Price Limits
Price limits, the levels that securities values are allowed to rise or fall in a day, have direct effects on price changes and margins. Specifically, the daily price limit is the maximum price advance or decline from the previous day's settlement price, permitted during one trading session, as fixed by the rules of an option or future exchange. Once controversial, price limits have become part of the landscape. Theorists still debate whether such regulations have the desired effect of curbing mob psychology and allowing the markets to cool off, rather than move prices beyond fundamentally rational bounds.

Effects on Price Change
The limits are stated in terms of the previous day's closing price plus or minus a fixed quantity of dollars or cents per unit. Once a futures price has increased (decreased) by its daily limit, there can be no trading at any higher (lower) price until the next trading day. CBOT's daily limit for a corn, for example, was currently $0.20/bushel and the previous day's settlement price was $2.36 (236'0 by CBOT's conventions), trading will be suspended for the remainder of the day at any price greater than $2.56 or less than $2.16. The following day, it can again move by $0.20/bushel.

In some futures contracts, the limit may be expanded or removed during a trading session for a specified period of time. This could occur after the contract is at "locked limit," the price that has advanced or declined the permissible limit during one trading session, according to exchange rules.

These exceptions exist because prices can become increasingly volatile during the month preceding the expiration date. This is a natural result of professional hedgers and speculators unwinding their positions, and the market has no interest in straight-jacketing that basic dynamic. Price limits are intended solely to prevent panicked buying and selling.

Effect On Margin
"Circuit breakers," a system of coordinated trading halts and price limits designed to provide a cooling-off period during large, intraday market declines, were first introduced after the crash of 1987.


Daily price limits are one type of circuit breaker. Many believe they have a steadying effect on margins because they ensure that the end-of-day settlement price will be more or less within the maintenance margin. This means that margin calls are all the more rare in the futures market.



Offsetting Contracts, Settlements And Delivery

Related Articles
  1. Markets

    Why China Is Suspending Market Circuit Breakers

    Chinese regulators have announced that beginning on January 8th, circuit breakers used to halt its stock markets will be suspended in order to "smooth" trading operations.
  2. Trading

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
  3. Trading

    A Guide To Day Trading On Margin

    Buying on margin is a good option if you don't have the cash to day trade.
  4. Trading

    Grow Your Finances In The Grain Markets

    Hedging with futures can protect those who buy and sell commodities from adverse price movements.
  5. Markets

    How to Trade Futures Contracts

    Futures is short for Futures Contracts, which are contracts between a buyer and seller of an asset who agree to exchange goods and money at a future date, but at a price and quantity determined ...
  6. Investing

    What is Rule 48?

    Rule 48 is a tool used by market operators to expedite trading in the opening hour, during periods of extreme volatility.
  7. Trading

    Limiting Losses

    It is impossible to avoid them completely, but there is a systematic method you can use to control them.
  8. ETFs & Mutual Funds

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  9. Markets

    The Advantages Of SPAN Margin

    Find out how it provides futures and commodity option strategists with more bang for their margin buck!
  10. Markets

    Insights: China’s Market Turbulence

    Temporary suspension of circuit breakers may introduce some calm, but the ups and downs of the China equity markets are not about to go away.
Trading Center