by Don Dawson, Online Trading Academy
When trading Futures contracts a trader must be aware of daily price limits for the markets they are trading. There are different types of price limits in different Futures markets. Some Futures contracts have a daily price limit while some have a circuit breaker. That said, not all Futures contracts have daily price limits. Some are free to move as far above or below the previous day’s close as the market wants to go.
To find out if the market you are trading has any kind of daily price limit you can visit the Exchange’s website where the Futures contract trades. If there is any sort of daily price limit it is clearly stated in the contract specifications.
Daily price limits used to be much more abundant in a variety of Futures markets. Today only a handful actually have these daily price limits. The Exchanges feel that having these daily price limits in place will help protect some investors in case markets make a parabolic move up or down due to technical or fundamental reasons. These extreme moves are often driven by emotions and the Exchanges feel that if they place these daily price limits then traders will stop trading for the day on such extreme emotions. Then when they return to trade for the next session perhaps cooler heads will prevail and return some order to the market price.
In the Professional Futures class we are asked questions about daily price limits. I will answer some of those questions in this article. Always remember to check a Futures contract before you ever trade it to see if there are daily price limits.
- How long have daily price limits been used in the Equity Index Futures?
The large S&P contract traded in the pits have had these limits since about 1988. In 1998 when the mini S&P contract began trading the exchanges switched to a percentage-based system instead of a fixed dollar amount.
- Do the daily price limits ever change?
Yes, price limits are established on a quarterly basis and are triggered by market declines of 10%, 20% and 30%. New limits go into effect at the beginning of each calendar quarter.
- How does the Exchange determine these levels?
The percentages (10, 20 & 30) are figured on the previous quarters closing price of the Equity Index. For example, if the December S&P Futures (mini and full size are calculated the same) expires at 1475.00, then the 10% daily price limit for the next quarter for the March S&P market will be 147.50 points (1475.00 * .10) subtracted from the last session’s close. The 20% daily price limit would be 295 points (1475.00 * .20) subtracted from the last sessions close. The 30% daily price limit would be 442.5 points (1474.00 * .30) subtracted from the last sessions close. These values would remain the same until the end of the next quarter when the expiring contract price will use the same formula for the next quarters daily price limits.
The Dow Futures use the same percentages and quarterly evaluation, but instead of using the Dow Futures they use the spot Dow Jones Index. Then they round that number to the nearest 50 points.
- Are the Equity Index Futures daily limits tied to the New York Stock Exchange (NYSE) and their daily limits?
Yes, the NYSE uses the same 10,20, & 30% levels to halt trading of Stocks when the Futures halt. If the NYSE securities go to a daily price limit before the Index Futures do then the Futures will stop trading at that moment. Once the NYSE securities start trading again the Index Futures will commence simultaneously regardless of the 10% rule on the Index Futures.
- How does the 10% Rule work for Index Futures?
The 10 percent limit is initiated if the lead month futures contract is limit offered. Once this has occurred, the limit is in effect for 10 minutes. This means you cannot trade below the limit, but it does allow you to trade at or above it. Once the 10 minutes has expired one of two things can happen. If the lead month futures contract is not limit offered after 10 minutes, trading will continue with the 20 percent limit in effect. If the lead month futures contract is limit offered after 10 minutes, trading will halt for two minutes. Once the two minutes has expired, trading will resume with the 20 percent limit in effect. This rule is per the CMEGroup Exchange.
An example would be if we use the above mentioned 10% Equity Index value of 147.50 and subtracted that from the previous sessions S&P close of 1523.00 the 10% daily price limit would be in place once the S&P traded to 1375.50.
These are big numbers and I can only remember about 3 or 4 of them in my trading career. Each time we were down 10% the market would find a temporary bottom and rally. Seems the long term investors find value at these low prices. I cannot even imagine what it would be like to see 20% because at 10% investors think the world is coming to an end.
- How does the 20% Equity Index daily limit work?
The 20% works the same way the 10% daily limit does. Once it is touched the market will stop trading for 10 minutes. Once the 10 minutes are up the market is free to go down to 30% or rally. If the market did trade down 30% from the previous close then the market will not be allowed to go lower that day.
- Do the pit traded S&P and the electronic E-mini S&P have the same daily price limits?
Yes, they both will stop at the same 10, 12, or 30% move.
- Are daily price limits in effect for both up and down limits?
During the extended trading hours the Equity Indexes will have limits to both the upside and the downside. During the regular trading hours the limits only apply to the downside.
- What are the Extended Trading Hours daily price limits?
During the Extended Trading Hours the market can only go up or down 5% and is not permitted to exceed that amount until the Regular Trading Session starts.
- Do Options on Equity Indexes daily price limits trade in conjunction with the Futures contracts?
Yes, once the front month Futures contract goes to its daily price limit then the Options stop trading also. The only exception is on the last trading day of the Option and then there are no limits.
Recently the Stock Indexes traded on the CMEGroup Exchange changed their trading hours and there is speculation that the Exchange is going to change the daily price limits in February. I will keep you posted on that subject if it does happen. In the mean time just be aware of these limits. It is very rare that you will see these, but you should still understand what they are and how to use them.
Wishing all members of the Online Trading Academy family a very Happy and Prosperous New Year!!
“Quite often we change jobs, friends and spouses instead of ourselves.” – Akbarali Jetha