Series 3: 1.3.4.5. Circuit Breakers And Price Limits

1.3.4.5.  Circuit Breakers and Price Limits

We have seen that many futures contracts impose price limits that restrict the amount of price fluctuation from the previous day’s close during any single trading day. When a contract moves “limit up,” its price has reached the upper limit for that day, and the futures product cannot be sold at a higher price. Locked limit up means the contract not only has reached its upper limit, but there are unfilled buy orders at that price. Trading is effectively halted, either for the day or until the market price falls of its own weight below the limit-up price.

Some contracts allow the limit to be expanded or suspended during a trading day after the contract is at locked limit for a certain period of time. Such exceptions are most common in the month preceding the expiration date, when traders are actively offsetting their contracts and prices are at their most volatile. Price limits are meant strictly to prevent panicked buying and selling. Other contracts, particularly stock index futures, contain mandatory trading halts (called circuit breakers) in which trading must be stopped for designated periods.

Finally, a trading halt may be