| Sales. | Speculation and Export. | Imports including Hull, &c. | ||||
| To-day. | Previous this Week. | To-day. | Previous this Week. | To-day. | Week’s Total. | |
| American | 6330 | 18,050 | 500 | 1500 | 17,665 | 53,684 |
| Pernam, &c. | 150 | 200 | · · | · · | · · | · · |
| Paraiba, &c. | 460 | 130 | · · | · · | · · | 2 |
| Ceara and Arac’ty | · · | 30 | · · | · · | · · | · · |
| Egyptian | 500 | 1200 | · · | · · | 321 | 7,983 |
| Peruvian | 460 | 350 | · · | · · | 32 | 32 |
| W. I. and African | 50 | 20 | · · | · · | · · | · · |
| Surat | · · | · · | · · | · · | 3,664 | 3,829 |
| Madras | 50 | 20 | · · | · · | · · | · · |
| Bengal | · · | · · | · · | · · | 608 | 608 |
| Sundries | · · | · · | · · | · · | · · | · · |
| Total | 8000 | 20,000 | 500 | 1500 | 2,290 | 66,138 |
| 8,000 | 500 | |||||
| Since Wednesday | 28,000 | 2000 | ||||
Purchases for “speculation” remain in the market and therefore figure again in the sales. These official prices are sometimes prices actually paid, and sometimes prices settled by a committee according to their notions of the prices that would “Points on or off.” have been realized at the close of the market had business been done. The work of the committee is by no means simple, as frequently very few transactions take place in the kinds of cotton of which quotations are given. As regards “middling” American, the committee fixes “spot” by allowing so many “points on or off” present month futures. The variations of the gaps between “spot” and “present month futures” are somewhat mysterious, a matter to which we shall recur. “Spot” quotations, the reader will now understand, are partly nominal, and must therefore be taken as affording a general idea only of movements in the prices of cotton. While quoted “spot” remained low, the prices paid by most spinners for the special kinds of cotton that they needed might rise. When the spinner has informed the dealer exactly what quality of cotton he needs, the dealer quotes so many “points on or off” the “future” quotations prevailing in Liverpool at the time of the purchase, which refer to Upland cotton of “middling grade,” of “no staple” and of the worst growth. Then, according as the spinner wants immediate delivery or delivery in some future month, he pays the price of current “futures,” or of “futures” of the month in which he requires delivery, plus or minus the “points on or off” previously fixed.
The considerations which determine the “points on or off” charged to the spinner may be taken roughly as three:—
1. The grade, i.e. the colour, cleanliness, &c., of the cotton. These are of importance to the spinner owing to the necessity of his cleaning machinery being adapted to the condition of the cotton. The lower the grade the more elaborate and expensive is the machinery required to clean it, and consequently a spinner is willing to pay a certain amount extra for high grade cotton in order to save expenditure on preparatory machinery.
2. The length of the staple. This determines to a large extent the fineness of the yarn which can be spun. Only the very lowest counts can be spun from cotton with “no staple,” that is, with a fibre of about three-quarters of an inch. The longer the staple above the minimum the higher the counts that can be spun.
3. The growth. The best American cotton (Sea Island and Florida cotton are always considered quite apart) is grown in the Mississippi valley, the next best in Texas, and the poorest on the Uplands (i.e. in Georgia and Alabama). Considerations of growth determine to a great extent the hardness or softness, and strength or weakness, of the fibre, and thus, indirectly, whether the cotton is suitable for warp or weft.
Some spinners cover their yarn contracts merely by buying “futures,” but the cover thus provided is frequently most inadequate owing to variations in the “points on or off” for the particular cotton that they want. For example, after the size of 1904-1905 crops became known, and the Americans attempted to hold back cotton, the “points on” for many qualities rose considerably owing to artificial scarcity, though the price of cotton, as indicated by “spot,” remained low. There is a tendency for cautious spinners in England to run no risks and fix the prices of their yarn in accordance with quotations for actual cotton of specified qualities made by their brokers.
We now return to exchange “future” transactions regarded as a genus. In addition to “futures” proper there are “options” and “straddles.” Options are single (“puts” or “calls”) or double (that “Options” and “straddles.” is, alternative “puts” or “calls”). The “put” is a right to sell cotton within some specified time in the future at a price fixed in the present, which need not, of course, be exercised. The “call” is similar, but relates to buying. It will be evident that the “put” is a hedge against prices falling, and the “call” a hedge against their rising. The basis of “options” is the same as that of ordinary “futures,” i.e. middling American cotton of “no staple,” &c. Whether the purchaser of an option gains or loses depends upon the price that he has paid in relation to the gain, if any, that he makes out of his power. The price of options of course varies: that of double options is always highest, but they are little used. A “straddle” is a speculation on the difference between the prices of nearer and more distant futures, which varies from time to time, or on the difference between the prices of different kinds of cotton. An example will make the nature of the straddle clear. Suppose a dealer buys April-May “futures” at 4d. a ℔ and sells the same quantity of May-June “futures” at 410⁄64d. a ℔. Then, whether prices rise or fall as a whole, he gains if the difference between the two prices becomes less than 10⁄64d., but if it becomes more, he loses. On the other hand, had the dealer bought May-June at 410⁄64d. and sold April-May at 4d. he would have gained in the event of the difference increasing, and lost in the event of its decreasing.
A question which has met with a good deal of attention is whether the speculation, which has been encouraged by the various arrangements made for facilitating operations in “futures,” has steadied or unsteadied prices. Measures of steadiness in prices. Before we are prepared to answer this question we must be furnished with a precise conception of what is meant by “steadiness” in prices. It is sometimes assumed that this is measured perfectly by the standard deviation,[6] which is obtained by taking the squares of the differences between the average and the individual prices, summing them and extracting the square root. But obviously the information given by the standard deviation is limited: the frequency of movement cannot be inferred from it; two series might have quite different average oscillations and yet the same standard deviation; and the range of movement, or spread of the variations from the average price (though allowed for in the standard deviation more than in the average error), is hidden. Now frequency of movement, average daily price variation, and range of price movements are matters of fundamental importance to the public. Hence for practical purposes we require several kinds of measurement of price movements, and it is impossible to weigh exactly the one against the other in respect of importance. Observe that an increase of the frequency of movement, or even of the average daily movement, is not necessarily objectionable, since changes are less harassing when they take place by small increments than when they are brought about by a few big variations. The difference between the highest and lowest price, we may observe, is a very imperfect indication of the range of movement (though, taken in conjunction with the standard deviation, it is the best at our disposal), because either of the extreme prices might be accidental and quite out of relation to all others. An investigator must be on his guard against using quotations of this kind. There is also a difficulty about the frequency of movement, because as a rule many movements take place in one day the total over a period sufficiently lengthy to yield general results is enormous, and many are unrecorded. In one day, for instance, when the net drop was 33 points and the range of variation 59 points (namely, 8.45 to 7.86), 150 price fluctuations were recorded. However, the count of frequency of movement from daily closing prices would probably afford a roughly satisfactory comparative measurement in markets in which prices sometimes remain the same for a day or two together. The points just noted apply also to the average fluctuation and the standard deviation, but it is probable in these cases that daily or even weekly quotations would be sufficient to yield the information sought for with sufficient exactness for purposes of comparison.
Now, supposing dealing to be confined to experts, what effects upon the course of prices would one expect from the specialism of the cotton market and improved facilities for dealing, on the assumption that dealers were Effect of speculation on steadiness of prices. governed wholly in their actions by the course of prices and never tried to manipulate them? The frequency of movement ought to increase because the market would become more sensitive, but, other things being equal, the range of movement ought to diminish, and ultimately the average daily movement also, though at first the latter might not fall appreciably if, indeed, it did not rise, owing to the increased frequency of movement. These results would prove beneficial to the community. May we infer deductively that they have been attained because of the increase of speculative transactions? By no means, and for two reasons. In the first place, the public speculates to a large extent on the cotton exchange, and its speculation (taken as a whole) is sheer gambling. But, it may be replied, the outsiders, being as a whole completely ignorant of the forces at work, so that they cannot form rational anticipations, cannot have any effect either way: by the law of chance their influences would neutralize one another. This would be so if people acted independently and without guidance, but actually they are sometimes misled by published advice and movements in the market intended to deceive them, and, even when they are not, they watch each other’s attitudes and tend to act as a crowd. The mass becomes unduly sanguine or weakly surrenders to panic. Hence the law of error does not apply, and speculation by the public may unsteady prices. Again, dealers sometimes try to create corners and form powerful syndicates for that purpose: the dealing syndicate of late years has become a force to be reckoned with. Many large-scale operations are entered into, not because prices are relatively high or low, but to make them high or low for ulterior purposes; i.e. the market is deliberately “bulled or beared.” In consequence of this tampering with the market no certainty can be felt about the effect even of expert dealing.