Chicago Board of Trade v. United States
Encyclopedia
Chicago Board of Trade v. United States, 246 U.S. 231 (1918), was a case in which the Supreme Court of the United States
applied the rule of reason
to the internal trading rules of a commodity market.
(CBOT) is a commodity market, dealing in spot sales
(sales of grain stored in Chicago and ready for delivery), future sales
(grain to be purchased for delivery at a later time), and “to arrive
” orders (grain which is en route to Chicago). CBOT introduced a new “call rule” which regulated board members buying or selling sales of “to arrive” orders—at the close of the call session (which at that point was 2:00 p.m Central Time
), the price of grain is set and dealers can’t sell grain at any other price. The United States Department of Justice
accused CBOT of price-fixing, and in 1913, filed suit against the Board in the United States District Court for the Northern District of Illinois
.
At trial, CBOT asserted that the rule did not have any unlawful purpose, but rather was set up to curb certain pre-existing problems and abuses. CBOT claimed that a group of agents were lowering discounts on commissions to those people buying grain after hours. These agents would wait until after hours, and then buyers would get cheaper prices. CBOT wanted to curb the power of these monopsony
/oligopsony
type of buyers by making prices same for everyone after hours. Also, the rule shortened the traders’ work hours, for the convenience of its members.
Ultimately, however, the District Court did not issue an opinion. The Justice Department and CBOT entered into a consent decree
under which enjoined them from acting upon the same or from adopting or acting upon any similar rule.
, writing for a unanimous court, first observed that every trade association and board of trade imposes some restraint upon the conduct of its members. He explained the essence of the Rule of Reason: "The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition." Whether or not a rule restrains trade in violation of the Sherman Act thus turns on the facts and circumstances of each particular case.
He then examined the nature, scope, effect, and history of the rule. He held that the call rule was ultimately procompetitive in purpose and effect. The scope of the rule was such that it only operated during certain times of day, and affects only small percentage of the grain market. The rule helped to create public market for grain, and made pricing more transparent. It decreased the market power
of dominant sellers, and made sure that prices were set by open competitive bidding. The decree of the District Court was reversed.
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
applied the rule of reason
Rule of reason
The Rule of Reason is a doctrine developed by the United States Supreme Court in its interpretation of the Sherman Antitrust Act. The rule, stated and applied in the case of Standard Oil Co. of New Jersey v. United States, 221 U.S...
to the internal trading rules of a commodity market.
Facts and procedural history
Defendant Chicago Board of TradeChicago Board of Trade
The Chicago Board of Trade , established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million...
(CBOT) is a commodity market, dealing in spot sales
Spot price
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate settlement . Spot settlement is normally one or two business days from trade date...
(sales of grain stored in Chicago and ready for delivery), future sales
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
(grain to be purchased for delivery at a later time), and “to arrive
Forward contract
In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a...
” orders (grain which is en route to Chicago). CBOT introduced a new “call rule” which regulated board members buying or selling sales of “to arrive” orders—at the close of the call session (which at that point was 2:00 p.m Central Time
Central Time zone
In North America, the Central Time Zone refers to national time zones which observe standard time by subtracting six hours from UTC , and daylight saving, or summer time by subtracting five hours...
), the price of grain is set and dealers can’t sell grain at any other price. The United States Department of Justice
United States Department of Justice
The United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
accused CBOT of price-fixing, and in 1913, filed suit against the Board in the United States District Court for the Northern District of Illinois
United States District Court for the Northern District of Illinois
The United States District Court for the Northern District of Illinois is the trial-level court with jurisdiction over the northern counties of Illinois....
.
At trial, CBOT asserted that the rule did not have any unlawful purpose, but rather was set up to curb certain pre-existing problems and abuses. CBOT claimed that a group of agents were lowering discounts on commissions to those people buying grain after hours. These agents would wait until after hours, and then buyers would get cheaper prices. CBOT wanted to curb the power of these monopsony
Monopsony
In economics, a monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers...
/oligopsony
Oligopsony
An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of buyers...
type of buyers by making prices same for everyone after hours. Also, the rule shortened the traders’ work hours, for the convenience of its members.
Ultimately, however, the District Court did not issue an opinion. The Justice Department and CBOT entered into a consent decree
Consent decree
A consent decree is a final, binding judicial decree or judgment memorializing a voluntary agreement between parties to a suit in return for withdrawal of a criminal charge or an end to a civil litigation...
under which enjoined them from acting upon the same or from adopting or acting upon any similar rule.
Decision
Justice BrandeisLouis Brandeis
Louis Dembitz Brandeis ; November 13, 1856 – October 5, 1941) was an Associate Justice on the Supreme Court of the United States from 1916 to 1939.He was born in Louisville, Kentucky, to Jewish immigrant parents who raised him in a secular mode...
, writing for a unanimous court, first observed that every trade association and board of trade imposes some restraint upon the conduct of its members. He explained the essence of the Rule of Reason: "The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition." Whether or not a rule restrains trade in violation of the Sherman Act thus turns on the facts and circumstances of each particular case.
He then examined the nature, scope, effect, and history of the rule. He held that the call rule was ultimately procompetitive in purpose and effect. The scope of the rule was such that it only operated during certain times of day, and affects only small percentage of the grain market. The rule helped to create public market for grain, and made pricing more transparent. It decreased the market power
Market power
In economics, market power is the ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors...
of dominant sellers, and made sure that prices were set by open competitive bidding. The decree of the District Court was reversed.