary here 
 than in the stock business, for the day's operations depend 
 absolutely upon the information furnished by the various 
 accounting media. If customer X desires to sell his longs 
 or cover his shorts, recourse must be had to X's account in 
 either the customers contract book or the customers margin 
 sheets. In the course of a day's transactions, several tele- 
 grams from out-of-town clients are received, in which orders 
 are given to close out longs or cover shorts, not stating in 
 what options such customers are interested. This illustrates 
 how essential it is to have the accounts completely written 
 up. To exercise a double check upon the accuracy of cus- 
 tomers' holdings, it becomes necessary for the margin clerk 
 and the bookkeeper to compare open contracts of clients very 
 frequently. 
 
 At any given time, also, it should be possible for the 
 Street clerk to prove the net interest, long or short, taken 
 from his Street books, with the net number of bales long and 
 short as they appear in the customers' records. Qassifying 
 the various contracts into months, the net interest in each 
 option can also be determined, upon the theory that the same 
 purchases and sales, leading up to the determination of the 
 net long and short, are passed through both divisions cus- 
 tomers' and Street. As was indicated, the Street section 
 
 167 
 
i68 
 
 COTTON BROKERAGE 
 
 
 concerns itself with the settlement with brokers, always 
 having as an objective the reduction of all closed contracts 
 to a condition where the net interest in the market approxi- 
 mates the customers* net interest. 
 
 It is easily seen, therefore, that there may be a wide 
 divergence between the books of the two divisions. Suppose 
 X, Y, and Z purchase in the aggregate 5,000 bales of various 
 options, and that customers M and N sell 3,000 bales of 
 different months. The net interest which the broker has in 
 the market for the account of his customers is 2,000 bales, 
 net long. Even if we suppose that all the contracts traded 
 m have been in the January option, no '*close out'' or settle- 
 ment by account sales can be made with the customers, 
 because the purchases and sales have been made for several 
 different accounts. Only where a client buys and sells the 
 same option month, can an account sales be rendered to him. 
 The status of the accounts, individually taken, would be such 
 that long contracts would be shown for some customers, 
 while short contracts of the same option months would be 
 revealed for other accounts. 
 
 The Street division takes no cognizance of such a condi- 
 tion existing among customers. As before stated, its pur- 
 pose is to settle contracts of the same month regardless of 
 other conditions. If a direct settlement, a ring, or Street 
 let-out be possible, it can be said with certainty that the 3,000 
 January bought and sold in the foregoing illustration, would 
 be settled before— and probably long before— the respective 
 customers liquidated their holdings. 
 
 Contract Differences Account 
 
 This brings us again to the subject of "Contract Dif- 
 ferences." If one division of the broker's office works in 
 total disregard of the apparently logical succession of opera- 
 tions involved in the settlement of contracts, then the results 
 
 / 
 
 I 
 
 CONTRACT DIFFERENCES-POINT BALANCE 169 
 
 obtained from the Street books will be in apparent contra- 
 diction to those obtained from the customers' records. This 
 fact was emphasized in the preceding illustration of 3,000 
 January upon which payment was either made or received 
 long in advance of any charges or credits being made in 
 customers' accounts. 
 
 A thorough understanding of the theory upon which the 
 Contract Differences account operates makes necessary the 
 division of the subject under two headings : 
 
 1. Treatment of the customers' transactions as open 
 
 contracts and liquidated contracts. 
 
 2. Treatment of the same transactions with brokers 
 
 in the Street as contracts open and contracts 
 settled. 
 
 Transactions which are settled for customers, represent- 
 ing purchase and sale, create either a debit or a credit to 
 Contract Differences as explained in Chapter XVIII. A 
 debit to that account signifies that the Street owes a sum 
 which would equal the gross profit of the customer on a 
 given transaction. A credit to the account under discussion 
 evidences the liability of the broker to the Street on account 
 of his customers' losses. Excluding all other factors at 
 this point, the difference— the Contract Differences account 
 — reflects a sum owing to or by the Street. Of course, this 
 case presupposes that all customers' holdings, long and short, 
 have been closed. If such be the case, then the immediate 
 relation between the customers' books and the Street books 
 is not so greatly strained. 
 
 But this, however, is seldom the case. The broker is an 
 agent. As such he is called upon to settle with the Street 
 on account of his customers' losses, and collect from it by 
 reason of his clients' profits, and unless the Street division is 
 able to settle the contracts in question with equal rapidity. 
 
 ^ 
 
\ 
 
 I 
 
 II 
 
 I- 
 
 170 
 
 COTTON BROKERAGE 
 
 or vice versa, the results shown by the customers' books and 
 the Street books may be widely different. 
 
 In the case of a loss, the Contract Differences account 
 shows the corresponding liability to the other Street brokers. 
 For instance, if the total loss be $800, a payment of cash to 
 the Street will offset the Contract Differences account by a 
 debit to it and a credit to cash. This simple operation, hypo- 
 thetical as it may be, illustrates one phase of the Contract 
 Differences account. 
 
 As soon as the element of practice enters the discussion, 
 the Contract Differences account assumes a very different 
 aspect. For instance, the contracts from the Street end 
 might create charges or credits long before or long after the 
 contracts were settled in the customers' accounts. In con- 
 clusion, this statement can be made : If all contracts were 
 closed with the Street and with customers, let us say at a 
 period of dissolution, the net losses or the net profits on 
 customers' contracts would equal the amount of cash paid to 
 or received from the Street. 
 
 How, then, is it possible at any time to prove the correct- 
 ness of the Contract Differences account ? How is it possible 
 to prove the accuracy of the debit, representing an asset, or 
 the credit, representing a liability ? 
 
 Point Balance 
 
 The answer to the foregoing question requires a dis- 
 cussion of the "Point Balance" method of reconciling the 
 Contract Differences account. 
 
 The closed contracts of customers and settled contracts 
 in the Street, give rise to charges and credits in the Contract 
 Differences account. The open contracts of customers and 
 unsettled contracts in the Street will, when finally liquidated, 
 create further charges and credits to the account in question. 
 But meanwhile it becomes necessary to reconcile the Con- 
 
 CONTRACT DIFFERENCES^POINT BALANCE 171 
 
 tract Differences account, for the reason that only through 
 it is a control of the Street books made possible. 
 
 The presumption that this question is one for the auditor 
 to answer is erroneous, because a constant check upon the 
 Street books is essential to assure accuracy in the operation 
 of the business. For this reason a point balance is taken at 
 the close of each month's transactions to prove the balance 
 which is to be found in the Contract Differences account. 
 The process of taking a point balance can best be explained 
 by a concrete example such as would be found in actual 
 practice. We will therefore follow a series of items through 
 the customers' division, and the same items through the 
 Street division as well. On January 22, the following 
 purchases were made for a client : 
 
 200 March at 12.60 
 300 " " 1270 
 500 " " 12.75 
 
 Also the following purchases for other clients : 
 
 200 July at 12.50 
 300 October " 12.32 
 
 On January •6, the customer who purchased 1,000 March, 
 sold: 
 
 400 March at 12.82 
 100 " " 12.81 
 
 leaving a balance long of 500 March at 12.75. 
 
 On January 8, 500 July were sold at 12.31, representing 
 a short sale of another client. 
 
 On January 10, 500 December were sold at 12.20. 
 
 From the customers' standpoint, the only transactions 
 which would be closed by an account sales seem to be the 
 200 March at 12.60 and 300 March at 12.70 against the sale 
 
 w 
 
172 
 
 COTTON BROKERAGE 
 
 of 400 at 12.82 and 100 at 12.81. The gross profit to the 
 customer would be 79 points, or $395. Consequently the 
 Contract Differences account would be charged with a like 
 sum, the customer be credited with $295, and the Commis- 
 sion account with $100. We are primarily concerned with 
 the charge to the Contract Differences account, for it is this 
 account which is to be treated in relation to the point balance, 
 the other factors such as commission and customers' charges 
 or credits, having no present bearing. 
 
 The only charge thus far in the Contract Differences 
 account is $395. What operations have gone on in the Street 
 division? Let us assume that the 500 March bought at 
 12.75 were settled against the sale of 400 at 12.82 and 100 
 at 12.81. This settlement might have been made directly; 
 that is, the same broker may have been dealt with in both 
 purchase and sale. This condition, however, is not a usual 
 one. Secondly, the 500 bales on either side might have 
 been settled by ringing. It is of minor concern to the 
 broker through what means a Street settlement is effected. 
 This settlement might have been made a week or ten days 
 after the customer's liquidation. On this particular Street 
 transaction the broker will have received from the Clearing 
 House or from the second broker direct, 34 points or $170. 
 This is arrived at in the following manner, considering these 
 three transactions : 
 
 500 March bought at 12.75 
 400 " sold " 12.82 
 100 " sold " 12.81 
 
 The difference between 12.75 and 12.82 on 400 bales is 28 
 points, and that between 12.75 and 12.81 is 6 points, making 
 a total of 34 points, or $170. The Contract Differences 
 account would receive credit for this amount against the 
 receipt of cash. 
 
 CONTRACT DIFFERENCES-POINT BALANCE 173 
 
 Proof of Contract Differences Account 
 
 Assuming that the last of the month has arrived, we will 
 set about proving by means of the point balance system, that 
 the debit balance of $225 appearing in the Contract Dif- 
 ferences account is correct. The following eight steps arc 
 employed to obtain this proof: 
 
 1. As all contracts are resolvable into points, proceed to 
 extend all open contracts of customers in this manner. 
 Thus, on the purchase side of the Customers* Open Trades 
 account, Form 46, the points representing the open con- 
 tracts, are determined as follows : 
 
 500 March at 12.75 equals 6,375 points 
 200 July " 12.50 " 2,500 " 
 300 October " 12.32 " 3.696 
 
 n 
 
 ii 
 
 Total 12,571 
 
 2. On the sales side the points are found as follows : 
 
 500 July at 12.31 equals 6,155 points 
 500 Dec. " 12.20 *' 6,100 " 
 
 Total 12,255 " 
 
 3. Deduct the lesser number of points from the greater. 
 Thus : 12,571 — 12,255 =- 316 points debit. 
 
 4. Construct a "dummy" ledger account called "Contract 
 Differences'* and apply this debit of 316 points to the credit 
 side of the dummy. (See Form 48.) Resolved into terms 
 of money, this would be equivalent to $1,580. Enter on the 
 debit side of the dummy account the balance of $225 from 
 the true Contract Differences account. The dummy account 
 then contains two factors : 
 
 (a) The debit of $225 as taken from the true Contract 
 
 Differences account; and 
 
 (b) A credit of $1,580, which is the amount just ap- 
 
 plied as a test figure. 
 
 fc 
 
Ill 
 
 174 
 
 COTTON BROKERAGE 
 
 5. This step deals with the working up of figures of the 
 Street division. (See Form 47.) On the purchase side, the 
 Street ledger will contain the following open contracts, 
 which are shown resolved into points : 
 
 200 March at 12.60 equals 2,520 points 
 
 300 " " 12.70 " 3,810 
 
 200 July " 12.50 " 2,500 
 
 300 October " 12.32 " 3,696 
 
 t( 
 
 « 
 
 <( 
 
 Total 12,526 
 
 « 
 
 6. The open contracts on the sales side of the Street 
 ledger, resolved into points, are : 
 
 500 July at 12.31 which equals 6,155 points 
 500 Dec. " 12.20 " " 6,100 " 
 
 Total 12,255 
 
 u 
 
 7. Deduct the lesser number of points from the greater. 
 Thus: 12,526 — 12.255 = 271 points debit. Resolved into 
 terms of money, this equals $1,355. 
 
 8. Apply this $1,355 to the debit side of the Contract 
 Differences dummy. This account now contains debits of 
 $225 and $1,355, making a total of $1,580. This balances 
 the credit of $1,580, which proves that the Contract Dif- 
 ferences account, as it appears in the general ledger, is cor- 
 rect. It also verifies all the open contracts in the Street 
 division and in the customers' division as to quantity and 
 prices. Finally, it attests to the correctness of the work for 
 the month, as far as the transactions and settlements are 
 concerned. 
 
 If the foregoing transactions be multiplied a hundred- 
 fold, as would be found in actual practice, the necessity of 
 the point balance method would become infinitely greater. 
 
 CONTRACT DIFFERENCES— POINT BALANCE 
 
 175 
 
 Confirmation Slips 
 
 Before the bookkeeper in charge of the Street records 
 attempts to compile the figures to be used in the point 
 balance, he confirms or checks up with the brokerage con- 
 cerns which hold the other end of the transactions, all open 
 trades — whether purchases or sales — as to price and quan- 
 tity. The confirmations are made by means of "Confirma- 
 tion of Open Trade Slips," which are sent out by the 
 bookkeeper to the other brokers for their signatures. These 
 slips contain a request for their return to the broker issuing 
 them. Thus the information for the point balance is really 
 gathered from the signed confirmation slips, w^hich serve as 
 a check on the Street records and give a sound basis for 
 facts and figures necessary for the point balance. 
 
CHAPTER XXII 
 
 TRANSACTIONS OF A COTTON BROKERAGE 
 
 HOUSE— GENERAL 
 
 Typical Transactions 
 
 The typical transactions of a cotton brokerage business 
 most frequently encountered are : 
 
 1. Direct purchases 
 
 2. Direct sales 
 
 3. Hedging 
 
 4. Speculation 
 
 5. Straddles 
 
 1. Direct Purchases. Direct purchases by mills and spot 
 merchants presuppose that the delivery of and payment for 
 cotton are made as it is desirable. 
 
 Mill operators seldom enter the futures market, since 
 they are able to satisfy all their needs by purchases in the 
 spot market. However, the actual markets may be demor- 
 alized, and then resort is had to futures. 
 
 The spot merchant, on the other hand, uses the futures 
 market for most of his business. He sells to the mill and 
 immediately buys that option month in which he is expected 
 to make delivery to the mill. Before the option becomes 
 due, he may buy the cotton in the spot market and sell his 
 futures. With the spots so purchased, he can then fill his 
 contract with the mill. 
 
 2. Direct Sales. Direct sales by the planter contem- 
 plate the actual shipment of cotton and immediate payment 
 thei ef or by the purchaser to the planter. 
 
 Suppose a cotton grower sells his cotton on a New York 
 
 176 
 
 TRANSACTIONS— GENERAL 
 
 177 
 
 contract. After the samples are classified, the cotton is sent 
 on to a licensed warehouse, weighed and compared with the 
 sample. The buyer comes into possession of the warehouse 
 receipts and makes payment to the planter to settle the trans- 
 action. 
 
 This subject is treated more fully in Chapter XXV, in 
 connection with spot market transactions. 
 
 3. Hedging. The hedging method of trading may be 
 used by planter, spot merchant, or speculator. The planter 
 seeks to protect himself against damages resulting from his 
 inability to make delivery against his sale. Such inability 
 might be caused by a failing crop. Again, he may have 
 sold his product at a stated price, long before the cotton was 
 in actual existence. Then, when his crop is realized, if there 
 is a small supply throughout the country, the price of cotton 
 may have risen 100 points. In that case, unless the planter 
 has purchased futures against his contracted sale and thus 
 protected himself, he will lose this increment. 
 
 The spot merchant, as already stated, uses the hedging 
 plan much in the same manner as does the planter. The 
 speculator hedges in order to escape additional loss on long 
 contracts in a declining market, and on short commitments 
 during an upward movement. 
 
 4. Speculation. Many traders make a close study of 
 crop conditions and then speculate in futures on the basis of 
 the information so acquired. Speculation in cotton futures 
 is as prevalent as speculation in stocks. However, more 
 factors enter into the price-making of cotton and other com- 
 modities than of stocks. Security values for the most part 
 rise and fall on the basis of strength or weakness in earnings. 
 The commodity markets, on the other hand, are so sensitive 
 to financial, economic, and general commercial conditions, 
 that a close study of all these conditions is essential to opera- 
 tion in, or an understanding of, the speculative phase of the 
 
178 
 
 COTTON BROKERAGE 
 
 futures market. A study of price-making involves so many- 
 technicalities and is so broad that the subject of speculation 
 cannot be treated in detail here. 
 
 5. Straddles. Another method of trading is known as 
 the "straddle." Invariably, all contracts approaching the 
 day of expiration sell either at a premium over other months 
 or at a discount. Where the demand for immediate use is 
 very large, the cotton which is most quickly deliverable will 
 command the highest price, and as between March and May, 
 March, which is the first expiring month, might sell at a 
 premium over May. If the supply is extremely large, March 
 contracts might sell below the price for May. For example, 
 the operator who makes a study of supply and demand condi- 
 tions, might purchase 500 March at 12.10 and sell 500 May 
 at 11.92. This trade is made at a difference of 18 points 
 between March and May. As the due date arrives for 
 March delivery, the demand is small and the price drops so 
 that the difference between the two months might be 65 
 points and a gross profit result of 235 points, or $1,175. A 
 transaction of this sort is known as a "straddle." 
 
 Notice of Delivery 
 
 All purchases whether they are direct, hedged, or 
 straddled, are passed through the books in the customary 
 way. When the option month in which the contract was 
 made nears the point of expiration, the direct purchasers, 
 such as the mill and the spot merchant, contemplate the 
 actual receipt of the commodity. The hedger and the 
 straddler make known their intentions to the broker before 
 the "Notice of DeHvery" (Form 49) is served on the latter 
 to the effect that the person issuing the notice is ready and 
 willing to deliver the number of bales of cotton called for 
 by the contract. 
 
 Considering the first class of customers — the mill and the 
 
 TRANSACTIONS— GENERAL 
 
 179 
 
 spot merchant — ^the notice, when issued to the buyer, is 
 "stopped." This means that the person stopping the notice 
 thereby signifies his intention to receive the cotton at the 
 price which is set by the Exchange to operate as the notice 
 price. (See Form 50.) The issuing broker, according to 
 the tenor of the notice, indicates his intention to deliver to 
 the person who "stops" the notice. 
 
 To illustrate, suppose White & Co. hold a contract with 
 Fairfield & Co. for the delivery of 100 bales of January, 
 purchased by White & Co. for the account of the American 
 Cotton Mills at 12.10. Suppose further, that the concern 
 issuing the notice is Hamlin & Co., and that the notice price 
 is 13 cents. 
 
 The notice to deliver is always transferable ; that is, the 
 seller may transfer to the buyer, who in turn, may transfer, 
 by a so-called indorsement, to any broker to whom the 
 transferor might have sold the same quantity of the option 
 concerned. This practice may continue throughout the day 
 until the notice of delivery is stopped. In the illus- 
 tration cited, the notice covering 100 bales of January cotton 
 will follow the described course until it comes into the pos- 
 session of Fairfield & Co. Then, within fifteen minutes 
 from its receipt by Fairfield & Co., White & Co. will receive 
 and stop the notice. The effect of these transfers is com- 
 parable to the ringing process of settling contracts which has 
 already been explained. Eventually, White & Co. will 
 receive a warehouse certificate upon payment of $6,500, 
 which is the cost of 100 bales at the notice price of 13 cents a 
 pound. 
 
 Adjustment of Difference between Purchase and Notice 
 Prices 
 
 The question may arise as to how the difference between 
 the purchase price and the notice price is adjusted. In the 
 
i8o 
 
 COTTON BROKERAGE 
 
 foregoing example, the 100 January was purchased at 12.10, 
 which, resolved into terms of dollars, is equivalent to $6,050. 
 In White & Co.'s Street ledger, under the account with 
 Fairfield & Co., the purchase price would appear as 12.10. 
 After the notice has been delivered to White & Co., an offset 
 must be made in the account to show the delivery by Fair- 
 field & Co. While the direct purchaser will be called upon 
 to pay $6,500, instead of $6,050, he will receive the differ- 
 ence of $450 from the broker with whom he made the 
 original commitment. That is, White & Co. would bill 
 Fairfield & Co. for the difference between 12.10 and 13, 
 which is 90 points, or $450. But between the time of stop- 
 ping the notice and of receiving the warehouse receipt, other 
 items will have entered into this spot transaction, such as 
 storage, insurance, labor, and sometimes freight charges. 
 All these incidentals are charged to the customer. 
 
 Sales for Actual Delivery 
 
 Let us now consider how a sale for actual delivery is 
 handled. Suppose a planter wishes to sell his output long in 
 advance of the crop's realization. In accordance with the 
 grading rules of the Cotton Exchange and the Department 
 of Agriculture of the United States, he can sell only a classi- 
 fied standard grade of cotton. Assuming that his product 
 comes within the classification, he sells through some broker 
 in New York or New Orleans — in the present instance 
 through Hamlin & Co. of New York. Upon the first notice 
 day, Hamlin & Co. will be called upon to issue a notice. 
 This they do. According to the rules, they must deliver the 
 number of bales called for. Each notice (Form 49) calls for 
 the delivery of 100 bales. The cotton is subsequently 
 shipped, inspected, and graded. If it comes within the pre- 
 scribed classification, the contract is settled by payment to 
 Hamlin & Co. of the notice price. 
 
 TRANSACTIONS— GENERAL 
 
 l8l 
 
 Adjustment of Difference between Sale and Purchase 
 Prices 
 
 Taking as a basis for further illustration, the purchase 
 and sale of 100 January at 12.10, we will now see how the 
 difference between the sale and purchase prices is adjusted 
 from the seller's end. The option was sold to Fairfield 
 & Co. at 12.10, entitling Hamlin & Co. to $6,050. But 
 according to the notice price they receive $6,500 from 
 White & Co. Turning again to the White & Co.'s Street 
 ledger, we find under the account with Fairfield & Co., 
 100 January sold at 12.10; and we find also that the con- 
 tract was offset at 13. Having sold at 12.10 but delivered 
 at 13, Hamlin & Co. have received $450 more than the 
 original contract called for, which amount is due and pay- 
 able to Fairfield & Co. Nothing need be said here as to 
 the actual method of settlement pursued, as the four 
 methods of settlement — direct settlement, ringing method, 
 Street let-out, and tender of notice — have already been 
 fully treated in Chapter XX. 
 
 Expiration of Options 
 
 Turning for a moment to hedged, straddled, and long 
 transactions, it will be found that customers who are carry- 
 ing the long side of an option approaching expiration, 
 will invariably sell or be compelled to sell as soon as the 
 notice is tendered. The broker to whom the contracts are 
 sold is the person to whom the notice is immediately trans- 
 ferred, thereby consummating the deal. 
 
 Customers who are short of an option whose expira- 
 tion is nearly due, usually cover or buy in the shortage in 
 order to escape the liability of actual delivery. 
 
 On long contracts, the options must be disposed of as 
 soon as the notice is tendered. On short contracts, how- 
 ever, the seller may remain short of his contract until 
 
l82 
 
 COTTON BROKERAGE 
 
 the last notice day. This is usually 12 o'clock noon of 
 the last day of the month— Sunday excepted. Ten minutes 
 is the time allowed for the transferring of notices on the 
 last day. This is technically known as a "short notice." 
 
 Broker's Net Interest 
 
 A condition might exist where one customer is long 
 and another short of the same month. From the broker's 
 point of view, this is known as a "net interest." In prac- 
 tice it operates somewhat in this manner: 
 
 As soon as the broker receives a notice to deliver, he 
 sends or transfers it to the person to whom he has sold. 
 From the customers' standpoint, one would still be long 
 and the other short of the month in question, but unless 
 actual receipt and delivery is intended, the customers will 
 be compelled to buy in the case of a short, or to sell in 
 the case of a long, on or before the last notice day. If 
 the short customer covers before this time, and notice of 
 delivery is sent to the broker, it will compel the sale of the 
 long contract immediately. 
 
 Borrowing a Place 
 
 Very often a customer having a heavy long interest in 
 the market desires to carry his contracts until the last notice 
 day— this for the reason that the price may greatly advance 
 as the option nears expiration. Under the customary 
 methods of business, long contracts cannot be carried beyond 
 the time of receipt of the notice. Frequently assistance 
 is rendered by a fellow broker who is short of the same 
 option and, in this position, is allowed to remain short 
 until the last notice day. He is therefore able to give a 
 place to the broker carrying the longs. To carry out the 
 arrangement, the notices as soon as they are received by 
 the longs, are transferred to the broker who has offered 
 
 TRANSACTIONS— GENERAL 183 
 
 accommodation, and the "long" broker is then said to 
 "borrow a place." Such a transaction has the effect of 
 placing two fictitious entries upon the Street ledger. One 
 attests that the long broker has "sold" the number of 
 contracts covered by the notices to the accommodating 
 party. The other entry evidences a "purchase" from the 
 accommodated broker. As the price on either transac- 
 tion is the notice price, the operation in itself constitutes 
 an even settlement and a convenient set-off. The "accom- 
 modating" broker may cover his shortage and thereby 
 incur the possibility of receiving a notice against such 
 fictitious purchase. As he lends or gives names to the 
 accommodated broker, he is forced to transfer the notices to 
 the latter, who, upon receipt of the notices, is compelled to 
 dispose of his longs in order that he may be able to trans- 
 fer the notices in his turn. The entries attesting to the 
 false purchase from, and sale to, the accommodating broker 
 are then reversed. The effect of such a transaction is an 
 even settlement, as the notice price would again appear 
 on either side of the books. 
 
 The practice of giving or borrowing a place is in vio- 
 lation of the rules of the Exchange. It is mentioned here 
 merely to indicate one of the methods of carrying long 
 transactions beyond the fair time of actual receipt or com- 
 pulsory sale of the cotton. 
 
CHAPTER XXIII 
 
 TRANSACTIONS OF A COTTON BROKERAGE 
 
 HOUSE— INCIDENTAL 
 
 Branch Offices 
 
 ^ The vast majority of cotton brokerage concerns main- 
 tain branch offices throughout the South. This is done 
 for the purpose of obtaining advices pertaining to crop 
 conditions, and as a medium for procuring Southern 
 business. 
 
 Solicitors 
 
 According to the rules of the Exchange, no concern 
 may enter into a contract of employment between itself 
 and solicitors for a period of less than one year. In most 
 cases the renewal of such contracts naturally depends upon 
 the amount of business which has been produced by the 
 solicitors. 
 
 In order to keep account of the business produced by 
 the solicitors, a production record is employed. This 
 record (Form 51) gives the number of bales solicited 
 during a day, week, month, and year, and the commission 
 resulting therefrom. Opposed to the production figures 
 are the factors of expense, including solicitors' salaries, 
 traveHng expenses, and rent for branch offices, if any. 
 Deducting the total expenses of any solicitor from his 
 production figures, reflects the margin of profit for that 
 sohcitor. The commissions are figured at $10 for each 
 100 bales. 
 
 Each day's record of purchases and sales is analyzed 
 for the purpose of allocating the respective units in the 
 
 184 
 
 TRANSACTIONS-INCIDENTAL 
 
 185 
 
 proper solicitors' columns. The production record con- 
 tains also a record of the business resulting from partners' 
 production or "local" activities. 
 
 Floor Brokerage Business 
 
 Many Exchange members make a practice of execut- 
 ing orders for other brokers at a charge of $1 for each 
 100 bales bought or sold. At the end of each month a 
 bill is rendered which, when paid, is credited to an account 
 known as "Floor Commissions Received." 
 
 Clearances 
 
 When a broker has bought and sold an option for his 
 personal account, and does not desire to carry the contracts 
 until settled, he may ask another concern to "clear" for 
 him. Clearances can be compared to the ordinary pur- 
 chase and sale for the account of a customer. The com- 
 mission charged on such transactions is $1.50 for the 
 "round trade" ; that is, for purchase and sale. The usual 
 account sales is rendered, and the commission is credited 
 in the regular way. At the end of the month, however, 
 such items are segregated by means of a summary, and 
 credited to an account known as "Clearance Commissions." 
 
 Carrying Transactions 
 
 Another source of income in the cotton brokerage 
 business is derived through the carrying of transactions 
 for other members of the Exchange. 
 
 A goodly number of the brokers speculate in the market 
 for their own account. They seldom carry their own con- 
 tracts, usually asking some other concern to carry their 
 commitments. When these accounts are subsequently closed, 
 a commission of $5 is charged by the carrying broker on 
 both the purchase and the sale; that is, $10 on the round 
 

 i86 
 
 COTTON BROKERAGE 
 
 transaction. Here, again, an account sales is rendered 
 and the brokerage earned is credited to the Commission 
 Earned account. 
 
 Change of Name or Price 
 
 Floor brokers executing orders sometimes act in the 
 capacity of agent and principal at the same time. If a 
 floor member receives an order to buy 100 January at 12.70, 
 he may sell it for his own account. Later in the day he 
 may make a purchase at 12.65 against this "short." After 
 the close of the Exchange, he will request the principal 
 m the origmal transaction to "change a name" or "change 
 a price." In other words, he substitutes in place of his 
 own name on the purchase of the January at 12.70, the 
 name of the broker from whom the January at 12.65^ was 
 purchased. 
 
 To illustrate, let us say that the January at 12 65 was 
 bought from Robinson & Co., that W. Spencer was the 
 broker, and John Brown the customer. The entry on the 
 purchase side of the blotter would then appear as follows • 
 
 100 
 100 
 
 W. spencer 
 John Brown 
 
 On the sales side the entry would be: 
 
 Bales 
 
 100 
 
 To Whom Sold 
 
 W. Spencer 
 
 Price 
 
 12.70 
 
 Customer 
 
 W. Spencer 
 
 The charge for such transactions is 50 cents for the 
 purchase and sale combined. An account sales is rendered, 
 and the brokerage is credited in the usual manner. All 
 
 TRANSACTIONS— INCIDENTAL 
 
 187 
 
 such items are summarized at the end of the month, and 
 passed to the credit of the Commission account. 
 
 Half-Commission Brokerage 
 
 Many of the firms having membership on the Exchange 
 neither clear nor carry the commitments of their customers. 
 There are various reasons for this. It is sometimes due 
 to the fact that there is a reluctance to tie up money un- 
 necessarily, as in original or Street margins. 
 
 In such cases, by arrangement with another concern, 
 the first concern can conduct its business on a half-com- 
 mission basis. That is, while the charge to the customer 
 is the usual $20 for the purchase and sale of a contract, 
 the brokerage concern is only charged $10 by the carry- 
 ing house for every hundred bales bought and sold— that 
 is, $5 on the purchase and a like brokerage charge on the 
 sale. 
 
 Under such circumstances, no Street books are kept by 
 the half-commission broker, for the need for such records 
 is never present. Nor is there any necessity for his keep- 
 ing Contract Differences account, as this phase of the pur- 
 chases and sales of each customer is the problem of the 
 "carrying" house. For example, customer A through his 
 broker who is operating on the half-commission basis, buys 
 100 January at 12.10 and sells 100 January at 11.90, 
 thereby losing 20 points, or $100. Adding the commis- 
 sion of $20, his total loss is $120. A*s broker instructs 
 the carrying house to apply or close out 100 January bought 
 at 12.10 against the sale at 11.90. As far as contract 
 differences are concerned, there would be none. However, 
 assuming for the moment that such an account is in opera- 
 tion, the credit to the account would be $100, but imme- 
 diately this amount would be offset by a charge to it and a 
 credit to the carrying broker. 
 
II 
 
 l88 COTTON BROKERAGE 
 
 The question might properly be asked, "How, then, is 
 the entry made on the books of A's broker?" It is made 
 through the medium of the general journal, in this manner: 
 
 Debit Customer A $120.00 
 
 Credit Carrying Broker 1 10.00 
 
 Credit Commission 10.00 
 
 An account sales is rendered to the customer, but it 
 acts only as material for the journal entry. Nothing more 
 is done with it. 
 
 As may be inferred, no analysis journal is necessary 
 in such transactions. 
 
 CHAPTER XXIV 
 
 TRANSACTIONS OF A COTTON BROKERAGE 
 HOUSE— CLOSING THE BOOKS 
 
 Adjusting Entries 
 
 Before closing the books of a cotton brokerage house, 
 a number of adjustments are necessary. The most com- 
 mon ones are: 
 
 1. Provision for reserve for depreciation on furniture 
 and fixtures. 
 
 2. Provision for reserve for doubtful accounts receivable. 
 
 3. Provision for doubtful and uncollectible accounts 
 receivable written off. 
 
 4. Provision for accruals of : 
 
 (a) Interest on: 
 
 (1) Street margins unreleased 
 
 (2) Notes receivable 
 
 (3) Notes payable 
 
 (b) Rent 
 
 (c) Office salaries 
 
 5. If securities be held for investment purposes, suitable 
 provision should be made for any depreciation in market 
 values. 
 
 6. All items under floor brokerage receivable or pay- 
 able should be evidenced by the books, so that a proper 
 accounting can be had of the earning or expense in con- 
 nection therewith. 
 
 7. In businesses which are conducted on a cash basis, 
 the usual tendency is to overlook items of expense for 
 which no bills have been received. To avoid an over- 
 
 189 
 
!' 
 
 
 IpO 
 
 COtTON BROKERAGE 
 
 Statement of profits, due to an understatement of expenses, 
 suitable provision should be made for such items as bills 
 due and unpaid, estimated traveling expenses, and the like. 
 
 Income and Expense Factors 
 
 The sources of income in the cotton brokerage business 
 and the general expense factors incident to the operation 
 of the business, including both main office and branch 
 offices, are as follov^s: 
 
 Income Factors 
 
 1. Commission from all sources 
 
 2. Interest on notes receivable 
 
 3. Interest on Street margins 
 
 4. Interest on bank balances 
 
 5. Dividends on securities 
 
 Expense Factors 
 
 1. Rent of offices 
 
 2. Salaries 
 
 3. Advertising 
 
 4. Telegraph 
 
 5. Telephone 
 
 6. Ticker service 
 
 7. Market reports and bulletins 
 
 8. Postage 
 
 9. Stationery and printing 
 
 10. Legal services 
 
 11. Collection on out-of-town checks 
 
 12. Traveling expenses 
 
 13. Entertainment 
 
 THE FINANCIAL STATEMENT 
 
 I. Statement of Income 
 1. Income from operation 
 
 TRANSACTIONS— CLOSING THE BOOKS 
 
 191 
 
 The main source of income from the operation of the 
 business is commission derived from the various sources 
 already explained. 
 
 II. Administrative Expense 
 
 1. Rent of offices 
 
 2. Salaries 
 
 3. Advertising 
 
 4. Telegraph 
 
 5. Telephone 
 
 6. Ticker service 
 
 7. Market reports and bulletins 
 
 8. Postage 
 
 9. Stationery and printing 
 
 10. Legal expense 
 
 11. Collection on out-of-town checks 
 
 III. Bbianch Office and Solicitors* Expense 
 
 1. Branch office rent 
 
 2. Agents' and solicitors' salaries 
 
 3. Traveling expense 
 
 4. Entertainment expense 
 
 IV. Net Income from Operation 
 
 The net income from operation is determined by de- 
 ducting the total expense from the income; i.e., I — (II + 
 III); or, I — II — m. 
 
 V. Secondary Income 
 
 Aside from commission, which is the main source of 
 income, the following four items may be considered as 
 secondary income: 
 
 1. Interest on notes receivable 
 
 2. " " Street margins 
 
 3. " " bank balances 
 
 4. " or dividends on securities 
 
192 
 
 COTTON BROKERAGE 
 
 I ! 
 
 VI. Income from All Sources 
 
 This is derived by adding the net income from opera- 
 tion and the secondary income, i.e., IV + V, which is the 
 same as, I — . H _ m + y. 
 
 VII. Deductions from Income 
 
 There are two items of expense which must be deducted 
 from the income, in order to obtain net income ; viz. : 
 
 1. Interest on notes payable 
 
 2. Exchange on out-of-town checks 
 
 VIII. Net Income 
 
 If the total of "Deductions from Income" is taken from 
 "Income from All Sources," the result is the net income, 
 
 which may be written thus : I — II — III + V VII • or' 
 
 (I + V) — (Il + III-t-VII). 
 
 IX. Profit and Loss Charges 
 Under this heading will be brought : 
 
 1. Loss on uncollectible accounts 
 
 2. Loss on the sale of securities held for investment. 
 
 3. Provision for reserve for depreciation of furni- 
 
 ture and fixtures. 
 
 4. Provision for reserve for doubtful accounts re- 
 
 ceivable. 
 
 5. Provision for reserve for sundry accounts pay- 
 
 able. 
 
 6. Provision for reserve for traveling expenses. 
 
 X. Profit and Loss Credits 
 
 1. Recovery on doubtful accounts receivable. 
 
 2. Profit on sale of securities held as investment. 
 
 XI. Profit and Loss 
 
 Deduct the profit and loss charges (IX) from the profit 
 and loss credits (X), or deduct X from IX, as the case may 
 be, and the net profit and loss debit or credit will be the 
 
 TRANSACTIONS— CLOSING THE BOOKS 
 
 \ 
 
 193 
 
 resultant. Applying the net profit and loss debit or credit 
 (XI) to the net income (VIII), (adding in case of a credit 
 and subtracting in case of a debit), the net surplus for the 
 accounting period will be determined. 
 
 The distribution of this surplus, according to the articles 
 of copartnership, will be the final operation in closing the 
 books. 
 
 THE BALANCE SHEET 
 
 Assets 
 
 Capital Assets 
 
 The only items which ordinarily appear as capital assets 
 are: 
 
 1. Furniture and fixtures 
 
 2. Securities held for investment 
 
 3. Membership on exchange 
 
 Current Assets 
 
 Under this heading are the following items: 
 
 1. Cash on hand and at banks 
 
 2. Accounts receivable — considered good 
 
 3. Street margins 
 
 4. Notes receivable 
 
 5. Accrued interest on Street margins 
 
 6. Accrued interest on notes receivable 
 
 7. Contract differences (this may sometimes appear 
 
 as a liability) 
 
 Deferred Debits 
 
 Under the heading of deferred debits may be listed the 
 following items : 
 
 1. Rent paid in advance 
 
 2. Membership dues paid in advance 
 
 3. Insurance paid in advance (on spot transactions) 
 
194 COTTON BROKERAGE 
 
 4. Telephone privilege on New York Cotton Ex- 
 change, paid in advance 
 
 Liabilities 
 Capital Liabilities 
 
 In the cotton brokerage business there are seldom found 
 
 any capital liabilities. For the most part, all the debts of 
 
 the concern are current in nature. The usual liability and 
 
 proprietorship items may be listed under the two headings 
 
 Current Liabilities" and "Proprietorship," as shown below. 
 
 Current Liabilities 
 
 1. Customers' accounts payable 
 
 2. Notes payable 
 
 3. Interest accrued on notes payable 
 
 4. Salaries accrued 
 
 5. Contract differences (this may be on the asset side 
 
 of the balance sheet) 
 
 Proprietorship 
 Reserves : 
 
 1. Reserve for depreciation on furniture and fix- 
 
 tures 
 
 2. Reserve for depreciation on security investments 
 
 3. Reserve for traveling expenses 
 
 4. Reserve for other expenses for which no in- 
 
 voices have been received 
 
 Capital : 
 
 L Partner A's capital 
 
 2. Partner B's capital 
 
 3. Partner C's capital 
 
 Pa/Il"^^''"? ""^ '^' ^'"^^'"'^ '"'"^ Customers' Accounts 
 Payable, reference must again be made to the table of 
 equities treated on page 12L The fact that a customer's 
 
 TRANSACTIONS-CLOSING THE BOOKS 
 
 195 
 
 account shows a credit balance of $1,000, is no indication 
 that such an amount is owing to him. What must be 
 considered is the loss or gain reflected in his open contracts. 
 
 The balance sheet should never be read without refer- 
 ence to the table of equities. 
 
 The listing of all assets and liabilities in the table of 
 equities is less urgent in cotton brokerage than in the stock 
 business. In cotton brokerage it will be sufficient to com- 
 pile a statement of margins for the sole purpose of determin- 
 ing the status of the customers' accounts and the relation 
 which this bears to the financial strength of the business 
 in general. 
 
 Dissolution 
 
 Both the voluntary and involuntary dissolution of a 
 stock brokerage business were treated in a general way in 
 Part I, and that discussion applies to cotton brokerage as 
 well. It may be said, however, that the customers' interests 
 are not as well guarded in the case of a forced dissolution 
 of a cotton brokerage house as in the failure of a stock 
 brokerage house. In the latter case the customers have 
 their securities to fall back upon, while in the cotton busi- 
 ness the only realizable asset outside of those which are 
 unimpaired, is the membership seat, worth approximately 
 $15,000, 
 
 
CHAPTER XXV 
 
 SPOT COTTON 
 
 Technicalities of the Spot Market 
 
 In discussing cotton brokerage accounting from the 
 standpoint of the futures market, we have seen that, for the 
 most part, settlement among the brokers is made by means 
 of the "differences" system. That is, the actual receipt and 
 delivery in satisfaction of the options bought and sold are 
 seldom availed of, but in the great majority of cases con- 
 tracts are closed by means of "rings,*' "let-outs," "direct 
 settlements," or "notice settlements," long before these con- 
 tracts expire. To such an extent is this carried as to create 
 the erroneous impression that speculation alone is the motive 
 prompting such transactions. 
 
 Although in spot market transactions, very little actual 
 accounting is required as compared with purchases and sales 
 in the futures market, there is probably nothing else in the 
 business of brokerage so involved in technicalities. The 
 system employed in "taking up" a contract, or making de- 
 livery against an option sold, is so different from anything 
 found in general business as to deserve further treatment in 
 its accounting phase. 
 
 Details of Actual Delivery 
 
 The intention to "take up" a cotton contract is mani- 
 fested by the stoppage of the "transferable notice." The 
 last holder is charged with the duty of informing the broker 
 issuing such document, that the former has in his possession 
 the notice in question and makes demand for the delivery of 
 
 196 
 
 SPOT COTTON 
 
 197 
 
 the cotton within two days from the date of the issued 
 notice. This is done by means of a "Demand Form" (Form 
 50) stamped in attestation and delivered to the broker upon 
 whom the demand is made. Such is the procedure attending 
 a stoppage of notice. The new contractual relations between 
 the brokers in the transaction are recognized by the Superin- 
 tendent of the Exchange, who may demand the fulfilment of 
 the contract between the parties. 
 
 As an illustration of the foregoing, let us assume that a 
 purchase of 100 bales of December cotton is made in May at 
 the price of 12.10. When the notice day comes, if it is the 
 intention of the buyer to assume the contract, he will go 
 through the stoppage of notice formalities just described; 
 and upon the third day from the date of notice, documents 
 known as "Grade Certificates" will be delivered by the seller 
 to the buyer for examination. At the same time the seller 
 delivers to the buyer a "Spot Bill." 
 
 The grade certificate states the number of bales which 
 each document represents; the markings for identification 
 purposes ; where the cotton is stored ; when inspected by the 
 Exchange authorities ; when the certificates expire ; and the 
 grades of cotton in each case. This grade certificate is a docu- 
 ment issued by the Classification Bureau of the Exchange. 
 
 The spot bill (Form 55) contains a full statement of 
 charges and allowances covering the "weight price." It 
 also states the cost for inspection, classification, certification, 
 and storage. Allowances for grade, weight, and storage of 
 cotton are items which must be studied independently, if 
 they are to be thoroughly understood and applied in prac- 
 tice. 
 
 On the third day after notice, warehouse certificates cov- 
 ering the actual commodity are delivered and the cotton is 
 paid for. This terminates the contractual relationship 
 betwecii the brokers involved in the transactions. 
 
198 
 
 COTTON BROKERAGE 
 
 I'll 
 
 Accounting Entries for Actual Deliveries 
 
 The first accounting entries when delivery of cotton is 
 made, are for the purpose of getting the option out of the 
 customers contract book. This is accomplished by first 
 making a memorandum journal entry to the effect that the 
 contract has been taken up. Then in the space provided for 
 the sale, in the customers contract book, the word "received'' 
 is inserted and reference is made to the number appearing on 
 the warehouse certificate. This takes the transaction out of 
 the contract book. The charge to the customer covering 
 the cost of the cotton is made through the cash book. In 
 transactions of this sort, commission of $25 per contract 
 IS debited to the customer through the general journal. 
 These are the initial entries to the customer's account. 
 
 The treatment in the Street books is the next logical con- 
 sideration. The fact that the cotton was received requires 
 an entry in the nature of an offset against the purchase as it 
 appears m the Street ledger. It will be recalled that tha 
 brokers' accounts, as they appear in that ledger, show the 
 purchase from, or the sale to, the broker keeping the record ' 
 For example, if 100 December at 12.10 were purchased by 
 Fairfield & Co. from White & Co., the purchase would be 
 entered on the left side of White & Co.'s account in Fair- 
 field's Street ledger, as shown by Form 52. If White & 
 Co., or some other concern for their account, delivered 
 warehouse certificates in fulfilment of the contract, some 
 entry would be made in the blotter to the effect that 100 ' 
 bales of December were tendered on notice at the notice 
 price. Assume, in this case, that the notice price is 12.40. 
 This information would be posted on the right side of 
 White & Co.'s account in the Street ledger, and a bill would 
 be sent to White & Co. for 30 points, or $150. 
 
 At this point a question may be raised as to the collec- 
 tion of the $150. A clearer conception of the principle' . 
 
 SPOT COTTON 
 
 199 
 
 y 
 
 If. 
 
 involved may be obtained by confining the transaction to 
 specified limits; i.e., the effect of .settlement on, (a) White 
 & Co.; (b) the broker receiving the cotton; and (c) the 
 person who makes delivery for White & Co.'s account. 
 
 Suppose, in this connection, that White & Co. sell to 
 Fairfield & Co., and buy from McFarland & Co., the 100 
 December at 12.10; and McFarland & Co. issue the trans- 
 ferable notice at the stated price of 12.40. McFarland & Co. 
 send the notice to White & Co., the concern which purchased 
 from them, and White & Co. send it to the firm which elects 
 to receive the cotton, Fairfield & Co., collecting from this 
 firm the amount based upon the notice price. The settle- 
 ment between Fairfield & Co. and White & Co. is effected 
 by the payment of $150 by the latter to the former. 
 
 It now remains to effect a settlement between McFarland, 
 & Co. and White & Co. This latter firm bought the cotton 
 at 12.10, and upon transfer of notice was forced to settle 
 with Fairfield & Co. at 12.40. The contract was made with 
 McFarland & Co., who are then billed by White & Co. for 30 
 points or $150. McFarland pays the $150 but, as already 
 explained, receives this difference from Fairfield & Co., the 
 firm taking up the cotton at the time the spot bill is sent to 
 the latter. Forms 53 and 54 illustrate the settlement 
 between White and McFarland, 
 
 Limits of a Cotton Contract i 
 
 According to the rules of the New York Cotton Ex- 
 change, a contract weighing between 49,500 and 50,500 
 pounds must be received in fulfilment of a transaction. So 
 long as the weight is within these prescribed limits, no im- 
 portance is attached to the number^ of bales involved. Thus, 
 instead of containing 100 bales, a contract might run from 
 4 to 8 bales over or under that number. If 92, 108, or 
 some other number of bales make up the necessary weight, 
 
I 
 
 200 
 
 COTTON BROKERAGE 
 
 their delivery comes under the regulation clause and is a 
 good delivery. 
 
 The laws of the Exchange provide that an allowance of 
 1/2 pound per bale for each month or fraction of a month, 
 be made to the buyer, from the time cotton is stored until 
 the date of transfer. 
 
 Let us assume that warehouse certificates show that 92 
 bales of cotton, covered by such certificates and weighing 
 49,838 pounds, were in the Manhattan Stores, on May 26, 
 1915. In this hypothetical transaction, if the cotton was 
 stored on May 26, 1915 and transferred on contract on 
 December 31, of the same year, there would be an allowance 
 in weight for seven full months and a fractional month, 
 making, under the rule, a total of eight months. Allowing 
 1/2 pound per bale per month for that period on 92 bales, 
 the weight allowance would be 368 pounds. If this is de- 
 ducted from the gross weight of 49,838 pounds, the net 
 weight is 49,470 pounds. (See Form 55.) 
 
 Cost of Contract 
 
 Continuing the same transaction, the next point for con- 
 sideration is the original cost of the contract. Multiplying 
 the net weight by the notice price of 12.40, the result 
 obtained is $6,134.28. 
 
 Added to the original cost is the standard charge of 
 12 1/2 cents per bale for inspection, classification, and 
 grading certificates. No matter how often the cotton is 
 transferred from one buyer to another, these charges obtain. 
 On 92 bales these incidental charges would be $11.50, 
 making a total cost of $6,14578. 
 
 Grades of Cotton 
 
 Under the rules of the New York Cotton Exchange, 
 specified grades of cotton only may be delivered on contract 
 
 r~-> 
 
 SPOT COTTON 
 
 20I 
 
 The following grades are admitted by the Classification 
 Committee : 
 
 Above Middling 
 
 Fair 
 
 Strict middling fair 
 
 Middling fair 
 
 Strict good middling 
 
 Fully good middling 
 
 Good middling 
 
 Barely good middling 
 
 Strict middling 
 
 Fully middling 
 
 Strict good middling tinged 
 
 Middling 
 
 Good middling tinged 
 
 Below Middling 
 
 Middling 
 
 Good middling tinged 
 
 Barely middling 
 
 Strict low middling 
 
 Fully low middling 
 
 Low middling 
 
 Strict good ordinary 
 
 Good ordinary 
 
 Strict middling tinged 
 
 Middling tinged 
 
 Strict low middling tinged 
 
 Low middling tinged 
 
 Middling stained 
 
 Grade Premium and Discount 
 
 The basis for all grades is middling cotton. All grades 
 above middling command a premium or an addition to the 
 stated selling price, by reason of the superior and higher 
 priced cotton entering the contract. On grades below 
 middling, an allowance is made on account of the inferior 
 quality of the cotton. Each grade except middling com- 
 mands a certain number of points, premium or discount. 
 
 Reverting to the 92 bales of cotton stored May 26, 1915, 
 let it be assumed that the delivery was as follows: 1 
 middling, 7 strict low middling, 12 fully low middling, 48 
 low middling, 23 strict good ordinary, and 1 good ordinary 
 — making 92 bales according to the contract. All of these 
 grades, excepting the middling, are below that basis, and are 
 subject to a discount. On the 1 bale of middling the rate is 
 "flat," meaning no discount or premium. On the 7 strict 
 
202 
 
 COTTON BROKERAGE 
 
 low middling, the discount is $.005 a pound, or a total of 
 $.035 ; on 12 fully low middling, the discount is $.0085 a 
 pound, making an allowance of $.102; on 48 low middling 
 at $.0125 discount, the allowance is $.60; on 23 strict good 
 ordinary at -$.02 discount, the allowance is $.46; and on 1 
 good ordinary, the discount is $.03 ; the grand total being 
 $1,227. Now, if we multiply the allowance of $1,227 by 
 the net weight of 49,470 pounds (that being the poundage 
 to be considered), and divide the product of $60,699.69 by 
 92 (the number of bales contained in the contract), we will 
 get $659.78, which is the allowance made for the inferior 
 grades. 
 
 Storage and Labor 
 
 The charge for storage and labor in connection with the 
 warehousing of cotton is sometimes paid by the seller to the 
 storage company up to the time of the sale. In the great 
 majority of cases, however, the storage and labor charge is 
 allowed to accumulate and is deducted by the seller from 
 his spot bill to the buyer. The charge for storage is 20 
 cents a bale for each month, and 10 cents a bale for half 
 months. The cost for labor is 10 cents "in" and 10 cents 
 "out" ; that is, 20 cents for putting the cotton in storage and 
 taking it out. The "out" storage charge is paid by the 
 buyer when he releases his cotton from store, while the "in** 
 storage is allowed by the seller. In the case of the cotton 
 stored May 26, 1915, the storage and labor were paid by 
 the seller up to May 26, 1915. From that date until De- 
 cember 31, 1915, there would be seven full months of storage 
 at 20 cents, and one half month at 10 cents, or $1.50 for 
 each bale. On 92 bales, therefore, the storage allowance 
 would be $138. 
 
 The total charges on this transaction are $6,145.78, and 
 the total allowances for grade, storage, and labor are 
 
 SPOT COTTON 
 
 203 
 
 %797.7^', therefore the net cost of the contract to the cus- 
 tomer, as shown by the spot bill, is $5,348. 
 
 Customer's Contract Difference Credit 
 
 Let us recall for a moment the $150 which the broker 
 collected, for the difference of 30 points between the pur- 
 chase and notice prices. What interest has the customer in 
 this sum? The charge to him should be on the basis of 
 12.10. Therefore, if he was charged on the basis of 12.40, 
 he is ordinarily entitled to the 30 points collected for him 
 by his broker, and is credited with this amount; Contract 
 Differences account being charged. 
 
 Insurance and Interest Charges 
 
 There are other minor charges in connection with spot 
 transactions, such as insurance and interest, and a small 
 charge for the storage of cotton samples. The addition of 
 these charges consummates the deal. 
 
 The Spot Register 
 
 All the facts pertaining to spot cotton transactions must 
 find suitable expression in some record arranged to show at 
 a glance all details in connection with the purchase and the 
 subsequent disposition, either by delivery against a futures 
 sale or by direct shipment to the customer. Such a record 
 is the "Spot Register" shown in Form 56. 
 
 
 
 
202 
 
 COTTON BROKERAGE 
 
 
 
 low middling, the discount is $.005 a pound, or a total of 
 $.035; on 12 fully low middling, the discount is $.0085 a 
 pound, making an allowance of $.102; on 48 low middling 
 at $.0125 discount, the allowance is $.60; on 23 strict good 
 ordinary at -$.02 discount, the allowance is $.46; and on 1 
 good ordinary, the discount is $.03 ; the grand total being 
 $1,227. Now, if we multiply the allowance of $1,227 by 
 the net weight of 49,470 pounds (that being the poundage 
 to be considered), and divide the product of $60,699.69 by 
 92 (the number of bales contained in the contract), we will 
 get $659.78, which is the allowance made for the inferior 
 grades. 
 
 Storage and Labor 
 
 The charge for storage and labor in connection with the 
 warehousing of cotton is sometimes paid by the seller to the 
 storage company up to the time of the sale. In the great 
 majority of cases, however, the storage and labor charge is 
 allowed to accumulate and is deducted by the seller from 
 his spot bill to the buyer. The charge for storage is 20 
 cents a bale for each month, and 10 cents a bale for half 
 months. The cost for labor is 10 cents "in" and 10 cents 
 "out" ; that is, 20 cents for putting the cotton in storage and 
 taking it out. The "out" storage charge is paid by the 
 buyer when he releases his cotton from store, while the "in" 
 storage is allowed by the seller. In the case of the cotton 
 stored May 26, 1915, the storage and labor were paid by 
 the seller up to May 26\ 1915. From that date until De- 
 cember 31, 1915, there would be seven full months of storage 
 at 20 cents, and one half month at 10 cents, or $1.50 for 
 each bale. On 92 bales, therefore, the storage allowance 
 would be $138. 
 
 The total charges on this transaction are $6,145.78, and 
 the total allowances for grade, storage, and labor are 
 
 SPOT COTTON 
 
 203 
 
 %797.7^\ therefore the net cost of the contract to the cus- 
 tomer, as shown by the spot bill, is $5,348. 
 
 Customer's Contract Difference Credit 
 
 Let us recall for a moment the $150 which the broker 
 collected, for the difference of 30 points between the pur- 
 chase and notice prices. What interest has the customer in 
 this sum? The charge to him should be on the basis of 
 12.10. Therefore, if he was charged on the basis of 12.40, 
 he is ordinarily entitled to the 30 points collected for him 
 by his broker, and is credited with this amount; Contract 
 Differences account being charged. 
 
 Insurance and Interest Charges 
 
 There are other minor charges in connection with spot 
 transactions, such as insurance and interest, and a small 
 charge for the storage of cotton samples. The addition of 
 these charges consummates the deal. 
 
 The Spot Register 
 
 All the facts pertaining to spot cotton transactions must 
 find suitable expression in some record arranged to show at 
 a glance all details in connection with the purchase and the 
 subsequent disposition, either by delivery against a futures 
 sale or by direct shipment to the customer. Such a record 
 is the "Spot Register" shown in Form 56. 
 
Part III — Produce Brokerage 
 
 CHAPTER XXVI 
 
 PRODUCE BROKERAGE— ITS CUSTOMS AND 
 
 RECORDS 
 
 Conditions and Customs 
 
 Under "Produce Brokerage," such transactions will be 
 discussed as occur on the New York Produce Exchange 
 and the Chicago Board of Trade. 
 
 Here, as in cotton brokerage, two markets exist: one 
 in which spot or cash transactions appear; the other deal- 
 ing with "futures." It may be said with safety that about 
 75% of all contracts are entered into for "future delivery." 
 This being true, it becomes quite apparent that produce 
 brokerage will, for the most part, concern itself with the 
 futures operations. It is therefore this phase of produce 
 brokerage accounting that is treated here. 
 
 The New York Produce Exchange, while it is nomi- 
 nally a market for grain, really does very little in this 
 line. Occasionally, however, the "Pit" is the scene of 
 large grain operations. The most prominent commodities 
 dealt in are corn and wheat. Barley, rye, and oats find a 
 better market on the Chicago Board of Trade. Concern- 
 ing ourselves chiefly with dealings in corn and wheat, it 
 is of importance to know, first, the methods of trading, 
 and second, the accounting necessary to record the 
 transactions. 
 
 204 
 
 ITS CUSTOMS AND RECORDS 
 
 205 
 
 When dealing in corn or wheat, the "contract," whether 
 it be for "spot" or for "future" delivery, is 5,000 bushels. 
 The price is quoted in cents and fractions of a cent per 
 bushel, the fluctuations varying by eighths or multiples 
 thereof. Thus, one contract of May wheat purchased at 
 96 1/8 cents per bushel will cost $4,806.25. Occasionally, a 
 double contract, i.e., 10,000 bushels, is traded at a "Split" 
 price. For instance, if 10,000 May corn were purchased 
 at the split price of 66 3/4 — 7/8, it would mean that 5,000 
 bushels were purchased at 66 3/4 and 5,000 at 66 1 1"^. 
 
 The commission on grain, according to the laws of the 
 New York Produce Exchange, is $6.25 for each contract 
 of 5,000 bushels purchased and sold; $3.12 1/2 on the pur- 
 chase, and a similar charge on the sale. 
 
 The most active option months for wheat and corn are 
 May, July, September, and December. The methods of 
 trading are very much the same as those in vogue on the 
 New York Cotton Exchange. The only difference from 
 the accounting standpoint is that the contracts are not 
 settled by the "point differences" system. That is to say, 
 the cost of the contract is resolved into dollars and cents, 
 and the difference, loss or gain, immediately reflects a 
 dollars-and-cents result. 
 
 Transferable notices and direct settlements operate as 
 a means of settling transactions between brokers. "Ring- 
 ing" is seldom resorted to as a matter of settlement, for 
 the reason that the clearing house system works along 
 such lines that ringing becomes unnecessary. Nor is the 
 Street "let-out" an important factor of settlement. 
 
 Books of Account 
 
 In the customers' division of a prouace brokerage con- 
 cern, the following books will be most commonly found 
 to record transactions in grain and oil : 
 
206 
 
 PRODUCE BROKERAGE 
 
 
 Purchases and sales book 
 Customers margin book 
 Customers contract book 
 Analysis journal 
 Customers ledger 
 General journal 
 Cash book 
 General ledger 
 Street margin ledger 
 
 The ruling, arrangement, and uses of these records are 
 identical in every respect with those of the corresponding 
 books used in the cotton business. Comment is therefore 
 unnecessary. 
 
 The Street books usually employed comprise the 
 following : 
 
 Blotter 
 Street ledger 
 Clearing house ledger 
 Margin book 
 
 The Blotter; the Street Ledger 
 
 After the transactions are made on the "floor" of the 
 Exchange, the customary "sign-up slips" form the basis 
 of entry for the blotter. This record is very much like 
 the blotter of the cotton brokerage business. 
 
 After the entry in the blotter is completed, this question 
 is asked : Is the broker named in the transaction a member 
 of the New York Produce Exchange Clearing Association? 
 If answered in the affirmative, then the transaction is 
 entered in the clearing house ledger. If answered in the 
 negative, then the Street ledger becomes the second book 
 for consideration. 
 
 This classification of brokers is necessary for the reason 
 
 ITS CUSTOMS AND RECORDS 
 
 207 
 
 \ 
 
 that many members of the Exchange have no membership 
 in the Clearing Association, which is a separate institution 
 from the Produce Exchange proper, and this fact bears 
 directly upon the entries made to record their transactions. 
 
 For instance, if broker A should purchase 5,000 bushels 
 of May corn from broker B — neither of them a member 
 of the Clearing Association — the transaction would rest 
 after being expressed in the Street ledger. If, by chance, 
 A should later sell to B, a direct settlement could be effected. 
 While it has been stated that the ringing method is not 
 used to an appreciable extent, it is nevertheless true that 
 brokers, such as A and B, might attempt to settle trans- 
 actions through this indirect means. This, however, is 
 seldom done. It is very obvious, then, that transactions 
 between two ex-clearing house brokers are carried along 
 until the "notice day." If A, using the same illustration, 
 should receive a notice from B, the same would be trans- 
 ferred to whomever A might have sold. 
 
 Again, if in the preceding transaction, one of the brokers 
 had clearing house privileges and one had not, the same 
 method of entry would still operate. 
 
 The Clearing House Ledger 
 
 Transactions between clearing house members assume 
 an entirely different aspect as far as entry and final settle- 
 ment are concerned. In such case "sign-up slips" are ex- 
 changed and the entry is made in the clearing house ledger. 
 All transactions expressed therein, attest to the fact that 
 the items have been cleared by the Association. 
 
 Inasmuch as the volume of business to be passed through 
 the clearing house ledger cannot be measured definitely, 
 it is best kept as a loose-leaf device. The ruling and ar- 
 rangement of the sheet should be such as to allow for the 
 convenient entry of the date of the transaction, the quan- 
 
208 
 
 PRODUCE BROKERAGE 
 
 tity, the price, and the broker of whom bought. The sales 
 division of the record should provide similar information. 
 In the Street ledger used in the cotton business, several 
 of these sheets are allotted to the respective Street brokers, 
 depending altogether upon the diversity of the options 
 bought and sold. In the grain market, hov^ever, all trans- 
 actions appear as though the Clearing House was the second 
 broker, handling the other end of the purchase or sale, 
 and the folios of the clearing house ledger will be headed 
 as follows : "Clearing House May Corn," "Clearing House 
 July Corn,'' "September Corn," "July Wheat," "September 
 Wheat," etc., etc. 
 
 This arrangement of the clearing house ledger shows 
 how similar the relationship of the clearing house to the 
 broker is to that which exists between one broker and 
 another in the cotton business, and between two ex-clearing 
 house members of the Produce Exchange. The Associa- 
 tion must answer to the member clearing, and vice versa. 
 One member cannot proceed against another on clearing 
 house transactions. As soon as the trade is accepted by 
 the manager for clearance, all claims are to be registered 
 against the clearing institution. In a word, the contractual 
 relationship between two clearing house members is severed 
 as soon as the item is passed through the Clearing House. 
 
 The clearing house ledger is not a financial book. At 
 best, it serves the purpose of tracing purchases and sales, 
 if for any reason a review becomes necessary, 
 
 Closing the Books 
 
 The closing of.the books necessitates adjustments similar 
 to those treated under "Cotton Brokerage." 
 
 The income statement, balance sheet, and "Margin 
 Tables" operate on the principles explained heretofore 
 (Chapter XXIV). 
 
 CHAPTER XXVII 
 
 PRODUCE BROKERAGE— THE CLEARING 
 
 HOUSE SYSTEM 
 
 New York Produce Exchange Clearing House Association 
 The Clearing House Association has for its purposes: 
 
 1. The settlement of purchases and sales among its 
 
 various members. 
 
 2. The calling of original and market margins when- 
 
 ever necessary. 
 
 3. The final receipt and delivery of all notices. 
 
 It differs in every respect from the clearing systems 
 of the New York Cotton and Stock Exchanges. It con- 
 stitutes itself as intermediary between brokers to the extent 
 that all purchases and sales are in effect assigned to it, 
 thereby creating an actual contract relationship between 
 the clearing house members and itself. In doing this, it 
 becomes liable in case of breach of contract. To protect 
 itself it demands: 
 
 1. The name of the broker with whom the transaction 
 
 was made. 
 
 2. The constant adjustment of prices arising from the 
 
 daily fluctuations, payable by check in the case 
 of a market loss, and receivable by a draft on 
 the Clearing House, where any market profit is 
 shown. 
 
 3. The calling of original margins within twenty-four 
 
 hours of the time in which transactions have been 
 made. 
 
 4. The calling of market margins between 10 a.m. 
 
 and 3 p.m., to adjust any differences in price 
 
 209 
 
! 
 
 210 PRODUCE BROKERAGE 
 
 which might exist on open clearing house con- 
 tracts by reason of a **wild" market. 
 
 Operation of the Clearing House System 
 
 Whenever a contract is made between two clearing 
 house members, both are required to file a sheet with the 
 Association before 10 o'clock on the first five business days 
 of the week, and before 9 :30 o'clock on Saturdays. Besides 
 the sheet, statements known as "Bought Slips" and "Sold 
 Slips" (Forms 57 and 58) must be filed. 
 
 A "Bought Slip" is made out for each class of grain, 
 i.e., corn and wheat. The information contained in the 
 "Bought" and also in the "Sold" slips is as follows : 
 
 1. Date of purchase 
 
 2. Name of the respondent member 
 
 3. Name of broker from whom purchased 
 
 4. Amount (in bushels) 
 
 5. Month (for instance, May corn) 
 
 6. Price 
 
 7. Settling price (clearing house) 
 
 8. Debit and credit columns (in which are stated either 
 
 the loss or the gain between the cost and the 
 clearing house settling price) 
 
 Taking, to illustrate the application of the clearing house 
 settling price, the purchase of 10,000 May corn at 67 3/8, 
 assume that 67 1/8 is the clearing figure issued by the Asso- 
 ciation at the close of business on that day. On this trans- 
 action the purchasing broker would be called upon to pay 
 the Clearing House the sum of $25. This amount would 
 appear in the "Debit" or loss column of the bought slip. 
 
 The Clearing House Sheet 
 
 Let us now consider the clearing house sheet proper 
 
 THE CLEARING HOUSE SYSTEM 
 
 
 [i 
 
 (Forms 59, 60). It has six main divisions arranged as 
 follows : 
 
 1. Contracts "Carried over for Tomorrow" 
 
 2. "Today's Trading" 
 
 3. Contracts "Carried over from Yesterday" 
 
 4. "Settling Price" 
 
 5. "Debit" 
 
 6. "Credit" 
 
 The first column is further subdivided so as to show: 
 "Long," "Month," and "Short." 
 
 The second column is subdivided into: "Bought," 
 "Month," and "Sold." 
 
 The third column contains information similar to the 
 
 first. 
 
 The fourth column is subdivided into: "Yesterday" 
 
 and "Today." 
 
 At the right-hand bottom of the sheet there will be found 
 under the monetary columns, spaces for recording any losses 
 or gains reflected on either the bought or sold slips. We 
 also find that the sheet is subdivided into two sections, an 
 upper and a lower, the first providing for wheat trans- 
 actions and the second for transactions in corn. 
 
 To illustrate, let us suppose that the purchase of 10,000 
 May corn has been entered on the clearing house sheet. 
 In the column which provides for "Today's Trading," we 
 find under the corn section 10,000 May bought. As this 
 trade was not "Carried over from Yesterday," it is to be 
 inferred that all market adjustments were made on the 
 bought slip. 
 
 Next, in the column "Settling Price" the clearing figure 
 will appear under the heading "Today," and under the 
 division which provides for the transactions "Carried over 
 for Tomorrow," the 10,000 May corn will appear in the 
 
i 
 
 !i 
 
 212 
 
 PRODUCE BROKERAGE 
 
 "Long" column. In the monetary columns providing for 
 losses or gains, as reflected by the bought or sold slips, 
 the amount of $25 appears as a debit opposite the caption 
 ^'Bought Sheet." At the very bottom of the clearing house 
 sheet these words appear: 
 
 Our 
 
 Your 
 
 Check 
 
 By crossing out the unnecessary word, we indicate whether 
 payment is to be made to or by, the Clearing House. In 
 this case the word **Your" is stricken out. The check and 
 the bought slip would accompany the sheet. ( See Form 59. ) 
 Considering the sheet of the next day (Form 60), we 
 find in the column headed "Carried over from Yesterday," 
 10,000 May corn. If no additional purchases or sales are 
 made, the same transactions are carried to the column 
 headed ''Carried over for Tomorrow." Let us assume here 
 that the clearing house price of the second day was 65. 
 In the "Yesterday" column the price of settlement appears 
 as 67 1/8. In order to adjust the contracts to the market 
 price, the settling price of "Today" is stated on the sheet. 
 The difference between yesterday's price of 67 1/8 and to- 
 day's price of 65 results in a market loss of 2 1/8 points on 
 10,000 bushels, or $212.50. A check is drawn by the pur- 
 chasing broker, payable to the Clearing House Association, 
 and the sheet is deposited. 
 
 Clearing House Adjustments 
 
 All payments and receipts pertaining to clearing house 
 adjustments are charged and credited to the account called 
 "Contract Differences— Grain— Clearing House." 
 
 Clearing House and Customers' Settlements 
 
 The next point for consideration is the relation which 
 such clearing house payments and receipts bear to the settle- 
 
 THE CLEARING HOUSE SYSTEM 
 
 213 
 
 ments in customers' accounts arising from purchases and 
 sales. If a customer purchased 10,000 May wheat at 92 1/8 
 and sells these contracts at 94, he will realize a gross profit 
 ■ of 1 7/S points, or $187.50. The customer will receive credit 
 for his net profit, and the account of "Contract Differences 
 — Grain" will be charged with the gross amount. Assume 
 the purchase and sale to have been made through clearing 
 house brokers on February 3 and February 6, respectively. 
 How would the daily adjustments of settling prices affect 
 these transactions? If, on the day of purchase the settle- ■ 
 ment figure were 91, a payment of $112.50 would be made 
 to the Clearing House by 10 o'clock a.m. on February 4. 
 If the settlement price on February 4 were 93 1/8, a draft 
 on the Clearing House would be made for $212.50, or 
 the difference between yesterday's figure and today's. On 
 February 5 the settlement price was 92 1/2,, and again a 
 payment to the Association of $62.50 would be necessary 
 as an adjustment of prices. 
 
 On February 6, the 10,000 May wheat were sold at 94. 
 At this juncture a sold slip would attest to the sale. The 
 settlement figure would be applied on the sold slip. Let 
 us assume that 93 5/8 was the clearing house price. The 
 sale having been made at 94, and the price necessary to 
 bring the contract to the closing figure being 93 5/8, the sum 
 of $37.50 would be carried out into the credit column of 
 the sold slip. To the extreme right of the clearing house 
 sheet, opposite the caption "Sold Sheet," $37.50 would be 
 reflected in the "Credit" column. We must remember, 
 however, that "Today's" settling price is not as yet applied 
 to the contract appearing on the sheet proper. If the 
 settling price of "Yesterday" (the 5th) were 92 1/2, and 
 "Today's" figure 93 5/8, an additional credit of $1 12.5a 
 would result in a draft being made upon the Clearing House 
 for $37.50 plus $112.50, or a total of $150. Now if we re- 
 
I 
 
 ». ij 
 
 . i ■ 
 
 I 
 
 m 
 
 
 214 PRODUCE BROKERAGE 
 
 view the payments to and from the Clearing House, we will 
 find: 
 
 Payments : 
 
 Februarys $112.50 
 
 " 5 62.50 
 
 Total $175.00 
 
 Receipts : 
 
 February 4 $212.50 
 
 6 150.00 
 
 'T^^tal $362.50 
 
 The difference between payments and receipts is $187.50. 
 This amount appears to the credit of the Contract Differ- 
 ences—Grain— Clearing House account. The gross profit 
 on the settlement by the customer was $187.50. The Con- 
 tract Differences— Grain account was charged with a like 
 sum. Thus the relation of the daily clearing house adjust- 
 ments to the final liquidation of customers' contracts becomes 
 apparent. If at this point the business were dissolved, the 
 Contract Differences accounts would be merged and the 
 result would be a settled account. 
 
 Proof of Contract Differences— Grain Account 
 
 In order to prove that the transactions liquidated by 
 customers have resulted in proper charges and credits to 
 their accounts, and in order to ascertain the correctness 
 of outstanding contracts, a proof is taken at the close of 
 each month's operations. The balance in the Contract Dif- 
 ferences—Grain account should be possible of reconciliation 
 after the balance which exists in the Contract Differences- 
 Grain— Clearing House account and the open contracts with 
 the Clearing House, are applied. Let us suppose that the 
 
 THE CLEARING HOUSE SYSTEM 
 
 215 
 
 debit in the Contract Differences — Grain account is $50), 
 resulting from the purchase of 5,000 bushels of May wheat 
 at 94 and the sale of 5,000 bushels at 95, and that, accord- 
 ing to the customers' books, there are still on hand 5,000 
 bushels of May corn "long" at 67 and 5,000 bushels of 
 July corn "short" at 69. Taking the settling prices of the 
 night previous, we find that the 5,000 bushels of May corn 
 were adjusted to the market price of 68 1/4; that the 5,000 
 bushels of July corn short also appear at 70 3/8, that being 
 the settling figure. As a result of the differences between 
 the actual price of the May corn and the settling price, and 
 the actual sales price of the July corn in comparison with 
 its settling figure, a debit of $6.25 appears in the Contract 
 Differences— Grain— Clearing House account. It will be 
 recalled that the sum of $50 had been received from the 
 Clearing House against the liquidated purchase of 5,000 
 May wheat at 94 and the subsequent sale at 95. Hence, 
 three factors will be introduced to prove the accuracy of 
 the Contract Differences — Grain account : 
 
 1. The unliquidated contracts of customers. 
 
 2. The unliquidated contracts as they appear upon the 
 
 sheet. 
 
 3. The payments to, and the receipts from, the Clearing 
 
 House. 
 
 ,6.-, 
 
 1. Resolving the unliquidated contracts of customers into 
 dollars and cents, we find that 5,000 May corn at 67 equals 
 $3,350, a debit; the 5,000 July corn short at 69 equals 
 $3,450, a credit. At this point we construct a "dummy" 
 Contract Differences— Grain account, recording on the 
 credit side $3,450, and on the debit, $3,350. 
 
 2. The items still open with the Clearing House are 
 5,000 May corn long appearing at the last settling figure 
 of 68 1/4. Resolving this into dollars and cents, the con- 
 
I 
 I 
 
 2l6 
 
 PRODUCE BROKERAGE 
 
 tract would amount to $3,412.50, which in the "dummy" 
 account is to be listed under the credits. The 5,000 July 
 corn *'short" with the Clearing House, figured at the set- 
 tling price of 70 3/8, amounts to $3,51875. This sum is to 
 be treated as a debit in the "dummy'' account. 
 
 3. Turning for a moment to the Contract Differences — 
 Grain— Clearing House account, we find a credit of $50 
 and a debit of $6.25, or a net credit of $4375. This sum 
 is to be treated in the dummy account as a debit. Then 
 on the debit side the following items appear: 
 
 $3,350.00 
 
 3,518.75 
 
 43.75 
 
 or a total of $6,912.50 
 And on the credit side items for : 
 
 $3,450.00 
 3,412.50 
 
 or a total of $6,862.50 
 
 After footing the debit and credit columns of the dummy 
 account, the balance is a debit of $50 which supports the 
 balance in the Contract Differences— Grain account. 
 
 The difference of $50 between the two totals of the 
 dummy account is proof positive that all transactions of 
 customers have been properly liquidated ; that all payments 
 to and receipts from the Clearing House are correct ; and 
 that the unliquidated contracts agree as to quantity and 
 price. 
 
 CHAPTER XXVIII 
 
 MARGINS 
 
 Original Margins 
 
 In a general way the customs and practices of the New 
 York Produce Exchange are discussed in the present 
 chapter. Between two ex-clearing house members in any 
 transaction, the right is reserved by either one to demand 
 original margin on contracts in wheat or corn, up to 5 cents 
 per bushel, or $250 for the contract. The call must be 
 made within 24 hours from the time of the transaction. 
 
 All transactions cleared by the Association are also 
 subject to original margin call. The manager of the Clear- 
 ing House issues all calls, and the margin when deposited 
 is made payable to the broker responding, or to the Clearing 
 Association of the New York Produce Exchange, as the 
 Secretary shall direct. The original margin requirements 
 in a normal market are 1 cent a bushel on contracts long 
 or short up to 250,000 bushels ; 1 1/2 cents a bushel on longs 
 or shorts from 250,000 to 500,000 bushels ; and 2 cents a 
 bushel on longs or shorts of 500,000 or over. When, in 
 the opinion of the directors of the Exchange, the market 
 is abnormal, the margin requirements may be greater. 
 
 Where a member is long of 100,000 May corn and short 
 of 50,000 July wheat, he is said to have a "spread" on 
 50,000 bushels. In that case the Association would require 
 1 cent a bushel on the 50,000 net long, and 1/2 cent a 
 bushel on the spread of 50,000 bushels. On spreads under 
 100,000 bushels, an original margin of 1/2 cent is demanded. 
 On spreads of 100,000 or over, 1 cent a bushel is the 
 
 217 
 
2l8 
 
 PRODUCE BROKERAGE 
 
 required margin. The requirements may, however, be in- 
 creased or decreased upon short notice, to conform to 
 market conditions. 
 
 Market Margins 
 
 Brokers without clearing house affiliations may call and 
 may be called for market margin. Where there exists a 
 difference between contract and market price, the broker in 
 whose favor the market is "working'* may demand the 
 deposit of a sufficient sum to margin the open contracts 
 Whenever a contract is entered into between a clearing 
 house broker and one without such special membership the 
 case remains the same. Market, and even original margin 
 must be deposited upon call. The difference between the 
 two IS simple. When original margin is required, both 
 brokers must deposit, but in the case of market margin 
 only the person suffering from market loss must deposit 
 Ihis is similar to the custom on the Cotton Exchange 
 
 One of the rights of the Clearing House Association is 
 to call Its members for market margin whenever such call 
 becomes necessary by reason of a wildly fluctuating market. 
 Ot course, the settling prices of the day would operate as 
 an adjustment between the preceding da/s settling price 
 and the following day. But, conceive of a condition where 
 the market breaks very sharply, directly after the sheet of 
 the previous day has been deposited, and suppose that the 
 broker is heavily long of corn or wheat. The Association 
 must seek temporary protection, and to that end issues a 
 call specifying the amount of market margin to be paid 
 The call is answered by paying the amount to the Asso- 
 ciation. When, however, the settling prices for the day 
 m question have been determined upon, the broker who 
 has been called for market margin during that day, may 
 treat such margin deposit as a credit on the sheet. In such 
 
 MARGINS 
 
 219 
 
 case after the adjustments ol settling prices have been made, 
 the final result is either added to, or subtracted from, the 
 credit appearing by reason of margin. 
 
 To illustrate, suppose that the market margin deposited 
 upon call of the Association was $2,000, and that after 
 today's settling price has been applied to the long con- 
 tracts, a loss of $800 is reflected; then a draft for $1,200 
 would be made upon the Clearing House. 
 
 From this it will be seen what adequate measures of 
 protection have been adopted by the Association. In case a 
 broker fails to respond to a margin call immediately, a con- 
 dition of insolvency may be suspected and the Association 
 exercises the right to close out all the commitments repre- 
 sented by the sheet. If any loss to the Association should 
 result from the insolvency of a member, it is liquidated by 
 the disposal of the stock which each member holds in the 
 Association. His seat on the Exchange is also lost to the 
 insolvent member. 
 
 Margin Details 
 
 All original and market margins called by non-clearing 
 house members are depositable within a reasonable time 
 after the call las been received. Such margin is made pay- 
 able to any one of the designated banks or trust companies 
 and is deposited with the Secretary of the Exchange. He 
 acts in the same capacity as does the Superintendent of 
 the Cotton Exchange. Interest at the rate of 2 to 3% is 
 allowed by the depository. 
 
 Release of Margins 
 
 "Original" margins may be released after the contracts 
 are settled between brokers ; market margins are releasable 
 when the market price again approximates the contract 
 price. 
 
 'fi 
 
220 
 
 PRODUCE BROKERAGE 
 
 •il 
 
 In the case of Association brokers, the margin (all being 
 original) is releasable: 
 
 1. After the contract is liquidated on the sheet by pur- 
 chase or sale. 
 
 2. As to the excess margin, whenever any additional 
 sale or purchase creates a "spread." For instance, if a 
 broker were long of 250,000 May corn, he would be re- 
 quired to deposit original margin of $2,500 (1 cent per 
 bushel). If he should subsequently sell 250,000 May corn, 
 all the original could be released. But, if instead of selling 
 250,000 May corn, his customers should sell only 100,000, 
 then only $1,000 could be released, representing the excess 
 original margin. Or, if a broker were long of 75,000 July 
 wheat, he would be required to deposit $750 as original 
 margin. If eventually he should decide to sell 75,000 July 
 corn, thus creating a "spread," he could release $375 in 
 original margin for the reason that the requirements are 
 only one-half cent per bushel on "spreads" under 100,000. 
 
 CHAPTER XXIX 
 
 CHICAGO BOARD OF TRADE BROKERAGE 
 
 The Chicago Board of Trade 
 
 Many Wall Street concerns have memberships on the 
 Chicago Board of Trade. By being so affiliated, they may 
 send orders to their Chicago correspondents for execution 
 and in that way earn one-half the commission charged on all 
 Chicago transactions. That is, without incurring any of 
 the expense of clearing their own purchases and sales, a 
 secondary commission is enjoyed by them. 
 
 On the Chicago market, the following commodities are 
 listed for active trading : 
 
 1. Grain — comprising corn, wheat, oats, rye, and barley. 
 
 2. Provisions — embracing pork, ribs, and lard. 
 
 A cash market and a futures market are operated. Most 
 of the business which is directed to Chicago by New York 
 brokers falls under the second division, namely, that of the 
 futures market. 
 
 It is not intended here to discuss the accounting on the 
 Chicago broker's books, but the treatment of Chicago pur- 
 chases and sales from the New York broker's standpoint. 
 
 The Grain Market 
 
 The methods of trading on the Chicago Board of Trade 
 are ve similar to those in vogue on the New York Produce 
 Excha. e. Wheat, oats, corn, rye, and barley are bought 
 and sold by contract. Each contract contains 5,000 bushels. 
 The price is quoted in cents and fractions of a cent ranging 
 from one-eighth to seven-eighths. A fluctuation of one- 
 
 221 
 
222 
 
 PRODUCE BROKERAGE 
 
 
 eighth is equivalent to $6.25 on each contract. Sometimes a 
 "double contract" consisting of 10,000 bushels is traded at 
 a "split" price. 
 
 The commission charged on a purchase and sale com- 
 bined is $7.50 for each contract of wheat, corn, and oats. 
 On transactions in rye and barley, the commission is $12.50 
 for the combined purchase and sale ; $6.25 for the purchase, 
 and a like charge on the sale. 
 
 Provisions 
 
 The purchase or sale of 250 barrels of pork is one con- 
 tract. The price is quoted in so many dollars and cents per 
 barrel. The fluctuations are 2 1/2 cents apart. To illus- 
 trate, assume the purchase of 250 barrels of pork at $19.50. 
 The next variation would be either $19.47 1/2 or $19.52 1/2. 
 In the upward trend, the fluctuations would range as fol- 
 lows: $19.50, 19.52 1/2, 19.55, 19.57 1/2, 19.60, etc. 
 Each variation is equivalent to $6.25. The commission is 
 $6.25 on the purchase and $6.25 on the sale; a total 
 brokerage of $12.50. 
 
 A contract in ribs equals 50,000 pounds. The price is 
 quoted in cents and hundredths of a cent per pound. The 
 fluctuations are 2 1/2 points. Each change in price is 
 equivalent to $12.50. The commission is one-eighth of one 
 per cent, or $12.50 on the "round" transaction. 
 
 Each contract in lard contains 250 tierces. Each tierce 
 is of the approximate weight of 340 pounds, or 85,000 
 pounds to the contract. The price is quoted in cents and 
 hundredths of a cent per pound. The fluctuations are of the 
 range of 2 1/2 points, or $21.25 on one contract. The 
 commission charge is $15. 
 
 Commissions Charged New York Members 
 
 The New York members who have occasion to use this 
 
 BOARD Ol^ TRADE BROKERAGE 
 
 223 
 
 market are charged a commission of $3.75 for wheat, corn, 
 and oats ; $6.25 for rye and barley ; $6.25 on ribs, $6.25 on 
 pork, and $7.50 on lard transactions. 
 
 Accounting for Chicago Trades 
 
 No books of account other than those kept for the general 
 business, are necessary to record the New York broker's 
 Chicago transactions. To illustrate, suppose that Charles 
 Fairfield & Co., members of the Chicago Board of Trade, 
 direct their orders in Chicago futures through Long & Bar- 
 nett of Chicago. The latter concern attends to the clearing 
 of the contracts, the margins, and settlements. In other 
 words, they literally carry the commitments until finally 
 closed. 
 
 A page similar to that used for recording customers' 
 purchases and sales in cotton, will answer the purpose in 
 expressing all transactions in Chicago futures contracted for 
 by New York customers. Thus, if customer A purchased 
 5,000 bushels of Chicago May corn at 67 1/2, one column 
 under A's contract folio would be headed "May Corn 
 Chicago" and all transactions therein be treated in the same 
 manner as are cotton contracts. To evidence the purchase 
 through the Chicago brokers, a column under Long & Bar- 
 nett's contract page would reflect the transaction. But in 
 this case the contract would be listed in the column for sales. 
 In effect it would be made to appear that Long & Barnett 
 had sold to Fairfield & Co., 5,000 May corn at 67 1/2. 
 When the customer sells, an account sales is rendered show- 
 ing the gain or the loss, and the result is entered in the 
 journal. The general journal is more commonly used in 
 connection with such entries. 
 
 Assume that the sale by A was made at 69 1/2, thereby 
 realizing a gross profit of $100. The entry would appear as 
 follows : 
 
224 PRODUCE BROKERAGE 
 
 Debit Long & Barnett. . . . $96.25 
 
 Credit Customer A 92.50 
 
 Credit Grain Commission. . 3.75 
 
 A statement of the trade would be received from Long & 
 Barnett, attesting to the accuracy of the settlement, and in 
 their contract account the sale would be reflected as though 
 a purchase had been made by them of 5,000 May corn at 
 69 1/2. 
 
 The same procedure is followed in other grain and pro- 
 vision settlements. 
 
 No "point balance" is necessary, owing to the fact that 
 the unliquidated contracts carried by the resident broker are 
 confirmed at the close of each month, showing the quantity 
 and price of all open commitments. The accuracy of the 
 settled options is verified by the account sales received during 
 the period. 
 
 On the "Income Statement" the commission realized 
 from Chicago business is treated as income from operation. 
 
 CHAPTER XXX 
 
 COTTONSEED-OIL AND COFFEE BROKERAGE 
 
 COTTONSEED-OIL BROKERAGE 
 
 The New York Produce Exchange is the world's market 
 for cottonseed-oil and its by-products. A contract in 
 cottonseed-oil contains 100 barrels of 400 pounds each, or in 
 the aggregate 40,000 pounds. Prices are quoted in cents 
 and one-hundredths of a cent per pound. A fluctuation of 
 1/100 is known as a point. A point equals $4 on each con- 
 tract. The commission is $15 to non-members for the 
 purchase and sale— $7.50 either way. The Clearing Asso- 
 ciation, discussed in Chapter XXVII, attends to the settle- 
 ment of all transactions. The same methods are employed 
 in the settlement of oil as in clearing grain contracts. 
 
 Original margin is demanded on purchases or sales. 
 The requirements are $1.50 per barrel, long or short, and 50 
 cents per barrel on "spreads." As between non-associate 
 members, original and market margins are required in the 
 customary way. The same holds true wherever an asso- 
 ciate member has dealings with a broker without such con- 
 nection. 
 
 The losses and gains of customers, arising out of oil 
 transactions, are recorded in an account known as "Contract 
 
 Differences— Oil." 
 
 All payments and receipts from the Association are 
 charged and credited to the account of "Contract Differences 
 — Oil — Clearing House." 
 
 The "point balance" operated in the cotton business 
 could be employed with equally good results in verifying the 
 balance appearing in the Contract Differences — Oil account. 
 
 The commission which is earned as a result of the trans- 
 
 225 
 
226 
 
 PRODUCE BROKERAGE 
 
 actions in cottonseed-oil constitutes primary income and is 
 to be treated in that manner on the "Income Statement." 
 
 COFFEE BROKERAGE 
 
 In rounding out the subject of brokerage accounting, 
 the business of the ''Coffee Futures" market will be discussed 
 briefly. 
 
 One contract in coffee is 250 bags, each bag being of the 
 approximate weight of 130 pounds. The contract, there- 
 fore, contains 32,500 pounds. The price is quoted in cents 
 and hundredths of a cent per pound. One one-hundredth 
 is known as a point. A fluctuation of one point equals $3.25 
 on the contract. The commission to non-members is $20 
 on the complete transaction — purchase and sale. 
 
 The majority of the produce concerns have memberships 
 on the Exchange. No additional books of account are nec- 
 essary in the accounting department to record transactions in 
 coffee. The only additional "Street" records required are 
 a Street ledger and margin book. 
 
 As the Coffee Exchange conducts no clearing house, all 
 contracts are usually carried until "tender" day, at which 
 time they are settled. 
 
 Under such conditions it becomes necessary for brokers 
 to call each other for original and market margins, thereby 
 protecting themselves against loss. The original margin 
 requirements are $1 on each bag, or $250 on the contract. 
 All margin checks are made payable to one of the designated 
 banks, and are deposited with the Secretary of the Exchange. 
 
 From the standpoint of the customer, the usual margin is 
 $500 per contract. As the market in coffee is subject to 
 great fluctuation, this margin is considered conservative. 
 
 The commission resulting from coffee transactions is 
 credited to a separate commission account, but is included as 
 primary income on the statement of income. 
 
 
 Part IV — Brokerage Auditing 
 
 CHAPTER XXXI 
 
 AUDIT OF STOCK BROKERAGE BOOKS 
 
 m 
 
 Purposes of Audit 
 
 The auditing of stock brokers' books is a new departure 
 for the accountant. While, by reason of the technical 
 knowledge which such an undertaking imposes, very little 
 can be accomplished without a thorough knowledge of 
 Wall Street technique, the accountant must recognize that 
 there is as much need for an audit of the "Street's" records 
 as there is for the examination of records in any other 
 line of commercial endeavor. 
 
 At this point the following extract from the report of 
 Governor Hughes' Committee on Speculation in Securities 
 and Commodities (1909) will be of interest as indicating 
 the position of the Hughes' Commission on periodic audits : 
 
 "Failures and examination of books: The advisability 
 of requiring by State authority an examination of the books 
 of all members of the Exchange analogous to that required 
 of banks, is urged upon us. Doubtless some failures would 
 be prevented by such a system rigidly in force, although 
 bank failures do occur in spite of the scrutiny of examiners. 
 Yet the relations between brokers and their customers are 
 of so confidential a nature that we do not recommend 
 an examination of their books by any public authority. 
 The books and accounts of members of the Exchange should, 
 however, be subjected to a periodical examination and in- 
 spection pursuant to rules and regulations to be prescribed 
 
 22J 
 
 . 
 
228 
 
 BROKERAGE AUDITING 
 
 by the Exchange, and the result should be promptly reported 
 to the Governors thereof." 
 
 Granting, then, the necessity for periodic examinations 
 of the brokers' books, what should an audit of brokerage 
 records show? Ordinarily, it should result in a report by 
 the accountant, commenting upon the financial condition 
 of the client, passing upon the correctness of the financial 
 statements, and construing such of the financial reports 
 as focus the operations of the period under review. Robert 
 H. Montgomery* gives the general purposes of an audit 
 as follows: 
 
 *To ascertain the actual financial condition and earnings 
 of an enterprise for : 
 
 (a) Its proprietors (partners or stockholders). 
 
 (b) Its executives (managers, officers, or directors). 
 
 (c) Bankers or investors .... 
 
 (d) Bankers who are considering the discounting or 
 
 purchasing of its promissory notes." 
 
 and to detect: 
 
 "Errors of principle 
 Clerical errors 
 Errors of omission 
 Errors of commission 
 OflFsetting errors" 
 
 With the purposes of an audit thus well defined, let 
 us consider the usefulness of such an examination to the 
 broker. First, it will serve his interest by giving him a 
 comprehensive and intelligent statement of his business, its 
 earnings and financial status. Second, it will help him in 
 the future administrative conduct of his business. Third, 
 
 •In "Auditing, Theory and Practice," pages 10, 15. 
 
 STOCK BROKERAGE BOOKS 
 
 229 
 
 !' 
 
 
 i 
 
 the result of an audit will help him materially in procuring 
 better banking consideration. 
 
 Also, it may be said that there is a satisfaction to be 
 enjoyed in the knowledge which an audit gives, that no 
 irregularities are occurring. In the brokerage business the 
 possibilities of peculation are great. "Money" is the only 
 commodity handled, and when this is considered there 
 should be no doubt as to the expediency of periodic in- 
 spections by a competent person, or as to the value of a 
 statement from him certifying to the condition of the 
 business and to the correctness of its operations. 
 
 Before proceeding further, the point should be em- 
 phasized that an audit, whether made at the instance of 
 an Exchange, a partner, or a customer, should not be 
 superficial; it should be intensely scrutinizing. More than 
 once have accounts been passed over whose very con- 
 struction should have elicited profound questioning by the 
 auditor. The accounts spread upon the broker's books are 
 too crowded with values to allow of a perfunctory handling. 
 
 Scope of Audit 
 
 The scope of a Wall Street audit is the next important 
 matter. What does it call for? Is it to be a periodic 
 audit? Is it to be a thorough examination, or an inspec- 
 tion of one particular account? What should the audit 
 of the securities department embrace? The answer to 
 these questions will depend somewhat upon the nature of 
 the business — whether it is a Stock Exchange concern or a 
 commodity broker. The following outline of audit require- 
 ments calls for a thorough examination of a concern with 
 memberships on all the important Exchanges. 
 
 Such an audit should embrace: 
 
 1. The verification of cash— petty and general. 
 
230 
 
 2. 
 
 3. 
 
 7. 
 
 8. 
 
 9. 
 
 10. 
 
 11. 
 
 12. 
 
 BROKERAGE AUDITING 
 
 The proof of correctness for stock accounts re- 
 ceivable, long of securities. 
 
 The verification of accounts receivable having no 
 equity in securities, but representing for the most 
 part credit advances to customers for the pur- 
 pose of investment and speculation — open debits 
 which are considered perfectly collectible. 
 
 The examination of notes receivable lodged with 
 the broker. 
 
 The ascertainment of the sufficiency of margins on 
 all commitments in the market. 
 
 The physical examination of securities in the 
 broker's possession representing the purchases of 
 customers on a marginal basis. 
 
 The physical examination of securities which the 
 broker is holding for safe-keeping for his cus- 
 tomers. 
 
 The confirmation with brokers in the Street of any 
 loans made on collateral by the client, paying 
 especial attention to the nature and adequacy of 
 the collateral in the loan, the interest rates, and 
 the duration of the loan — whether on time or 
 demand — and if on time, whether for 30 or 60 
 days, or for a longer period. 
 
 The examination of securities owned by the broker 
 and the place of deposit. 
 
 The depreciation of such securities. 
 
 The item of "Furniture and Fixtures,'* with par- 
 ticular attention to the matter of depreciation 
 and whether any capital assets of this class have 
 been charged to income. This error when com- 
 mitted is usually due to the laxity of affairs and 
 the total ignoring of proper accounting principles. 
 
 As many brokers also do a banking business, they 
 
 STOCK BROKERAGE BOOKS 
 
 231 
 
 
 frequently have their own buildings, upon which 
 taxes are payable and upon which depreciation 
 and reserves are to be allowed for. 
 
 13. The item of stocks borrowed against short sales 
 
 is important enough to warrant the confirmation 
 of the lender, thereby verifying the number of 
 shares, the description of the security, and the 
 price and rate at which borrowed. 
 
 14. Dividends which have been or are to be received 
 
 on long stocks should receive the attention of 
 the auditor. 
 
 15. The treatment of dividends in the event of an 
 
 "even interest" in the stock; that is, where some 
 accounts are long and others short of the same 
 security during dividend time. 
 
 16. In connection with dividends, the consideration of 
 
 due bills receivable to corroborate the right to 
 dividends whose payments are pending^ 
 
 The foregoing relate to the asset section of the balance 
 sheet. On the liability side the audit should embrace : 
 
 1. Accounts payable representing: 
 
 3 (a) Open credit balances, in which, however, the 
 accounts have no further equity by reason 
 of "long" securities, 
 (b) Open balances, when the accounts also in- 
 clude holdings of stocks or bonds. 
 
 2. Verification of accounts payable whose equity is 
 
 subject to the purchase or "cover" of short 
 securities. 
 
 3. Certification of the correctness of the Notes Pay- 
 
 able account. 
 
 4. Verification of dividends payable, whether arising 
 
 from borrowed stock, or from certificates having 
 
2^2 BROKERAGE AUDITING 
 
 remained in the client's name after the date of 
 sale. In connection with this is the Due Bill 
 account attesting to the liability of dividend pay- 
 ment by the client. 
 
 5. The examination of Stocks Loaned account, cov- 
 
 ering the name of the borrower, the number of 
 shares, description of issue, and the price and 
 rate at which the loan stands. 
 
 * 
 
 6. The confirmation with the lending bank or broker 
 
 of any money borrowed on collateral by the client, 
 at the same time corroborating the amount of 
 the loan, its duration, the collateral contained 
 therein, and the rate of interest. 
 
 The third list of audit requirements concerns itself 
 mainly with the economic or income statement accounts. 
 For this it is necessary: 
 
 1. To examine into the adequacy of reserves which 
 
 might be created to provide for depreciations 
 and doubtful accounts, directing such adjusting 
 entries to be made as seem necessary or consistent 
 with the policy of the client whose books are 
 being examined. 
 
 2. To verify the Commission account, which will 
 
 present no little hardship, for here it will become 
 necessary to check the individual credits and 
 debits from the blotters— clearing house and ex- 
 clearing house. 
 
 3. To verify the interest on customers' accounts. 
 
 4. To verify the interest debits or credits on account 
 
 of stocks loaned or borrowed. 
 
 5. To verify the premiums on stocks loaned or bor- 
 
 rowed. 
 
 STOCK BROKERAGE BOOKS 
 
 233 
 
 1 
 
 6. To confirm with the lender or borrower the interest 
 
 on money borrowed or loaned. 
 
 7. To examine into the apportionment over the period 
 
 of membership dues usually paid in advance. 
 
 8. To examine into other deferred debit items, such 
 
 as insurance on building, taxes, etc. 
 
 Finally, the capital accounts of the partners, and the 
 just distribution of profits and losses according to the arti- 
 cles of copartnership, will claim the attention of the auditor 
 in charge of the examination. 
 
 If 
 
 ■ 
 
 * 
 
CHAPTER XXXII 
 
 AUDIT OF STOCK BROKERAGE BOOKS 
 
 ASSET ACCOUNTS 
 
 While the audit outline of the preceding chapter is fairly 
 comprehensive, there is a probability of an even greater 
 number of factors being found in any particular audit 
 which should command careful consideration. For instance, 
 there may be a substitution of securities while the securi- 
 ties accounts are being inspected, or a sale of certain securi- 
 ties while the auditor is working on the account in which 
 they are entered. Such possibilities must be recognized 
 and provided for, as it is obvious that if once the control 
 of securities is lost, the continuance of the examination 
 becomes absurd. 
 
 In the present consideration it is not intended to lay 
 down any hard and fixed rules of procedure, but only to 
 suggest the method of verifying unusual items and to call 
 attention to those other features of the audit which require 
 more careful scrutiny or special procedure. 
 
 Stock Accounts Receivable 
 
 Unlike the mercantile business where almost every entry 
 grows out of the purchase, sale, or return of merchandise, 
 and where a charge to a customer's account presupposes 
 such a transaction, the accounts receivable of stock houses 
 may represent many things. They may show purchases 
 of stocks still long, balances without equity to the cus- 
 tomer, or mere advances to the trader for one reason or 
 another. 
 
 The only sources of entries to the customers ledgers 
 
 234 
 
 STOCK BROKERAGE BOOKS 
 
 235 
 
 are the blotters. Consequently, the blotters may be looked 
 to and depended upon to reveal a complete history of the 
 transactions appearing in the accounts receivable. Having 
 by this means established the regularity and the nature of 
 the particular account under review, we must admit such 
 possibilities as may require further proof of the regularity 
 and correctness of any particular account. Is it identified 
 by a number instead of a name? Or does it bear a mis- 
 leading letter? In either case the rule to be adopted is 
 the authentication of the account by the client or by some 
 person in authority. There need be no cause for imme- 
 diate alarm when a numbered or lettered account is met, 
 for in no other business, perhaps, are the accounts of 
 large customers more sacredly guarded. Nor is there any- 
 where greater need for a positive verification of accounts 
 receivable than here. Much collusion can be practiced by 
 clerks through the operation of fictitious accounts — a fact 
 that, some years since, was brought out very forcibly by 
 the testimony of a member of a certain Exchange, whose 
 concern carried the account of a prominent executive at 
 Albany. 
 
 In any event, the auditor should insist upon a statement 
 from his client to the effect that all such numbered ac- 
 counts are known to him. Also the identity of the customer 
 should be made known to the auditor, whereupon the usual 
 letter of the client should accompany the auditor's request 
 for verification of balances and securities as appearing upon 
 the statement of the customer. At the same time, the 
 number of shares, the description of the securities, the 
 balances against or in favor of the customer, should be 
 recorded on a separate statement for the auditor's benefit; 
 or else the statement of the customer should be copied in a 
 press book for the auditor's benefit before being mailed to 
 the customer. Invariably the customer will respond very 
 
236 
 
 BROKERAGE AUDITING 
 
 promptly, for it is much to his interest to answer all com- 
 munications of auditors engaged in an examination of his 
 broker's books. This is particularly true of margin 
 customers. 
 
 If still further scrutiny is desirable, the auditor may go 
 to the length of procuring the client's authentication of all 
 signatures subscribed to the returned letters of confirma- 
 tion. On the other hand, if any of the customers fail to 
 reply, then the client should be apprised of the fact in the 
 report rendered at the close of the examination. 
 
 Under stock accounts receivable, another salient feature 
 should be noted, namely, the sufficiency of margins. As 
 has been pointed out under the subject of equity tables, a 
 customer's account may be approaching the danger mark 
 as far as his margins are concerned. Again, there may 
 not be a vestige of margin left in the account, so that 
 the difference betvi^een the ledger debit and the market 
 value of the securities held by the customer leans towards 
 "a minus equity" to the customer after sale. Here, the 
 nature of the account would change from a stock account 
 receivable to an ordinary doubtful or uncollectible account 
 receivable. The importance of this point can be readily ' 
 seen by referring to the case of the customer who, having a 
 credit extended to him, had an open loss of $25,000 on 
 a purchase of 5,000 Steel. 
 
 In conclusion, it may be said that a general classifica- 
 tion should be made of the various stock receivable accounts, 
 grouping credit customers, margins accounts, minus equity- 
 accounts, and doubtful accounts containing no securities. 
 
 The Revenue Stamps Account 
 
 The Revenue Stamps account is nothing more than an 
 inventory account. It records the purchase of stamps on 
 the debit side and the consumption figure on the credit 
 
 STOCK BROKERAGE BOOKS 
 
 237 
 
 side, these representing the use of the stamps on account 
 of sales or transfers. The balance figures should agree with 
 those resulting from a physical inventory taken by the 
 auditor. 
 
 The item of revenue stamps is an important one, 
 requiring keen inspection. 
 
 Securities of Customers 
 
 Whether the customer is long or short of securities, 
 every single share of stock as recorded by the securities 
 ledger should be traceable to its place of deposit. 
 
 If John Brown, for instance, is long of 100 shares of 
 Copper, they should be in one of four places, i.e., in the 
 vault, in the transfer office, in a stock loan, or in a collateral '^ 
 loan with some bank or broker. Their position should be 
 confirmed by physical examination if in the vault, or by 
 letter if at the transfer office or in either stock loan or 
 collateral loan. 
 
 Or, if John Brown is short of 100 Steel, they should be 
 accounted for in one of two ways, i.e., they may be bor- 
 rowed — in which case the auditor should confirm the bor- 
 rowing of the shares by communicating with the lender 
 thereof — or it may be that 100 shares of Steel long by 
 another customer have been used to make delivery against 
 the short. It should be remembered that the broker may 
 use long securities only with the customer's permission. 
 
 Wherever possible, in all cases involving such securi- 
 ties a thorough examination of the certificates t)f stock 
 should be made, taking note of the serial number in each 
 instance. If the auditor be engaged in verifying securities, 
 and occasion should arise for the broker to use a particular 
 certificate of stock, then the serial number should again 
 be taken and a notation made accounting for this certificate 
 in one of the following ways : 
 
238 BROKERAGE AUDITING 
 
 1. Sale. 
 
 2. Pledged as collateral in a loan. 
 
 3. Lent out in the Street. 
 
 4. At the transfer office for re-registration. 
 
 5. At the bank for purposes of substitution, that is, to 
 
 be exchanged for such securities as might be nec- 
 essary for delivery against a sale. 
 
 In the last case the certificates which were received in 
 return should be taken care of in accounting for their 
 position. ' 
 
 Bonds are either registered or coupon in character. In 
 examining coupon bonds, it should be noted that all coupons 
 are intact, and any irregularities should be commented upon. 
 For example, if a bond bearing January and July coupons 
 be examined in June, it should bear the coupon of July of 
 the same year and all others until maturity. 
 
 While considering coupon bonds, the necessity of de- 
 termining whether all coupons have been placed to the 
 credit of the account owning the bonds becomes very 
 patent. Coupons, while they are negotiable (being bearer 
 instruments), are nevertheless subject to a collection rule 
 which most banks have laid down — namely, that all coupons 
 must be enclosed in an envelope bearing the name of the 
 depositor and that of the corporation by which the coupons 
 are payable. Consequently, some supervision is possible 
 along these lines. 
 
 Registered bondholders receive interest checks direct 
 from the paying company. Here too, a watchful eye must 
 be given to the payments of interest during the period, or 
 those pending between the commencement of the examina- 
 tion and the completion thereof. In the matter of regis- 
 tered bonds, the serial number should be recorded, and it 
 should be noted that the bond is negotiable in nature. 
 
 STOCK BROKERAGE BOOKS 
 
 239 
 
 Depreciation of Securities Owned 
 
 Securities may be held for investment by the client, i.e., 
 the broker for whom the audit is made. In such cases 
 the tendency is to carry securities at cost, but conservatism 
 and good accounting principles dictate the practice of taking 
 cognizance of any variance in values, particularly so if such 
 values show a depreciation. As the auditor is employed 
 to examine books and not to criticise methods or policies 
 of his client, he can hardly do more than make the subject 
 of depreciation of values an item in his report. Needless 
 to say, if he be requested to adjust values, he should not 
 overlook this important account. 
 
 Money Loaned Account 
 
 It is not an uncommon practice for brokers to lend 
 money in the "loan crowd" of the Exchange. The loan, 
 having thus been created, is subject to examination by the 
 auditor and should be confirmed by the borrower as to 
 the collateral contained therein, the amount of the loan, the 
 rate of interest, and the duration. Inasmuch as the loan 
 envelope will be -available for inspection,, this should be 
 taken advantage of to substantiate the record appearing in 
 the "Money Loaned Book," which is further supported 
 by the account in the general ledger bearing the same 
 caption. The adequacy of margin should be investigated, 
 and in the event of insufficiency should be brought to the 
 notice of the client. On liquidated loans, the auditor should 
 test the correctness of the interest. 
 
 There is much to be said about call loans, inasmuch 
 as the interest rate is variable, and it behooves the auditor 
 to check not only the prevailing rate of interest but also 
 the changes from the day the loan was made up to the 
 present period. Since the 'lender is only pledgee for the 
 securities, he may only hold them as a pledge and not use 
 
240 
 
 BROKERAGE AUDITING 
 
 them for any purpose. If he does, such use may render 
 him liable to a charge of conversion. For this reason, the 
 whereabouts and use of such securities should be carefully 
 investigated and immediate attention be called to any 
 irregularities discovered. 
 
 On time loans the same general procedure is to be fol- 
 lowed, the only difference being in the interest payments. 
 This will be touched upon in Chapter XXXIII. 
 
 Furniture and Fixtures 
 
 It is almost a fixed rule among brokers to charge the 
 cost of furniture and fixtures to income. In practice one 
 meets this condition constantly. In principle the method 
 is very wrong, indeed. 
 
 In such cases it will devolve upon the auditor to explain 
 that an account should be set up with furniture and fixtures, 
 showing the purchase price, which in reality amounts to 
 many thousands of dollars. When this account is found, 
 the auditor upon questioning will usually be told that a 
 nominal rate of 10% is annually charged off on account 
 of depreciation. If no reserve for such depreciation has 
 been set aside, the practice should be advocated. Usually 
 it will be found that the broker is either too conservative 
 in his accounting allowances or too liberal. The tendency, 
 verj^ regretably, leans strongly towards carelessness. 
 
 Land and Buildings 
 
 A few of the larger brokerage concerns occupy entire 
 buildings for their business use. They may own or lease 
 these buildings. Where owned, the necessity of deprecia- 
 tion should again be emphasized. Also the items of taxes 
 and insurance should be intelligently accounted for, appor- 
 tioning the insurance over the period and making due 
 allowance for the accruing taxes. 
 
 STOCK BROKERAGE BOOKS 
 
 241 
 
 Stocks Borrowed 
 
 The subject of "stocks borrowed" has been discussed 
 in connection with short sales of customers. But for audit- 
 ing purposes it should be treated under a separate heading. 
 
 Stocks borrowed are equivalent to money loaned. How- 
 ever, the constant marking up and marking down of values 
 while the stock is borroVved presents no little task to the 
 auditor, who must consider the various changes that have 
 taken place since the particular stock was borrowed. All 
 such changes in value and interest rates should be listed 
 and the listing be made the contents of a letter of con- 
 firmation to be sent to the lending broker. 
 
 Dividends Receivable 
 
 Among other items of importance to the auditor is that 
 of dividends. The Dividends Receivable account should 
 show the shares of stock upon which dividends have been, 
 or are to be, received. In proving the correctness of this 
 account, the stock ledger should be consulted for informa- 
 tion in regard to the long stocks upon which dividends 
 are due. A record should be compiled of the purchases 
 and sales of all dividend-bearing stocks within the period, 
 closely watching for sales and purchases before dividend 
 declaration time. By checking the open "longs" with the 
 Dow Jones Dividend List or any other official dividend 
 indicator, the charges in the Dividends Receivable account 
 can be proved. 
 
 Credits may appear in this account, with complementary 
 entries to the Due Bills Receivable account. In that case 
 it is evident that the stock upon which the dividend is to 
 be paid was sold after declaration day, but before the day 
 of payment. In the event of due bills, they should be care- 
 fully examined and confirmed by the broker issuing same. 
 
 As a last factor in proving Dividends Receivable account, 
 
 / 
 
242 
 
 BROKERAGE AUDITING 
 
 it should be recalled that the sale of short stocks of a 
 similar class might prevent the appearance of an entry in 
 either "Dividends" account or Due Bills account. This is 
 so by reason of the offset appearing in the ex-blotter, and 
 attesting to the fact that the "long" customer was credited 
 with the dividends and the "short" customer charged there- 
 with. It is obvious that this situation precludes the pos- 
 sibility of a dividend being received if the certificate was 
 transferred by the buying broker at the time delivery was 
 made by the client broker against the short sale of his 
 customer. The point is mentioned here merely to put the 
 accountant on guard should he meet such a condition. Of 
 course, it must be borne in mind that the client may receive 
 dividends on stock in which he has no "net interest," due 
 to the fact that the buyer could not or did not transfer 
 the certificates in time to receive the dividend check direct 
 from the corporation. 
 
 Having compiled such information as can be used to 
 check the entries in the Dividends Receivable account, the 
 auditor should proceed with the checking of dividend 
 credits appearing in the customers' accounts. In this con- 
 nection it should be remembered that the practice in some 
 concerns is to credit the customer's account without the 
 operation of the Dividends Receivable account, and*among 
 other brokerage houses a practice is made of crediting 
 the customer upon declaration day rather than on the pay- 
 ment day. If the important facts be kept in mind, little 
 difficulty should be experienced in auditing "dividends." 
 
 
 CHAPTER XXXIII 
 
 AUDIT OF STOCK BROKERAGE BOOKS 
 LIABILITY ACCOUNTS; INCOME ITEMS 
 
 LIABILITY ACCOUNTS 
 
 Accounts Payable 
 
 The only accounts payable usually found in the audit of 
 a broker's books are in the nature of "short" accounts and 
 open credit balances having no securities. There may be 
 one or two accounts which, besides having such balances, 
 are also long of securities that for the most part can be 
 traced to the safe deposit box. 
 
 The procedure here is to check the transactions appear- 
 ing within the period covered, with the blotters and securi- 
 ties ledger. If interest be allowed on open credit accounts, 
 its amount should be tested. The appearance of interest 
 other than that allowed on margins on short accounts should 
 provoke inquiry as to the regularity of the interest credit. 
 The general rule is not to allow interest save on "short" 
 margins, unless a special arrangement therefor be made 
 with the customer. 
 
 In the matter of short accounts, the same procedure as 
 obtained in long accounts receivable should be followed in 
 determining the adequacy of margins on the open commit- 
 ments. In both accounts receivable and payable, where an 
 interest in the market is evidenced by the records, the audi- 
 tor should inquire as to the classification of accounts; that 
 is, whether the customer is trading on a credit extension 
 or whether he is operating on margin. This distinction 
 
 243 
 
 \ 
 
 f 
 
244 
 
 BROKERAGE AUDITING 
 
 is an important one, particularly so if the auditor's report 
 is to be used for the purpose of securing banking favors. 
 Approaching the subject of short accounts from the 
 angle of "stocks borrowed," it is important to determine 
 whether the short stock is borrowed in the Street or from 
 a customer. Under the present law it is conversion to 
 borrow stocks from long customers in order to make de- 
 livery against short sales, unless the long customer has 
 signed a waiver giving the broker the right of hypotheca- 
 tion for the amount in excess of the balance owed by the 
 customer. 
 
 Dividends Payable 
 
 It has already been pointed out that the Dividends 
 Payable account is created: 
 
 1. Where stock sold before dividend declaration day 
 
 remains in the client's name until after a dividend 
 has been declared. In such cases, upon receipt 
 of the dividend check, the Dividends Payable 
 account should be credited until the dividend is 
 claimed by the broker holding the certificate of 
 stock. 
 
 2. Where a dividend is declared on short stock which 
 
 has been borrowed from the Street. In such case 
 the customer's account is charged and the Divi- 
 dends Payable account is credited, being charged 
 only after a due bill is sent to the lending broker. 
 Under that circumstance the Due Bills Payable 
 account would attest the liability. 
 
 The further procedure in verification of dividends pay- 
 able is similar to that prescribed for dividends receivable 
 in the preceding chapter. 
 
 ( 
 
 STOCK BROKERAGE BOOKS 
 
 245 
 
 H *^ 
 
 •■ 
 
 f<iBp 
 
 Stocks Loaned 
 
 The procedure in auditing the Stocks Loaned account 
 is identical with that prescribed for the verification of stocks 
 borrowed. 
 
 Bank Loans and Brokers' Loans 
 
 In the audit of loans from banks and brokers, it is 
 necessary to get the lender's confirmation of the collateral 
 contained in the loan; also of the amount, the rate of in- 
 terest, and the sufficiency of collateral. If it be a demand 
 loan, the daily interest changes should also be noted in 
 the letter of confirmation. In the case of a time loan, the 
 duration should be stated, together with the interest accrued 
 thus far. The agreement with the lender may call for the 
 interest to be paid in advance, monthly or at the liquida- 
 tion of the loan. All such data should be availed of wherever 
 possible. 
 
 INCOME ITEMS 
 Commissions 
 
 As was pointed out in Chapter XIV, the commissions 
 of the securities department may arise from two sources: 
 
 1. The execution of orders for customers. 
 
 2. The execution of orders for other members of the 
 
 same Exchange, either for "carrying'* transac- 
 tions, "clearances,'* or "give up" business. 
 
 The charges against the Commission account result 
 from : 
 
 1. Floor brokerage due to brokers for the execution 
 
 of orders. 
 
 2. Commission owing to other brokerage concerns 
 
 which may be carrying the client's commitments 
 for him. 
 
 3. Commission charged on clearances. 
 
246 
 
 BROKERAGE AUDITING 
 
 All charges and credits to the Commission account 
 should be tested by reference to the blotter containing such 
 entries, and by the compilation from the purchases and sales 
 book of a statement of orders executed by other floor 
 brokers. The credits to this account arising out of the 
 execution of orders for other concerns, can be traced to 
 the record from which the monthly commission bills are 
 made out. This last record should be carefully scrutinized. 
 If these bills have not been paid, as evidenced by the books, 
 written confirmations should be secured from the respective 
 brokers for the purpose of verifying those outstanding 
 items of which no previous cognizance had been taken. 
 
 Interest Charges and Credits on Customers* Accounts 
 
 Some customers ledgers are so ruled as to give the num- 
 ber of days for which interest is to be charged or credited, 
 and the individual interest amounts are carried into an in- 
 terest column. The net difference between the charges and 
 credits is then passed through the ex-blotter for journaliza- 
 tion, and debited to the customers' accounts in the usual 
 manner. 
 
 This arrangement is ideal but is seldom met. The 
 general rule is to make interest calculations on the state- 
 ment, of which a press copy is made. The net amount of 
 interest to be charged or allowed is entered net to the 
 customer. Wherever this system prevails, use should be 
 made of the press-copy books to test the interest debits and 
 credits. 
 
 The auditor will also meet cases where no press copies 
 are made. In that event it would be safe to test the interest 
 on each transaction appearing in the accounts. Under the 
 rule of the Exchange, it is in violation of the commission 
 law to rebate interest. Wherever such rebates are discov- 
 ered, they should be called to the attention of the client 
 
 STOCK BROKERAGE BOOKS 
 
 247 
 
 so that proper adjustment may be made if possible or a 
 recurrence prevented. 
 
 In the discussion of accounts payable in the present 
 chapter, it was intimated that accounts payable with open 
 credits seldom benefit by interest credits. The method of 
 procedure suggested there could be followed to good ad- 
 vantage in the general investigation of interest charges. 
 
 Interest on Stock Loans and Premiums 
 
 Exacting methods should be adopted in proving the 
 interest and premiums on stocks borrowed and loaned. 
 The stocks borrowed and loaned book offers the best founda- 
 tion upon which to build the interest accounts. On clearing 
 house stock returned or called, recourse should be had to 
 the clearing house blotter containing the record of the 
 transaction. The interest should be thoroughly tested. 
 
 The premiums appearing in the premium accounts should 
 be examined in like manner. The rule of the Exchange 
 should be remembered, that premiums are not to be charged 
 for Saturdays, Sundays, and hoHdays. 
 
 Where interest or premiums have accrued or are ac- 
 cruing, a confirmation should be sent to the broker on the 
 other side of the transaction. This procedure will disclose 
 any error or irregularity. 
 
 Expense Items 
 
 Expenditures are to be verified in the usual manner. 
 As a suggestion, however, it would be well to get a state- 
 ment from the client as to what expenditures are consistent 
 or customary to the business. All vouchers should be 
 examined carefully, and especially those concerned with the 
 expenses of branch offices and solicitors. 
 
 Final Procedure 
 
 The auditor should examine the table of equities, being 
 
248 
 
 BROKERAGE AUDITING 
 
 especially careful as to accounts with minus equities and 
 accounts nearing the margin-exhaust point. 
 
 The system obtaining in the concern under audit should 
 not be attacked unnecessarily, for the very good reason that 
 unsolicited information is undesirable in the vast majority 
 of cases. Of course, it behooves the auditor to point out 
 where losses and leakages could be prevented, but beyond 
 that it would be indiscreet to submit a dissertation on the 
 relative weakness of the system or the morale of the office 
 staff. 
 
 As a final word in the audit of the stock brokerage 
 business, the auditor should bear in mind that the report 
 is more comprehensible to the client if the technical terms 
 be used. It is a fact that the broker thinks and speaks 
 in the parlance of the Street, and any other accounting 
 terminology is as foreign to him as his vernacular is to 
 the layman. 
 
 CHAPTER XXXIV 
 
 AUDIT OF COTTON BROKERAGE BOOKS 
 
 Outline of Audit 
 
 The audit of cotton brokerage books will require the 
 verification or confirmation of: 
 
 1. Petty and general cash. 
 
 2. Accounts receivable representing open debit balances 
 of credit customers and of marginal accounts, both having 
 no interest in the market. 
 
 3. Accounts receivable which have commitments open 
 showing gains large enough to offset their ledger balances. 
 
 4. Accounts receivable, mainly credit accounts, whose 
 open transactions show market losses, thereby augmenting 
 the ledger debit. 
 
 5. Accounts receivable against which spot cotton ware- 
 house certificates are held, thereby creating equities in favor 
 of the customer. 
 
 6. Notes receivable. 
 
 7. Street margins deposited by the client. 
 
 8. Agreements between the client and other houses to 
 give checks as margins, instead of depositing with the 
 Superintendent of the Exchange in the usual way. 
 
 9. Contracts open for account of customers, stating the 
 date of purchase or sale, the option, and the price. 
 
 10. Contract Differences account, debit or credit, in- 
 volving : 
 
 (a) Sending confirmations of open trades to customers. 
 
 (b) Sending confirmations of open trades to Street 
 
 brokers. 
 
 249 
 
 4 
 
250 BROKERAGE AUDITING 
 
 (c) Checking account sales during the period embraced 
 
 bv the audit. 
 
 (d) Checking receipts from, and payments to, the 
 
 clearing house and ex-clearing house brokers. 
 
 (e) Checking of point balance; this 
 
 (f) Resulting in present balance in Contract Differ- 
 
 ences. 
 
 11. Accounts payable with customers, this being done 
 in the usual way, carefully noticing any numbered or 
 lettered accounts. 
 
 12. Adequacy of margins on open commitments of credit 
 customers, seeing that no calls have been overlooked. 
 
 • 13. Sufficiency of margins on the open trades of margin 
 customers. 
 
 14. Spot transactions carried on margins — ^the charges 
 of labor, storage, insurance, and interest always being added 
 to the open debits. 
 
 15. Notes discounted. 
 
 16. Loans payable, containing collateral in the nature 
 of warehouse certificates. 
 
 It is also necessary to — 
 
 17. Test thoroughly the Commission account, being 
 careful to include in the examination the verification of 
 commission bills receivable and payable. 
 
 18. Test beyond a doubt the correctness of interest on 
 margins released, notes receivable, notes payable, and loans 
 payable. 
 
 19. Give the expense factors the same careful scrutiny 
 that was suggested under the securities audit. 
 
 20. Finally, investigate the division of profits and losses 
 as per the articles of agreement. 
 
 Accounts Receivable 
 
 Unless the account be that of a credit customer, there 
 
 COTTON BROKERAGE BOOKS 
 
 251 
 
 should exist no customers' accounts receivable on the books 
 of the cotton department, except in the case of a customer 
 having open trades showing a profit large enough to equal 
 or exceed the indebtedness. It is almost conclusive that if 
 any other accounts receivable be discovered, such accounts 
 are to be reserved or written off entirely. It devolves upon 
 the examiner to call the client's attention to such cases 
 whenever they arise. 
 
 There is still another set of accounts, mainly to be sought 
 in credit accounts, where a market loss is to be added to 
 the debit balance in the ledger, thereby increasing the in- 
 debtedness. If a credit agreement has been entered into 
 between the client and the customer, the fact should be 
 made known to the auditor, for without such knowledge 
 the results of the examination are misleading, the basis for 
 the division of accounts having been disturbed. 
 
 Other accounts receivable are fully secured by having as 
 collateral, spot cotton warehouse certificates. In such ac- 
 counts items of interest, labor, storage, and commission 
 are to be looked for. Storage and interest are charged 
 monthly, while labor and insurance are charged upon ex- 
 piration of the policy, or, as in the case of labor, when 
 the cotton is moved at the time of sale or shipment. 
 
 Street Margins 
 
 Verify Street margins deposited by the client, by send- 
 ing written confirmations to the broker for whose benefit 
 the deposit was made. On margins released within the 
 period, it is incumbent upon the accountant to prove the 
 deposits and releases, paying strict attention to the fact 
 that margins are "up" only when necessary, meaning that 
 the margins so deposited represent either market losses or 
 "original" calls. 
 
 On Street margins up by other brokers, as evidenced 
 
252 
 
 BROKERAGE AUDITING 
 
 by the Street margin record, verification should also be 
 had by the usual letter of confirmation. In this connection 
 it should be noted that there are large concerns in the 
 Street which are not called until a certain sum is owing— a 
 sort of credit comity between the house?. Now, if the 
 auditor should meet such accounts, he should first determine 
 by inquiry whether the house in question is callable within 
 certain limits. Otherwise, as a rule, no broker should owe 
 the client more than $500 without being called. Accounts 
 which show "no margin up" should be commented upon 
 
 in the report. 
 
 Sometimes it is advisable for houses to exchange checks 
 for the amount owing on open trades, rather than deposit 
 such sums in the usual way. This would allow the use 
 of the funds by the concerns to whom the margins are 
 owing. Before remarking upon the absence of margins 
 "up" by other concerns, it would first be advisable to con- 
 sult the general ledger with this possibility in mind. 
 
 Open Trades of Customers 
 
 Statements containing a list of open trades should be 
 sent to each customer for verification, accompanied by the 
 request to return the same to the auditor at once, the purpose 
 of the request being stated. 
 
 Verification of the Contract Differences Account 
 
 The advices received from customers should form the 
 basis for verification of the Contract Differences account 
 in the general ledger. In connection therewith, it will be 
 necessary to confirm with the brokers in the Street all open 
 trades, giving the number of bales, the options, and prices. 
 The return advices are to be used for purposes of verifying 
 the Contract Differences account in the manner prescribed 
 under the section "Point Balance" (Chapter XXI). 
 
 COTTON BROKERAGE BOOKS 
 
 253 
 
 The account sales rendered to the customers should be 
 checked with the purpose of testing proper charges and 
 credits to the Contract Differences account. The receipts 
 and payments made on account of clearing house settle- 
 ments should be checked to the cash book, which in turn 
 should be tested with the monthly charges and credits in 
 the Contract Differences account. 
 
 By setting up the facts as outlined, the point balance 
 will receive not only the usual check, but also that involved 
 in a thorough compilation of all facts entering into the 
 construction of the account under review. 
 
 Accounts Payable 
 
 The accounts payable with customers represent margins 
 deposited on market commitments. Under the law of the 
 Exchange, no interest may be allowed on deposits of cus- 
 tomers' margins. If a violation of this rule be apparent, it 
 should be brought to the attention of the client and be 
 remedied immediately. A statement of each account mailed 
 to the party to whom it is owing, with a request to con- 
 firm, will assure a thorough check of the accounts payable. 
 All the account sales should again be checked to the cus- 
 tomers' accounts, together with cash receipts and cash 
 disbursements from the check book. Journal entries should 
 also be checked, as they affect the accounts of customers 
 through bank advices. The margins of customers should 
 be looked into, calling attention to any "weak accounts." 
 Always consult the table of equities in regard to margins. 
 
 Commissions 
 
 Commissions should be checked from the contract 
 analysis journal and from commission bills receivable and 
 payable. The suggestions as to the verification of unpaid 
 bilk in the stock brokerage audit may be well adopted here. 
 
254 
 
 BROKERAGE AUDITING 
 
 Interest on Margins 
 
 Interest on brokers' margins should be tested in the 
 following manner : 
 
 1. Ascertain the date of deposit and the date of release. 
 
 2. Compute the interest for the number of days that 
 
 the margin was on deposit. 
 
 Audit of Other Commodity Departments 
 
 The same procedure as outlined for the audit of the 
 cotton department may be used to good advantage in the 
 audit of the produce, grain, cottonseed-oil, and coffee 
 departments. The only difference really arises in the matter 
 of proving the Contract Differences— Clearing House ac- 
 count and the Contract Differences — Oil account. If the 
 verification of the "Point Balance" as outlined in Chapter 
 XXI be followed, no difficulty need be experienced in test- 
 ing the accuracy of the accounts in discussion. 
 
 Part V — Forms 
 
 CHAPTER XXXV 
 
 STOCK BROKERAGE FORMS 
 
256 
 
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 Form 20. Customer's Ledger Account— John Jones— Settled 
 
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 Form 22. Customer's Ledger Account— Henry Brown— Short 
 
 STOCK BROKERAGE 
 
 281 
 
 
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 COTTON BROKERAGE FORMS 
 
284 
 
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 1 
 
 
 
 
 
 
 
 
 
 
 
 
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 J /- 
 
 
 
 
 
 
 
 
 
 
 
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 1 
 
 
 
 
 
 
 
 
 
 
 
 
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 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 R' 
 
 rsi 
 
 ^^S 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 lU 
 
 _J 
 
 1 
 
 
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 C^ 
 
 ; 
 
 
 
 
 
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 4 
 
 
 
 
 
 
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 5 
 
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 $^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 * 
 
 9 
 
 * 
 
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 ^ 
 
 r« 
 
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 : 
 
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 ^ 
 
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 ■ 
 
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 I 
 
 en 
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 o 
 o 
 
 ■4-» 
 U 
 
 PJ 
 
 o 
 
 ll 
 
 o 
 
 •4-» 
 
 3 
 
 u 
 
 
 o 
 
 (Z4 
 
 COTTON BROKERAGE 
 
 287 
 
 6. orULu. 
 
 ^AA/rviM^, cJ JD- 
 
 Remarks: 
 
 DATE 
 
 \ e 1 t 5 
 
 jdlX/. 
 
 '*?' 
 
 ^ 
 
 3. 
 
 EXPLANATORY 
 
 jbeJpct6*M- TkUd l^e(L>Jif 
 
 Soo 
 
 yucui 
 
 Fa. 
 
 3(0 
 
 
 DEBIT 
 
 122 
 
 CREDIT 
 
 Z2l2a 
 
 balance: 
 
 DEBIT 
 
 CREDIT 
 
 Z22D. 
 
 222. 
 
 Form 28. Customers Ledger 
 
^!f 
 
 > I 
 
 
 288 
 
 FORMS 
 
 COTTON BROKERAGE 
 
 289 
 
 m: 
 
 1 
 
 lliCl^mhr I9IS 
 
 
 
 
 
 
 GENERAL 
 
 SPECIAL 1 
 
 
 3UNt 
 
 RY BANKS CIC 
 
 TOMERS 
 
 f=OL D( 
 
 Bbit Cr 
 
 «di+ D 
 
 ebit Cr 
 
 edit 
 
 
 
 2. 
 
 
 
 
 
 
 
 
 n^.tUfU^iS^A^nj^ 
 
 • 
 
 
 
 522 
 
 
 
 
 So ^fud (had 
 
 • 
 
 
 
 
 ^Of 
 
 
 
 [kifrn/ yoeipir e{tvv\t advKciu 
 
 
 
 
 
 
 
 . 
 
 1 ( . y / 
 
 
 
 
 
 
 
 
 3 
 
 
 
 
 
 
 
 
 fl'K.ThU^hLaM^ 
 
 • 
 
 2>5b 
 
 
 
 
 
 
 1 u ■ - 
 
 • 
 
 
 2^ 
 
 
 
 
 
 ^e|( lfcfnf:iSoo-4LM^ cLeK. 
 
 
 
 
 
 
 
 
 V 
 
 
 
 
 
 
 
 
 CUbX^lt. X^^u^Kf 4*^t^ 
 
 / 
 
 
 
 / coo 
 
 
 
 
 
 • 
 
 
 
 ' 
 
 looo 
 
 
 
 (Wben.fvuxAfJ- of Ufvu fi*m. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 - 
 
 = 
 
 r —— r 
 
 1 — m 
 
 rm inr 
 
 Mil II TT 
 
 Trmnr 
 
 TTTTl 
 
 Form 29. General Journal 
 
 en 
 
 0/ 
 
 o 
 
 n 
 u 
 
 8 
 
 i2 
 
 I 
 
n 
 
 290 
 
 FORMS 
 
 CO 
 
 O 
 
 O 
 
 pq 
 
 u 
 
 o 
 
 CO 
 
 o 
 
 COTTON BROKERAGE 
 
 291 
 
 It 
 
 /<?/5 
 
 
 DEBIT 
 
 1 CREDIT IbSlANCE 
 
 ^hUtfi 
 
 ' 7?tz2/l^?7L^^ljM^,fa»fjb^,il*W>Oa- 
 
 4>t [00 
 
 1 ?}3 
 
 3 
 
 " • AlltLeLojiy 
 
 4>c 
 
 . _ 5"*' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ■■ 
 
 
 
 
 1 
 
 
 
 
 f 
 
 
 
 
 f 
 
 1 1 
 
 
 JL 
 
 
 
 ^-n-r-r-T-^ 
 
 
 rnr— 1 1 1 
 
 T.lLX.im 
 
 Form 31. Street Margin Ledger 
 
 Q/^AUAjCurvb iCjiS ^jMot/i^ 
 
 i^ 
 
 BOUGHT rCOM 
 
 Date 
 
 'Ml 
 
 Price 
 
 i2 
 
 00 
 
 Remarks 
 
 j(W i>.tf ^^w»^ 
 
 SOLD TO 
 
 Date 
 
 Tumid 
 
 PVice 
 
 J2 
 
 Remarks 
 
 T^i/VbcJt 
 
 DEBIT 
 
 CREDIT 
 
 2gc 
 
 
 Form 32. Street Ledger — B. & Co. 
 
II 
 
 Ij 
 
 292 
 
 FORMS 
 
 M^.^ OffMn 
 
 New York. 
 
 y^a^- 
 
 ^9L^^lL 
 
 CHA5 fAIRFiELD & CO 
 927 William Street 
 
 Form 33. Customer's Statement 
 
 VijuAl^LiL^ 
 
 CHAS PAlRf lELO & CO. 
 927 William Street 
 
 At the close of business to-day we have on our 
 books the following OPtN TRADES for your account. 
 
 LONQ 
 
 Quality 
 
 Commodity 
 
 Mce 
 
 SHORT 
 
 Quantity 
 
 ^00 
 
 Commodity 
 
 j^ 
 
 fVice 
 
 1223 
 
 "ElSTOF 
 
 Kindly notify us at once of any discrepancy 
 
 ChA5 rAIRflElLDficCO 
 
 Form 34. Statement of Open Trades 
 
 COTTON BROKERAGE 
 
 293 
 
 Nq.^ 
 
 Account - Sales of 
 CHA5. rAIRflELD & CQ 
 
 927 William Street 
 
 NewYorK 
 Statement of Soo Bales Cotton 
 
 f9^ Delivery 
 
 Bought and Sold by order and for account of 
 
 Form 35. Account Sales Statement 
 
t.H 
 
 ^ 
 
 294 
 
 FORMS 
 
 tl 
 
 
 *i 
 
 =tl 
 
 l> 
 
 COTTON (mrna blotter- Bought hr(LL)dl^ Delivery 
 
 BALES 
 
 yg>o 
 
 100 
 
 JfiC 
 
 /<90 
 
 /oo 
 
 FPOM WHOM 
 
 ^^^4Aap£<^^ 
 
 <^fvt^t^/»t.t— """'"tgp 
 
 PCICE 
 
 J2 
 
 QL 
 
 izU> 
 
 iicL 
 
 J2. 
 
 O^ 
 
 Jl 
 
 aJ5T0MEB 
 
 y^QirtH^ 
 
 ^ 'io /fu 
 
 AjC 
 
 et 
 
 OIK^^C^ 
 
 O 
 
 O 
 
 Form 36a. Street Blotter (left) 
 
 o 
 
 o 
 
 COrrON CONTRACT BL0nEC-5old fhr jluU I Q/^ Delivpry 
 
 BALE5 
 
 fOO 
 
 100 
 
 fO0 
 
 100 
 
 loo 
 
 /oo 
 
 /oo 
 
 lOO 
 
 foo 
 
 100 
 
 TO WHOM 
 
 ^}i- .^W^g^^cce % C 
 
 
 PCICE 
 
 IL 
 
 ^ 
 
 J± 
 
 n 
 
 JL 
 
 P- 
 
 Jl 
 
 Jl 
 
 JX 
 
 Jl 
 
 n 
 
 J2 
 
 /> 
 
 ^ 
 
 1^ 
 
 If 
 
 a. 
 
 n 
 
 If 
 
 If 
 
 CUSTOMED 
 
 
 ^V./M(M^ 
 
 Form 36b. Street Blotter (right) 
 
 COTTON BROKERAGE 
 
 29s 
 
 o 
 et 
 
 u 
 
 a 
 o 
 o 
 
 10 
 
 to 
 
 c« 
 
 a 
 
 9 
 O 
 
 •S £ 
 
 o 
 
 .. ►-» 
 
 2S ^ 
 
 N (0 |_ 
 
 ei S -^ 
 
 £ S 'r 
 90 bo 
 
 So « 
 •^ Oh 
 
 ^ "-^ 
 
 §0 ^ 
 ^-§ 
 
 S < 
 
 
 > 
 o 
 
 -s 
 
 o 
 
 .a 
 
 ft 
 
 a 
 
 a 
 
 9 
 
 
 O 
 
 CO 
 
 O 
 (X4 
 
296 
 
 FORMS 
 
 COTTON BROKERAGE 
 
 297 
 
 K, 
 
 I 
 
 W 
 
 o 
 
 u 
 
 < 
 
 bo 
 
 G 
 
 O 
 O 
 
 bo 
 
 i-i 
 
 
 C/3 
 CO 
 
 a 
 
 O 
 
 ! 
 
 
 
 ER 
 Price 
 
 
 
 
 y „ 
 
 si 
 
 
 roB! 
 
 Bales 
 
 H* AM- 
 
 L^l At 
 
 
 51 
 
 & 0, 
 
 y 5 /[ 
 
 « / 
 
 r 
 1- 
 
 1 
 
 11 
 
 
 3 !> 
 
 » 
 
 1 
 
 ULY 
 Bales 
 
 r 
 
 .J 
 
 1 
 
 
 11 }- 
 
 
 ' i 
 
 .8 ^ . . . . 
 
 al § § 8 8 § 
 
 < (g -. ^ ■* — 
 
 i jB ^ ' • ' • JL 
 
 1 - jL 
 
 
 
 8 
 
 Bales 
 
 ^_ — 
 
 
 ^ s^ 
 
 "^ 2 
 
 c 
 
 3 
 O 
 u 
 o 
 
 < 
 
 o 
 
 t/2 
 
 •g, 
 
 o 
 o 
 
 bo 
 i-i 
 
 
 m 
 
 B 
 
ii 
 
 DV 
 
 298 
 
 FORMS 
 
 
 MAI2GIIN CALL 
 
 Trom 
 
 CHA3t FAICHELD & CO. 
 9Z7 William 5treet 
 
 New ^rk "071:^^25. sii 
 Rease deposit in .^OTripm'.^Uo^ through 
 
 New York Cotton Exchange, margin to egual market 
 price on all open contracts with you. Of deposited 
 elsewhere, the deposit will be at your risk) 
 
 \6urs nespectfuHy 
 CHA5. TAIRFJELD & CQ 
 
 Ffer pro....^^.'&^^^j^c/ _ 
 
 Form 39. Margin Call 
 
 We have this day delivered to Superintendent 
 of New York Cotton Exchange, certified check for 
 
 ♦2500= for deposit in "K. U X^ 3m^.$^_£or 
 
 in response to your call for margin. 
 
 
 Yours truly 
 
 3 H. BELL & CO. 
 
 Ffer pro..(^X9l%<xWy-. 
 
 Form 40, Margin Response 
 
 H 
 
 COTTON BROKERAGE 
 
 L-a 
 
 a A 
 
 i 
 
 
 S^ ipx: 
 
 (^ 1:^ ^ :ij _ 2* I 
 
 
 h^ 
 
 
 Ci 
 
 o 
 
 UJ 
 
 •d 
 
 5 
 
 I 
 o 
 
 o ?i I^ O '^ c^ 
 
 
 
 
 cu 
 
 •a 
 
 
 «G CO C - S 
 
 1^ 
 
 i 
 
 « 
 
 c 
 cm 
 
 1^1 
 
 « 7= «^ (0 2 
 £ ^ 0) (U >< 
 
 a> -^ T-« 
 ^ ^ 13 T3 " 
 
 Q c C r- +_> 
 
 7 :l^ X3 J5 g 
 
 -> 52 CD rrt t. C 
 ^ j^ -- a»^ 
 
 
 
 (oo; 
 
 3 
 4-1 
 
 C 
 
 
 
 ^ 
 
 
 
 
 
 
 
 ^ 
 
 •8 
 
 
 
 o< 
 
 
 Oi 
 
 CD 
 
 O 
 
 a 
 
 (0 
 
 ft 
 
 I 
 
 •3 
 
 u 
 •» -^^ 
 
 u 
 
 rt C 
 
 S"a 
 
 o 
 
 Ma 
 
I 
 
 300 
 
 FORMS 
 
 COTTON CONTRAQ BLOnEFl-Bcxjght for 0^nkj9/6 Delivery 
 
 DatE ^jOAxL 18. iQis 
 
 
 BALES 
 
 FROM WHOM 
 
 PRICE 
 
 CUSTOMER 
 
 / 
 
 )0O 
 
 f:^r^ 
 
 J2^ 
 
 ^gr^.'Lfer^f- 
 
 ou} 
 
 
 100 
 
 
 11 
 
 Ho 
 
 
 
 
 
 100 
 
 
 12 
 
 A/C? 
 
 
 
 
 
 100 
 
 
 12- 
 
 Ho 
 
 
 
 
 
 100 
 
 
 n 
 
 A/O 
 
 
 
 
 
 100 
 
 
 IXH<i 
 
 
 
 
 
 100 
 
 too 
 
 
 12^ 
 
 
 
 
 
 
 12 Uo 
 
 
 
 
 
 100 
 
 
 12140 
 
 
 
 
 1 
 
 100 
 
 1 ~1 
 
 1 ; n 
 
 n 
 
 -J 
 
 ' — ' 
 
 
 U 
 
 - 1 
 
 Form 42a. Street Blotter (left), showing Street let-out transactions 
 
 
 COTTON CONTRACT BLOTTER -Sold for O^i'y niL Delivery 
 
 Date 7)UajcL^iI (CffS 
 
 
 BALES 
 
 TO WHOM 
 
 PRICE 
 
 CUSTOMER 
 
 1 
 
 /oo 
 
 ^r^ 
 
 n 
 
 4o 
 
 /St^O-'cfc^ ^-OijJ-' 
 
 
 wo 
 
 ^^ 
 
 n 
 
 Uo 
 
 
 
 
 100 
 
 ^f^ 
 
 n 
 
 Uo 
 
 
 
 
 100 
 
 -^r^o 
 
 12 
 
 Uc 
 
 
 
 
 100 
 
 * 
 
 ,x 
 
 Uc 
 
 
 
 
 100 
 
 « 
 
 n. 
 
 H6 
 
 
 
 
 loo 
 
 4^^^0 
 
 11 
 
 Uo 
 
 
 
 
 loo 
 
 ■ 
 
 12 
 
 *k> 
 
 < 1-1 
 
 
 
 100 
 
 4 
 
 
 
 ifo 
 
 
 
 : 
 
 100 
 
 _ ■■ 
 
 • 
 
 17 
 
 Ho 
 
 
 
 1 
 
 n ■-. ^ •: 
 
 
 Form 42b. Street Blotter (right), showing Street let-out transactions 
 
 COTTON BROKERAGE 
 
 301 
 
 CLEARING HOUSE- NEW YORK COTTON EXCHANGE 
 
 Reporf cf M^ JaJniudA. ^<&. items Cleared Jil_ 
 VenXo^Aoc^.n^Mh.. Balance Owedf ;?/^a.Balanoe Oaimed. — 
 
 WE 
 
 CWCTO 
 
 vk. 
 
 AusHn&Rand 
 
 Backe&CQj.5 
 
 Baily&Gild 
 
 Barren & Co. 
 
 WE CLAIM 
 
 Bell&Co,5H. 
 
 Carpenter & Co. 
 
 Chaplin &C0.5B Y'' 
 
 r\ , » r^ 
 
 ClemnDons & Co 
 
 2£ 
 
 I 
 
 P 
 
 QC 
 
 23 
 
 m 
 
 Dickey Bnas & Ca 
 
 rairfield&Cp^Chas 
 
 Gibert &, Co 
 
 (jwynne&Co 
 
 Hall&5Hle5 
 
 hamlin & (jo. 
 
 Havden. Stokes &(g 
 
 Norton &Co..EE 
 
 HubbertBras, 
 
 Josephs &.Lewi5 
 
 Kendal & Whitman 
 
 Ledman Bros 
 
 WE 
 OVCTD 
 
 tvE CLAIM 
 
 rcoM 
 
 Logan &Brvce 
 
 Mg^farland & Co 
 
 Muller & Cq 
 
 Newburq & Co. 
 
 O'Donnell & Co 
 
 Randolf. EC 
 
 /3/: 
 
 Thoma^tTowne & Co 
 
 30 
 
 Wandell&Adamson 
 
 V\fell5&Co,TM. 
 
 Ill 
 
 m: 
 
 RECAPITULATION 
 
 OHZD 
 
 I 
 
 Column 1 
 
 Balance 
 
 aAlMED 
 
 im 
 
 l^i 
 
 ■in: 
 
 Form 43. Clearing House Sheet used in Settling Transactions 
 
 % 
 
302 
 
 FORMS 
 
 Cleanng Comparison 5lip from CHA5. FAICflELD & CO 
 
 3.%.^lM rC New York. 0^?!^A__i9z^ 
 
 Wfe claim fnom^ on the following contracts 
 for the future delivery of cotton to be adjusted thnaugh 
 the Qeanng house 
 
 Form 44. Bill used in Settling Transactions in Qearing House 
 
 COTTON BROKERAGE 
 
 303 
 
 o 
 
 J3 
 
 bo 
 
 '-3 
 c 
 o 
 o* 
 
 V) 
 
 4) /"^ 
 
 « o 
 V o 
 
 bO 
 
 o 
 £ o 
 
 G 
 
 E 
 
 t/3 
 
 (A 
 
 I 
 
 Wi 
 
 E 
 
 u 
 
304 
 
 FORMS 
 
 COTTON BROKERAGE 
 
 305 
 
 S 
 
 U 
 
 
 bo 
 
 s 
 
 C 
 
 V 
 
 <u 
 
 boc 
 
 u u 
 
 a; 
 
 -SI 
 
 o 
 u 
 
 u 
 
 o 
 
 ■«-» 
 
 c 
 a; 
 
 a 
 
 V 
 ■*-• 
 
 a 
 
 ■*-» 
 
 C/5 
 
 en 
 
 u 
 
 O 
 u 
 
 PQ 
 
 
 o 
 
 B 
 o 
 
 u 
 
 LONG 
 
 
 poiNrrs 
 
 6375- 
 
 iBoc 
 
 
 5 
 
 5gc 
 
 5H0RT 
 
 POINTS 
 
 
 ^IclniSt>r 
 
 il 
 
 151' 
 
 00 
 
 /nS3- 
 
 Form 46. Customers* Open Trades 
 
 5H0RT 
 
 700 OnoAdL 
 3oo ' 
 
 3oo ^cXUi/r 
 
 Soo 
 
 sfOO 
 
 ^^^^m.Hr 
 
 POINTS 
 
 
 fiiSi 
 
 Form 47. Street Open Trades 
 
 CONTRACT DirrERENCK 
 
 DR. 
 
 
 5^22 
 
 3«r- 
 
 /fS: 
 
 CR. 
 
 j/Wtfi^t^iUi^Crvvi/io 1^ 
 
 nil" M 
 
 /5Sc 
 
 /5J3 
 
 Form 48. Contract Differences "Dummy" 
 
3o6 
 
 FORMS 
 
 COTTON BROKERAGE 
 
 I 
 
 
 J 
 
 I 
 
 II 
 
 ( 9.59 OclocK), 
 
 ' Take notice that on March 31. 1916. we 
 shall deliver to you 50.000 pounds of cotton in a- 
 bout 100 square bales m accordance with the 
 tenns of our contract of sale to you. We pledge 
 ourselves to deliver before 2 PM on the day spec- 
 ified for delivery, to the last holder hereof a 
 Warehouse receipt or receipts, or a Pro Forma bill 
 as provided m 5ec 57 of the By-laws, and either 
 vn the same time, or as soon thereafter as prac- 
 ticable, an Inspector's certificate or certificates 
 of grade, upon written notice of the last holder 
 hereof, cf the holding of the same to us. not 
 later than 4 PM on the day previous to the one 
 herein specified for delivery of the cotton. This 
 notice to be delivered to us simultaneously with 
 our delivery of the Warehouse receipt or re- 
 ceipts to the holder thereof 
 
 (Signed) CHAS. FAIRfJElLD & CO.. 
 per pro "^^ "GjmJUlsy,/^ 
 
 Conditions 
 (Conditions of sale printed here on original form) 
 
 rORM OF TRANSFER. 
 
 New Yor k &KaA.cl2a M 
 
 TIME 
 RECD 
 
 ACCEPTED BY 
 
 ^pi/T f^o 
 
 TRANSFERRED TO 
 
 
 J. ^ ypeppe/r tjoo 
 
 Form 49. Notice of Delivery and Form of Transfer 
 
 307 
 
 a 
 o 
 
 ■*-» 
 
 o 
 U 
 
 > 
 
 Q 
 
 bo 
 c 
 
 u 
 
 m 
 a 
 
 u 
 u 
 
 C 
 
 a 
 E 
 
 Q 
 
 o 
 10 
 
 & 
 
%!} 
 
 iiti I 
 
 I 
 
 #!■ I 
 
 i i 
 
 m 
 
 f 
 
 308 
 
 FORMS 
 
 SOLICITORS PRODUCTION 
 Month flf ^loA^^ly iQ/^ 
 
 SOLICITORS 
 
 > EXPEN5E 
 
 
 
 
 
 
 ^Wl 
 
 te« 
 
 C4 
 
 a 
 
 m 
 
 ll 
 
 JJi. 
 
 r 
 
 fjC^ 
 
 m 
 
 .M 
 
 ^r 
 
 5JJ 
 
 f 
 
 / 2a^ 
 
 1/ 
 
 
 
 
 /3oo 
 
 ^ 
 
 fc/ — 
 
 
 
 
 
 
 
 % 3ik)o 
 
 70c 
 
 
 
 /2(?o 
 
 l$oo 
 
 
 
 
 
 
 
 
 
 3* joo 
 
 2oo 
 
 
 3oo 
 
 100 
 
 
 Joo 
 
 
 
 
 
 
 
 
 3 ^feoo 
 
 700 
 
 Ooc 
 
 ;?oc 
 
 HiXK) 
 
 3Sco 
 
 
 
 
 
 
 
 
 
 ^ Vpc 
 
 •]Do 
 
 
 aoo 
 
 too 
 
 Tjoo 
 
 
 
 
 
 
 
 
 
 S u 
 
 /OO 
 
 
 
 
 5oo 
 
 
 
 
 
 
 
 
 
 Q iqoo 
 
 U 
 
 
 
 ttoo 
 
 1700 
 
 
 
 
 
 
 
 
 
 lo ^ 
 
 4^x> 
 
 
 
 
 200 
 
 
 
 
 
 
 
 
 
 II fSoo 
 
 2oo 
 
 Uoo 
 
 
 
 900 
 
 
 
 
 
 
 
 
 
 /3 ;3oo 
 
 /^oo 
 
 
 2oo 
 
 
 ceo 
 
 
 
 
 
 
 
 
 
 /S S-xoo 
 
 ;ooo 
 
 
 
 100 
 
 '^100 
 
 
 
 
 
 
 
 
 
 i \iioo 
 
 
 
 
 200 
 
 1200 
 
 
 
 
 
 
 
 
 
 n woo 
 
 :?oo 
 
 
 
 poo 
 
 boc 
 
 
 
 
 
 
 
 
 
 iS 2oc 
 
 
 
 
 
 200 
 
 
 
 
 
 
 
 
 
 iq (>oc 
 
 
 
 
 
 ()eo 
 
 
 
 
 
 
 
 
 
 50 /ooo 
 
 Boo 
 
 
 
 
 ^0 
 
 200 
 
 
 
 
 
 
 
 
 71 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Hi HOC 
 
 
 
 
 loo 
 
 ;<XW3 
 
 
 
 
 
 
 
 
 
 37 5K00 
 
 2oo 
 
 
 
 
 2200 
 
 
 
 
 
 
 
 
 
 2i 3oo 
 
 too 
 
 
 
 
 aoe 
 
 
 
 
 
 
 
 
 
 S* *^ 
 
 ,. 
 
 
 
 
 ^0 
 
 
 
 
 
 
 
 
 
 rj^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 SBlary 
 
 
 
 
 
 
 
 '?5o 
 
 
 ISq 
 
 37^ 
 
 L, 
 
 
 
 Expense 
 
 
 
 
 
 
 
 1^ 
 
 
 
 /a54 
 
 
 
 
 Ibbi 
 
 TJoo 
 
 ice 
 
 ^ 
 
 lioo 
 
 53/00 
 
 /ooo 
 
 
 
 
 
 
 
 
 ComrrKh. 
 
 V- 
 
 '(. 
 
 % 
 
 V 
 
 53(0 
 
 'ioc 
 
 
 
 
 
 
 
 
 Expense 
 
 50C 
 
 1^ 
 
 f5i. 
 
 m^ % 
 
 4co 
 
 i» 
 
 
 
 
 
 
 
 
 ftsfS-" 
 
 
 ^ 
 
 :to 
 
 l(>Sf4 
 
 
 r" 
 
 -(00 
 
 
 
 
 
 - 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 Form 51. Solicitors' Production Record 
 
 COTTON BROKERAGE 
 
 309 
 
 t/boi/^^w t<fi3 2uf^^ Or^-^c 
 
 BOUGHT fTtOYA 
 
 m 
 
 TsMtL 
 
 FVicfe 
 
 Jl 
 
 10 
 
 Remarks 
 
 -^yCtox kj-c'd. 
 
 SOLD TO 
 
 m 
 
 &£.dL 
 
 Price 
 
 /2</o 
 
 Remarks 
 
 JAa%</>fu->totlce. 
 
 DEBIT 
 
 CREDIT 
 
 ^^2 
 
 Form 52. White & Co.'s Account in Fairfield & Co.'s Street Ledger 
 
 2jtC^P*l£u- l^fS ^Dl£4MVUl 
 
 7k^9£xaJU^^^^o 
 
 BOUGHT FROM 
 
 Date 
 
 0^ 
 
 Al 
 
 Price 
 
 /2 
 
 10 
 
 Remarks 
 
 50LD TO 
 
 
 htj. 
 
 3t 
 
 fVice 
 
 /2 
 
 "Aj 
 
 Remarks 
 
 ^LOiia^yio^^ 
 
 T- I I 
 
 DEBIT 
 
 TrrTTllI iiiurm 
 
 CREDIT 
 
 /Jo 
 
 Form 53. McFarland & Co.'s Account in White & Co.'s Street Ledger 
 
 %.C£ / ^uJ^ /^iS SbdwtA^f 
 
 Ofn/C^ *Wo 
 
 BOUGHT FROM 
 
 Date 
 
 dSti 
 
 h 
 
 JU- 
 
 3/ 
 
 FVice 
 
 n^-o 
 
 Remarks 
 
 JJa*^ 
 
 yietucs. 
 
 SOLD TO 
 
 Date 
 
 (2^ 
 
 IS 
 
 Phce 
 
 J2I0 
 
 Remarks 
 
 DEBIT 
 
 ^ 
 
 LI2 
 
 I I I 
 
 CREDIT 
 
 -rrrrmrmTrr-i 
 
 Form 54. White & Co.'s Account in McFarland & Co.'s Street Ledger 
 

 I 
 
 > a 
 
 310 
 
 FORMS 
 
 Nan 38 
 
 New York. ^i^c^^^^A^ 3i iq/.^ 
 
 TO M5FARLAND & CO dr. 
 
 TERMS CASH 
 W''y'»8«-E BY CCRTlFieO CHECK 
 
 MARKS 
 
 STORES 
 
 jL^tWElGHIN G MqS3S LBS 
 
 "^IstycK'fS 1(0 6aA« 
 
 ^L£SS ALLOWANCE 3U LP5 tlqUlO ^^7 U-Q 
 
 h COST INSPEaiQH. CLASSIFICATION *(IRTIFtCATrS.»l2&«v^ 
 PREMIUM rOR STAPLE X 
 
 ■^} MID0LIN6 
 
 OR- 
 
 TCP GRADE 11x7 
 
 ALLOWANCE TOR UNCOMPRtSSCD COTTON \ 
 
 ^ ^3a 
 
 II ^o 
 
 it>5(] 
 
 J2>S 
 
 2? 
 
 IS 
 
 00 
 
 'i^us- 
 
 BALANCE DUE (^ 
 
 :*©tr 
 
 Bales ABOVE MIDDLING 
 
 CLASSIFICATION 
 
 7^7 
 
 7 
 
 ^3Mg 
 
 :2: 
 
 I£ 
 
 1^ 
 
 FAIR 
 
 e I 75 
 
 WOtia 
 
 STRig MIDDUNG FAIR 1.50 
 
 MIDDLING FAIR 
 
 9 130 
 
 STRin GOOD MIDDLING © 90 
 
 FULLV GOOD MIDDLING 9 78 
 
 GOOD MIDDLING © 15 
 
 BARf LV GOOD MIDDLING f 48 
 
 Bales BELOW MIDDLING 
 
 / MIDDUNG 
 
 <P BAS'S 
 
 looths 
 
 GOOD MIDDUNG TINGED VmotMop 
 
 BARELY MIDDLING 
 
 @ 
 
 .25 
 
 STRirt MIDDLING 
 
 32 
 
 FUUV MIDDLING 
 
 16 
 
 STRIG GOOD MI0OL16 TlN5fD(? 45 
 
 MIDDLING 
 
 ^ BASIS 
 
 GOOD MIDDLING UNGfD ValcfMoc 
 
 7 STRig LOW MIDDLING @ 50 
 
 l> FULLY LOW MIDDLING (? 85 
 
 US LOW MIDDLING 
 
 @ 1.25 
 
 ^50 
 
 10 20 
 
 23 STRiq GOOD ORDINARY @ 2X» 
 
 / GOOD ORDINARY 
 
 @ iOO 
 
 TOTAL ABOVf MIDDLING 
 
 STRICT MIDDLING TINGED ® 20 
 
 MIDDLING T1NGCD 
 
 % m 
 
 ^o-oo 
 
 4L 
 
 00 
 
 3 00 
 
 STRICT LOW MIDOUNGTWGCD ® 1.25 
 
 LOW MIDDLING TINGED 9 3X)0 
 
 MIDPLING STAINED 
 
 €> I2S 
 
 • Cents and hundredrha of cents per pound 
 
 ^1 TOTAL BELOW MIDDLINQ" 
 
 /1270 
 
 Form 55. Spot Bill 
 
 COTTON BROKERAGE 
 
 3" 
 
 
 
 Date 
 
 
 
 Contract Nunr^ber 
 
 
 
 Stores 
 
 
 
 Classification Na 
 
 
 
 Marks 
 
 
 
 Bales 
 
 
 
 Weiaht 
 
 
 
 Stored 
 
 
 
 Charges paid 1d 
 
 
 
 Certificates expire 
 
 
 
 Premium 
 
 
 
 .Discount 
 
 
 
 Notice -price 
 
 
 
 Date when 
 samples recaved 
 
 
 
 Account 
 
 
 
 Fronn whom 
 received 
 
 
 
 Contract 
 purchase price 
 
 
 • 
 
 Date of' actual 
 purchase 
 
 
 
 Remarks : 
 
 
 
 Date delivered 
 
 
 
 lb whom delivered 
 
 
 
 Samples delivered 
 
 
 
 Price 
 
 
 
 Storage and labor 
 allowed or paid 
 
 
 
 Date of sale 
 
 \\ 
 
 Actual sales-price 
 
 
 
 Account 
 
 
 
 Remarks 
 
 Form 56. Spot Register 
 
^ 
 
 II 
 
 11 
 
 I 
 
 
 I* 
 
 CHAPTER XXXVII 
 
 PRODUCE BROKERAGE FORMS 
 
fii't 
 
 314 
 
 FORMS 
 
 ^ 
 
 BOUGHT 
 Com 
 
 CHA5. TAIRriELD & CQ 
 
 New York. (Laaj.^ \qj£_ 
 
 II 
 
 Form 57. "Bought" Slip 
 
 SOLD 
 
 "Wheat 
 
 CHA5 rAlRPIELD & CQ 
 
 Form 58. "Sold" Slip 
 
 
 PRODUCE BROKERAGE 
 
 315 
 
 ir> 
 
 3 
 
 C 
 
 V 
 III 
 
 V 
 in 
 
 S 
 
 o 
 
 u 
 
 G 
 
 
 o 
 
 I 
 
3i6 
 
 FORMS 
 
 i ■m 
 
 ii 
 
 II 
 
 INDEX 
 
 Abbreviations, purchases and sales book, 31 
 Account, 
 
 books of (see below) 
 cotton brokerage, 
 
 contract differences, 141, 169, 173 
 
 form, 305 
 customers* open trades, 173 
 
 form, 305 
 Street ledger, 149, 198, 206 
 
 forms, 309 
 Street open trades, 174 
 form, 305 
 stock brokerage, 
 
 customers' ledger, 27, 40 
 forms, 280 
 Account, books of, 25 (See also individual book titles throughout 
 the index; for list of books, see table of contents) 
 closing, 114, 189, 208 
 
 expenses omitted, 115 
 cotton brokerage, 132 
 adjusting entries, 189 
 customers' records, 132 
 "Street" records, 133 
 Exchange rules affect, 25 
 final entries, 91, 97, 98 
 list of books required, 27 
 produce brokerage, 205 
 accounting for Chicago trades, 223 
 closing, 208 
 
 customers' records, 206 (See also "Cotton Brokerage" above) 
 sequence of recording transactions, 64 
 state laws affect, 25 
 stock brokerage, 25 
 uniformity of method, 26 
 
 317 
 
3i8 
 
 INDEX 
 
 •it 
 
 li! 
 
 Account sales register, cotton brokerage, 133, 141. 143 145 
 form, 295 ' 
 
 Account sales statement, cotton brokerage. 147 
 
 form, 293 
 Accounts payable, customers', 
 
 cotton brokerage, 146 
 Accounts, stock brokerage, 
 
 borrowing stocks against short sales, 87 
 customers' purchases and sales, 85 
 financing the transactions, 86 
 odd lot transactions, 88 
 opening entries, 84 
 Accruals, treatment on books, 116 
 Adjustment entries, method of handling, 37 
 Agency, 
 
 duration of, 22 
 law of, 
 brokerage governed by, 19 
 New York State, 20 
 Allowance, cotton shrinkage. 
 
 New York Cotton Exchange rule, 199, 200 
 Analysis journal, cotton brokerage, 
 
 form, 295 
 Assets, 
 
 cotton brokerage, 193 
 stock brokerage, 120 
 
 ^"^^dltif ") '^''''^ Brokerage Auditing," "Cotton Brokerage 
 
 B 
 
 Balance sheet, 
 
 cotton brokerage, 193 
 
 stock brokerage, 119 
 Bank loans, collateral, 101 
 Bankrupt, release of securities held by, 124 
 Bankruptcy, court decisions re customer's equity, 124, 125, 126 
 Barley, Chicago Board of Trade, 221 
 Bids and offers, 
 
 "at three days," 30 
 
 "buyers' or sellers' options," 31 
 
 "cash" method, 30 
 
 "regular way," 30 
 Bids, "10:30 A. M.," cotton brokerage, 160 
 
 INDEX 
 
 Bill, cotton brokerage, 
 
 settlement, 164 
 spot, 197 
 
 form, 310 
 used in settling transactions in Clearing House, 164 
 form, 302 
 Blotter (See also "Blotters" below), 
 forms, 258, 259, 271-276 
 barometer of financial conditions, 36 
 basic financial record, 33 
 cash entries, 34 
 clearing house, 33, 37 
 combined journal and cash book, 34 
 cotton brokerage. 
 Street, 133, 148 
 forms, 294, 300 
 ex-clearing house, 33, 37 
 
 uses of, 81 
 form of, 37 
 principle of, 33 
 produce brokerage, 206 
 stock brokerage, 27 
 clearing house, 33, 37 
 
 forms, 258, 259, 271, 272 
 ex-clearing house, 33, 37, 81 
 forms, 273-276 
 Blotters, 36 
 
 alternating, method of, 37 
 balancing of, 77 
 clearing house, 77 
 ex-clearing house, 80, 81 
 Bonds, 
 
 coupons on bonds out as collateral, 102 
 interest on, 105 
 Books of account (see "Accounts") 
 "Borrow a place,** cotton brokerage, 182 
 "Borrowed and loaned** books, 
 money, 27, 55 
 
 forms, 263, 264 
 stock, 27, 54 
 forms, 261, 262 
 Borrowed stock (See "Stock, borrowed") 
 "Bought" slip, produce brokerage, 210 
 form, 313 
 
 319 
 
m 
 
 kt 
 
 k\ 
 
 320 
 
 INDEX 
 
 Branch offices, 
 
 cotton brokerage, 184 
 expenses, 118 
 
 Broker (See also "Brokerage," "Brokers," "Customers") 
 
 clearing house balance, 75 
 
 cotton brokerage, 
 "net interest," 182 
 
 customer and, legal relation, 19, 20 
 
 duties of, 20 
 
 liability in New York State, 20 
 
 pledging of customer's securities, 21 
 
 Stock Exchange membership, 24 
 
 Stock Exchange seat, disposal of bankrupt's membership, 127 
 Brokerage (see "Cotton," "Produce," "Stock Brokerage") . 
 Brokers (see also "Broker" above) 
 
 cotton, 
 
 settlement between, methods of, 157, 158 
 statement, 133, 165 
 forms, 303, 304 
 Produce Exchange, classification, 206 
 Buyers* or sellers* options* 31 
 interest, 31 
 
 Call loans (see "Loans**) 
 Call, margin, 
 
 cotton brokerage, 153 
 
 form, 298 
 produce brokerage, 219 
 "Called** stocks, 39. 51 
 
 Carrying transactions, cotton brokerage, 185 
 Cash 
 
 entries on blotter, 34 
 Cash book, 
 
 cotton brokerage, 133, 138 
 forms, 289, 290 
 balancing of, 139 
 
 "Cash** method, bids and ofTer, 30 
 
 Certificate, margin, cotton brokerage, 
 forms, 299 
 
 Chicago Board of Trade, 204, 221 
 
 INDEX 
 
 Clearance loans (See "Loans") 
 '^^learances, cotton brokerage, 185 
 
 Clearing House, 
 Cotton, 161 
 payments on settlements, 164 
 ring clerks, 161 
 sheet, 
 form, 301 
 Produce, 209 
 adjustments, 212 
 customers' settlements, 212 
 ledger, 207 
 
 operation of system, 210 
 sheet, 210 
 forms, 314, 315 
 Stock, 
 blotter, 
 
 forms, 271, 272 
 broker's balance, 75 
 deliveries, 72 
 delivery prices, 72 
 function, 67 
 listings, 68 
 methods, 69 
 sheets, 70 
 form, 270 
 balancing of, 71 
 tickets, 69 
 
 "Close-out," defined, 22 
 
 Closing books, 
 
 produce brokerage, 208 
 cotton brokerage, 189 
 stock brokerage, 114 
 
 Co£Fee brokerage, 226 
 
 Collateral, 
 
 record of, money borrowed and loaned book, 55 
 
 release by payment of loan, 56 
 
 substitutions, 55 
 Commission, 
 
 coffee brokerage (defined), 226 
 
 cotton brokerage, half commission brokerage, 187 
 
 cottonseed-oil brokerage (defined), 225 
 
 grain, N. Y. Produce Exchange rate, 205 
 
 321 
 
322 
 
 INDEX 
 
 INDEX 
 
 323 
 
 ■1 
 
 II 
 
 \l 
 
 Commission — (Continued) 
 stock brokerage, 
 floor brokerage, 117 
 rate in marginal operations, 61 
 stock and bond sales or purchases, 24 
 Confirmation slips, cotton brokerage, 
 
 point balance, 175 
 Contract, 
 
 coffee brokerage (defined), 226 
 corn or wheat (defined), 205 
 cotton, limits of, 199 
 cottonseed-oil brokerage (defined), 225 
 Contract analysis journal, 
 
 cotton brokerage, 133, 141, 143, 145 
 form, 295 
 Contract book, customers, cotton brokerage, 
 
 form, 286 
 Contract differences account, cotton brokerage, 
 defined and analyzed, 141, 169 
 "dummy" account, 173 
 
 form, 305 
 factors entering into, 142 
 "point balance" and, 167 
 proof of, 173 
 Contract differences — grain account, 
 
 proof of, 214 
 Contract di£Ferences^-oil account, 
 
 customers* gains or losses, 225 
 Com, 
 
 Chicago Board of Trade, 221 
 "contract" defined, 205 
 price, basis of quotations, 205 
 Cotton (see also headings below), 
 classification of, 201 
 
 grade premium and discount, 201 
 contract blotter (See "Street Blotter") 
 contract, limits of, 199 
 cost, 
 inspection, classification and grading certificates, 200 
 insurance and interest, 203 
 purchase price, 200 
 storage and labor, 202 
 deliveries, actual, 196 
 grades of, N. Y. Cotton Exchange rules, 180, 200, 201 
 
 Cotton — (Continued) 
 
 "one contract" defined, 131 
 
 "point" defined, 132 
 
 prices quoted in cents and hundredths per pound, 131 
 
 shrinkage allowance, 199, 200 
 
 spot, 
 
 cash transaction, 132 
 
 technicalities of, 196 
 weight per bale prescribed, 131 
 Cotton brokerage, 129 (for references to books and records, see 
 individual titles throughout index) 
 
 forms, 284-311 
 auditing, 
 
 accounts payable, 253 
 
 commissions, 253 
 
 interest on margins, 254 
 
 open trades of customers, 252 
 
 same procedure for produce brokerage, 254 
 
 scope of audit, 249 
 
 Street margins, 251 
 
 verification of contract differences, 252 
 books of account, closing, 189 
 branch offices, 184 
 carrying transactions, 185 
 clearances, 185 
 dissolution of business, 195 
 floor brokerage business, 185 
 half commission brokerage, 187 
 name or price change, 186 
 purchases, direct, 176 
 sales, direct, 176 
 solicitors, 184 
 speculation, 176, 177 
 
 terminology, 
 borrow a place, 182 
 close out, 168 
 difference method, 132, 136 
 "flat" rate, 201 
 hedging, 176, 177 
 margin certificate, 154 
 market margin call, 153 
 net interest, 182 
 one contract, 131 
 original margin, 155 
 
lij 
 
 m 
 
 324 
 
 INDEX 
 
 Cotton hrokersigt— (Continued) 
 terminology — (continued) 
 
 point, 132 
 
 point balance, 147, 170 
 
 "ringing." 158 
 
 short notice, 181 
 
 sign-up slips, 148 
 
 stop, 135 
 
 straddles, 178 
 
 Street let-out, 161 
 
 taking-up, 196 
 
 tender day, 129 
 Cotton Exchange, 
 
 New York Cotton Exchange rules, 131, 180, 200, 201 
 Cotton futures, 
 
 market, 129 
 customs of, 131 
 defined, 129 
 
 trading is speculative, 130 
 Cottonsecd-oU brokerage, 225 
 
 "contract" defined, 225 
 Coupons (See "Bonds") 
 Court decisions. 
 
 Federal Court, 
 
 release of securities held by bankrupt, 124 
 New York court, 
 
 customer's equity in deposited securities, 126 
 
 Markham v. Jaudon, 19 
 North Carolina re bankrupt broker, 125 
 United States Supreme Court, 
 
 broker an agent, 19 
 
 equity in clearance loans, 126 
 "Cover," defined, 41 
 
 Credit extension, customer's operation upon, 60 
 Customers, 
 
 accounts, 110 
 
 accounts and statement, relation between, 113 
 
 accounts payable, cotton brokerage, 146 
 
 cash margin operation, 60 
 
 contract book, cotton brokerage, 132, 135 
 form, 286 
 
 contract difference credit, 203 
 
 credit extension used by, 60 
 
 defined, 44 
 
 INDEX 
 
 325 
 
 Customers — (Continued) 
 duties of, 21 
 
 equity in deposited securities, 126 
 interest charges, 110 
 ledger accounts, stock brokerage, 27, 40 
 
 forms, 280 
 ledger, cotton brokerage, 132, 138 
 
 form, 287 
 margin book, cotton brokerage, 132, 134 
 
 form, 285 
 marginal requirements, 59 
 open trades, cotton brokerage, 173 
 
 forms, 305 
 purchases and sales book, cotton brokerage, 134 
 
 forms, 284 
 records, cotton brokerage, 134 (See also individual titles 
 
 throughout index) 
 "short accounts" do not draw interest, 112 
 statements, 110 
 
 cotton brokerage, 146 
 form, 292 
 
 stock brokerage, 110 
 forms, 277-279 
 stock margin record, 58, 89 
 
 forms, 265, 266 
 
 Day (U. S. Supreme Court Justice), decision by, 19 
 Delivery, 
 
 actual, cotton brokerage, 196 
 accounting entries, 198 
 sales for, 180 
 demand by purchaser preceding, cotton brokerage, 179 
 
 form, 306 
 notice of, cotton brokerage, 178 
 
 form, 306 
 Saturday not a day of, 30 
 Demand by purchaser preceding delivery of cotton, 179 
 
 form, 307 
 Depreciation, reserve for, 116 (See also ''Reserve Accounts, Cotton 
 
 Brokerage," 194) 
 "Difference*' method, cotton brokerage, 132, 136, 137, 141 
 Direct settlement method, cotton brokerage, 158 
 
 
326 
 
 INDEX 
 
 INDEX 
 
 327 
 
 I 
 
 i' 
 
 V ' 
 
 Mil 
 
 ;f 
 
 I 
 
 i 
 
 Dissolution, 
 
 cotton brokerage business, 195 
 stock brokerage business, 123 
 
 Dividends (See "Stock") 
 
 Due bill, defined, 108 
 
 Equity (See also "Equities" below) 
 collateral loans, 103 
 customers, 
 
 bankrupt broker's Exchange membership, 127 
 clearance loans, 126 
 
 protection of, in bankruptcy of broker, 124 
 securities deposited, 126 
 Equities, 
 
 balance sheet and equity statement combined, 122 
 table of, cotton brokerage, 194 
 table of, stock brokerage, 121 
 form, 282 
 compilation of, 41 
 Exchange (See "Cotton," "Stock Exchange") 
 Ex-clearing house blotter, stock brokerage, 33, 37, 81 
 
 forms, 273-276 
 Ex-dividend, 106 
 Expenses, 
 
 cotton brokerage, 
 
 factors in closing books, 190, 191 
 stock brokerage, 
 classification, 114 
 general and administrative, 117 
 omitted in closing books, 115 
 solicitors' and branch office, 118 
 
 F 
 
 Failure and dissolution, 
 
 cotton brokerage business, 195 
 
 stock brokerage business, 123 
 Financial conditions, blotter indicates, 36 
 Financial statement, cotton brokerage, 190 
 Floor brokerage business, 
 
 cotton brokerage, 185 
 
 stock brokerage, commission, 117 
 Futures, cotton (See "Cotton Futures") 
 
 General journal, cotton brokerage, 133, 138 
 
 form, 288 
 Grading rules. 
 
 Cotton Exchange, 180 
 
 U. S. Dept. of Agriculture, 180 
 Grain, 
 
 Chicago Board of Trade, 221 
 
 commission regulated, 205 
 
 H 
 
 Half commission brokerage, cotton, 187 
 "Half-stock," defined, 90 
 "Hedged," defined, 41 
 "Hedged" accounts, 
 
 objections to, 43 
 
 "short" accounts, method of handling, 42 
 Hedging, 
 
 cotton brokerage, 176, 177 
 
 cotton futures as a means of, 130 
 
 Income, 
 
 cotton brokerage, 
 
 factors in closing books, 190, 191 
 stock brokerage, 
 
 classification, 114 
 
 net, 119 
 
 secondary, 117 
 
 sources of, 117 
 
 statement, 117 
 Indorsement, Stock Exchange, 106 
 Insurance and Interest, spot cotton shipments, 203 
 Interest, 
 
 bond, 105 
 
 buyers' or sellers' option contracts, 31 
 
 cotton brokerage, 154 
 
 rate allowed on margins, 155 
 source of, 
 
 clearing house items, 38 
 
 ex-clearing house items, 39 
 stock borrowed, 97, 99, 100 
 
328 
 
 INDEX 
 
 INDEX 
 
 329 
 
 /"ill 
 
 ii 
 
 i 
 
 Journal, 
 
 contract analysis, cotton brokerage, 133, 141, 143 145 
 form, 295 ' 
 
 general, cotton brokerage, 133, 138 
 form, 288 
 
 Lard, Chicago Board of Trade, 221 
 Ledger, 
 
 classification of, stock brokerage, 40 
 clearing house, produce brokerage, 207 
 customers, 
 
 cotton brokerage, 132, 138 
 
 form, 287 
 stock brokerage, 27, 40 
 forms, 280 
 
 general ledger does not control, 43 
 general, 
 
 cotton brokerage, 133, 138 
 
 stock brokerage, 27, 48 
 margin (Street), cotton brokerage, 139 
 
 form, 291 
 posting from blotter, method, 35 
 private, stock brokerage, 27, 44 
 securities, stock brokerage, 27, 45 
 form, 260 
 
 auditing of, 47 
 
 form and ruling, 46 
 
 method of operating, 47 
 Street, cotton brokerage, 133, 149, 198 
 
 forms, 291, 309 
 
 Street, produce brokerage, 206 
 Liabilities, 
 
 cotton brokerage, 194 
 
 stock brokerage, 20 
 Listings, Stock Clearing House, 6S 
 Loans, 
 
 call, 55, 91 
 
 clearance, 103 
 
 customer's equity, 126 
 
 collateral bank, 101 
 
 collateral, equity in, 103 
 
 Loans— (CoM/inu^rf) 
 
 collateral time, 102 
 stock (See also "Stock Borrowed") 
 comparison with collateral loans, 46 
 Loss (See also "Profit and Loss") 
 ■ customer to indemnify broker, 21 
 
 M 
 
 Margin, 
 
 coffee brokerage, 226 
 cotton brokerage, 
 book (Street), 133, 151 
 
 forms, 296, 297 
 call, 153 
 
 form, 298 
 certificate, 154 
 
 forms, 299 
 interest, 154 
 ledger (Street), 133, 151 
 
 forms, 296, 297 
 market, time of deposit, 156 
 original margin, 155 
 record, 132, 134 
 
 form, 285 
 response, 153, 155 
 
 form, 298 
 same as stock brokerage, 134 
 cottonseed-oil brokerage, 
 
 original margin required, 225 
 produce brokerage, 217 
 calls, 219 
 market, 218 
 original, 217 
 release of, 219 
 stock brokerage, 
 call for, by broker, 23 
 cash, 60 
 
 commission charged, 61 
 customer must provide, 21 
 defined, 58 
 equities, table of, 121 
 
 forms, 282 
 interest on deposit allowed, 111 
 
I 
 
 I 
 
 330 
 
 INDEX 
 
 Margin— (Co«/i«M^flf) 
 
 stock brokerage— (Con^mw^rf) 
 record, 58, 89 
 
 forms, 265, 266 
 statement, 121 
 
 form, 282 
 trading on, 20, 58 
 "Mark-down," 
 defined, 53 
 issuance of, 104 
 "Mark-up," 
 defined, 53 
 issuance of, 104 
 Market, 
 
 Chicago Board of Trade, 
 barley, 204, 221 
 oats, 204, 221 
 provisions, 221 
 rye, 204, 221 
 
 New York Produce Exchange, 
 corn, 204 
 wheat, 204 
 "Market down" (See "Mark-down") 
 Market margin (See "Margin") 
 
 Money borrowed and loaned book, stock brokerage 27 55 
 forms, 263, 264 * , , 
 
 relation to other books, 56 
 
 N 
 
 Name, change of. cotton brokerage. 186 
 National Bankruptcy Act, 
 
 securities recovered by action based on, 126 
 "Net interest," broker's, cotton brokerage, 182 
 New York Produce Exchange Clearing Association, 206 
 
 rules of, 209 
 
 New York Stock Exchange (See "Stock Exchange") 
 Notice, 
 
 delivery, cotton brokerage, 178 
 
 form, 306 
 stop, cotton brokerage, 179 
 
 form, 307 
 tender of, cotton brokerage, 158, 163 
 to customer, marginal call, 23 
 
 INDEX 
 
 Oats, Chicago Board of Trade, 221 
 Offers (See "Bids and Offers") 
 "One contract" (cotton brokerage), defined, 131 
 Open trades, cotton brokerage, 
 statements of, 147 
 
 form, 292 
 Street, 174 
 form, 305 
 Options, 
 
 cotton brokerage, 
 expiration, 130, 181 
 "tender day," 129 
 produce brokerage, active months, 205 
 Original margin (See "Margin") 
 Overdrafts on bank, purchased securities paid for by, 51 
 
 Partnership, 
 
 cotton brokerage, 
 dissolution, 195 
 stock brokerage, 
 dissolution, 123 
 formation, 84 
 Point, 
 
 cotton brokerage, 132 
 cottonseed-oil brokerage, 225 
 Point balance, 
 
 cotton brokerage, 
 
 confirmation slips, 175 
 
 contract differences account reconciled by, 170 
 cottonseed-oil brokerage, 
 
 proof of contract difference — oil account, 225 
 Pork, 
 
 Chicago Board of Trade, 221 
 contract defined, 222 
 Premiums, 
 
 stock borrowed, 97, 100 
 Price, 
 
 clearing house delivery, 72 
 cotton brokerage, 
 change of, 186 
 
 purchase and notice price differences, 179 
 sale and purchase price differences, adjustment, 181 
 
 331 
 
332 
 
 INDEX 
 
 Private ledger (See "Ledger") 
 Produce brokerage. 
 
 Clearing House system, 
 
 N^ Y. Produce Exchange Clearing House Association, 209 
 conditions and customs, 204 
 double contract, 222 
 markets, 
 futures, 204 
 spot, 204 
 split price, 205 
 Production record, solicitors', 
 cotton brokerage, 184 
 
 form, 308 
 stock brokerage, 64 
 form, 281 
 Profit, stock brokerage, 24 
 Profit and loss, 
 
 cotton brokerage, 192 
 stock brokerage, 119 
 Proprietor's capital account, 120 
 Provisions, Chicago Board of Trade, 221, 222 
 Purchases, 
 
 direct, cotton brokerage, 176 
 financing of, 96 
 
 Purchases and sales, stock brokerage, 92 
 Purchases and sales book, 
 abbreviations used, 31 
 cotton brokerage, 132, 134, 148 
 
 form, 284 
 stock brokerage, 27, 29, 30 
 forms, 256, 257 
 bound book preferred, 29 
 clearing house, 29 
 
 form, 256 
 cx-clearing house, 29 
 form, 257 
 "Put through," defined, 37 
 
 Receive and deUvcr tickets, clearing house records 74 
 Register, 
 
 account sales, cotton brokerage, 133, 141 143 145 
 form, 295 
 
 INDEX 
 
 Register — (Continued) 
 
 revenue tax, stock brokerage, 28 
 form, 269 
 New York State, 63 
 
 spot, cotton brokerage, 203 
 form, 311 
 
 stock transfer, 28, 62, 88 
 form, 267 
 Release, margin, produce brokerage, 219 
 Reserve accounts, 
 
 cotton brokerage, 194 
 
 stock brokerage, 116 
 Response, margin (See "Margin Response") 
 "Returned" stocks, 39, 51 
 Revenue stamps, stealing, check on, 64 
 Revenue tax register (See "Register") 
 Ribs, 
 
 Chicago Board of Trade, "contract" defined, 222 
 "Ringing," 
 
 cotton brokerage, settlement method, 158 
 
 Produce Exchange seldom uses, 205 
 Rye, Chicago Board of Trade, 221 
 
 S 
 
 Sales (See also "Purchases and Sales"), 
 bonds (See "Bonds") 
 direct, cotton brokerage, 176 
 stock brokerage, 
 cash items, 95 
 short, 52, 95 
 Sales book, stock brokerage, 27 
 Saturday, not day of delivery, 30 
 Securities, 
 
 deposited, customer's equity in, 126 
 ledger, 27 
 form, 260 
 Sellers' option (See "Bids and Offers") 
 Settlements between brokers, cotton brokerage, 
 book, settlement, 133, 165 
 
 form, 303, 304 
 clearing house bill used, 164 
 form, 302 
 
 333 
 
^■ii|i 
 
 334 
 
 INDEX 
 
 INDEX 
 
 II 
 
 Settlements between brokers, cotton hroktragt— (Continued) 
 clearing house sheet used, 164 
 
 form, 302 
 direct settlement method, 158 
 ringing method, 158 
 Street let-out, 158 
 tender of notice, 158 
 
 Sheet, clearing house (See "Clearing House Sheet") 
 
 "Short." defined, 41 
 
 Short accounts, interest not allowed customers, 112 
 
 "Short covering," defined, 41 
 
 Short sales, 52, 95 
 
 Shrinkage allowance, cotton, 199, 200 
 
 "Sign-up slips," cotton brokerage, 148 
 
 "Sold" slip, produce brokerage, 210 
 
 form, 33 
 Solicitors' production record, 
 cotton brokerage, 184 
 
 form, 308 
 stock brokerage, 64 
 form, 281 
 
 Speculation, cotton brokerage, 176, 177 
 "Split" price, produce brokerage, 205 
 Spot bill, cotton brokerage, 197 
 
 form, 310 
 Spot cotton, technicalities of, 196 
 Spot merchant, cotton brokerage, 176 
 Spot register, cotton brokerage, 203 
 
 form, 311 
 Statement, 
 
 cotton brokerage, 
 account sales, 147 
 
 form, 293 
 brokers', 165 
 
 forms, 303, 304 
 customer's, 146 
 
 form, 292 
 financial, 190 
 open trades, 147 
 form, 292 
 stock brokerage, 
 customer's, 110 
 forms, 277-279 
 
 335 
 
 Statement — ( Continued) 
 
 stock brokerage — (Continued) 
 income, 117 
 margins, 41, 121 
 form, 282 
 
 Stock, 
 
 borrowed, 51, 93 
 
 call and return of, 99 
 
 interest on, 94 
 
 returns, 94 
 
 "short" sales, 51 
 borrowed and loaned book, 27, 54 
 
 forms, 261, 262 
 borrowing and lending, advantages, 52 
 Clearing House, 68 
 dividends on, 106 
 
 due bill covering transfer of, 108 
 "ex-dividend," 106 
 "half-stock," 90 
 ledger, 27 
 
 form, 260 
 lending, 49 
 margin record, customers, 58 
 
 forms, 265, 266 
 odd lots of bonds and, record, 29 
 transfer, collection charge, 62 
 transfer register, 28, 62, 88 
 
 form, 267 
 
 Stock brokerage, 19 (For references to books and records, see 
 individual titles throughout index) 
 
 forms, 256-282 
 books of account required, 27 
 partnership, 
 
 dissolution, 123 
 
 formation, 84 
 terminology, 
 
 close-out, 22 
 
 cover, 41 
 
 hedged, 41 
 
 margin, 58 
 
 mark-down, 53 
 
 mark-up, 53 
 
 net longs, 41 
 
 net shorts, 41 
 
li 
 
 ii' 
 
 33^ 
 
 INDEX 
 
 Stock brokerage— (Con/mu^rf) 
 terminology — (Continued) 
 on call, 33 
 short, 41 
 
 short covering, 41 
 stop loss order, 22 
 stop-out, 61 
 throwing back, 48 
 transactions, methods of operation, 83 
 Stock brokerage auditing, 227 
 •asset accounts, 
 
 depreciation of securities owned, 239 
 dividends receivable, 241 
 furniture and fixtures, 240 
 land and buildings, 240 
 money loaned, 239 
 revenue stamp account, 236 
 securities of customers, 237 
 stock accounts receivable, 234, 235 
 stocks borrowed, 241 
 equities, table of, 247 
 expense items, 247 
 failures and examination of books, 229 
 
 Gov Hughes' Committee on Speculation in Securities and 
 Commodities (1909), 227 ^^urmes ana 
 
 income accounts, 
 commissions, 245 
 
 interest charges and credits, customers' accounts, 246 
 mterest on stock loans and premiums, 247 
 liability accounts, 
 accounts payable, 243 
 bank loans and brokers* loans, 245 
 dividends payable, 244 
 stocks loaned, 245 
 purposes of audit, 227, 228 
 scope of audit, 229 
 Stock Clearing House, function of, 67 
 Stock Exchange, 
 broker's seat, 23 
 
 disposal of bankrupt's membership, 127 
 membership, 23 
 
 New York, constitution relating to bids and offers 30 
 representation on, 23 ' 
 
 rules cover broker and customer, 22 
 
 INDEX 
 
 337 
 
 "Stop,** defined (cotton brokerage), 135 
 "Stop loss orders," cancellation of, 23 
 
 issuance of, 22 
 Stop notice, cotton brokerage, 179 
 
 form, 307 
 "Stop-out," defined (stock brokerage), 61 
 Storage and labor costs, cotton, 202 
 Straddles, cotton brokerage, 176, 178 
 Street ledger, produce brokerage, 206 
 
 "Street let-out" method pf settlement, cotton brokerage, 158, 161 
 Street records, cotton brokerage, 133, 148 
 blotter, 133, 148 
 
 forms, 294, 300 
 ledger, 133, 149, 198 
 
 forms, 291, 309 
 margin ledger, 133, 151 
 
 forms, 291, 296, 297 
 open trades, 174 
 
 form, 305 
 settlement book, 133, 165 
 forms, 303, 304 
 
 Table of equities, stock brokerage, 41, 121 
 
 form, 282 
 "Taking up," cotton brokerage, 196 
 Tax register, revenue, stock brokerage, 28, 63 
 
 form, 269 
 Tender day, 
 
 coffee brokerage, 
 
 contracts carried until, 226 
 cotton brokerage, 
 
 defined, 129 
 "Tender of notice" settlement, cotton brokerage, 158, 163 
 Terminology (See "Cotton," "Produce," "Stock Brokerage") 
 "Throwing back," defined, 48 
 Transfer, form of, cotton brokerage, 
 
 form, 306 
 Transfer register, stock, 
 
 form, 267 
 
 U 
 
 United States, Department of Agriculture, grading rules, 180 
 
33^ 
 
 INDEX 
 
 Vault Kst, stock brokerage, 27, 63, 89 
 form, 268 
 
 w 
 
 Warehouse certificates, cotton brokerage, 
 
 issuance of, 197 
 Wheat, 
 
 Chicago Board of Trade, 221 
 
 "contract" defined, 205 
 
 price, basis of quotations, 205 
 
 

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