There are some pretty significant differences between the futures markets and the equities markets. The first big difference is the trading hours: the futures markets trade 23 hours a day for most markets versus an 8:30 AM (central time) open and a 3:00 PM close in the equities markets. The second difference is the ease of short selling. In futures markets, there is no need to borrow the underlying shares like you would when you sell a stock short. The third difference, and the one I will write about in this article, is the daily trading limits that are in place for futures contracts. This is a difference many don’t understand until they learn the hard way. A stock on Google could go to 0 or to infinity in one day, and the exchange will do nothing to stop it (barring certain circumstances). The futures markets, on the other hand, have pre-set limits. They are important to know as we see them hit regularly.
Limit up and limit down is the highest amount of decline or advance the price of a futures contract can move in a single trading day before trading on that contract is halted. Once a contract reaches the daily limit, the exchange will halt trading until the market price moves back within the limits*. One of the reasons behind the limits is to provide some checks and balances to the market place, especially during panic moves or days when the selling or buying dries up. These trading halts allow some breathing room and also give the market a chance to digest news events or a crisis. The limits placed on each commodity differ, based mainly on the contract size and historical volatility. The exchanges are in charge of setting these limits and can change them at their discretion pending board approval.
Another aspect to daily limits is that they expand after a one day limit move. For example, corn has a daily limit of 30 cents. If the corn market would close “limit down”, or 30 cents lower, the next day the daily limits will be 45 cents. Seldom do we see daily limits expanded for more than two days, but it has happened recently.
Each exchange sets their own limits and they range from a certain percentage move to a constant limit move. Some contracts do not have limits while some have tighter limits than others. For example, corn and wheat in Chicago have been trading at par with each other as of late, but the daily limit on wheat is 60 cents and the corn limit is 30 cents. Keep in mind, however, that these limits are eliminated on the grains after the first notice day. We saw a 70 cent move in July corn one day a few days after its first notice day. Daily price limits exist to protect the investor, make sure you are aware of the daily price limit, or the lack thereof in the contract you trade. All daily price limits are subject to change on notice by the exchange.
Price Limits for Commonly Traded Futures Contracts
- Corn – $.30 cents
- Wheat (All)- $.60
- Soybeans- $.70
- Soymeal – $20
- Soy oil – $.025
- Hogs – $3.00
- Live Cattle – $3.00
- Crude Oil – $10.00*
- Natural Gas – $1.50*
- Gasoline – .$.25*
- Coffee – None
- Cocoa – None
- Orange Juice – $.10
- Sugar – None
- Currencies – None
- Gold – None
- Silver – None
- Copper – None
- Interest Rates – None
- Lumber – $10
- E-mini S&P 500**
*For NYMEX energy contracts the limits trigger a circuit breaker which will halt trading for a short period, after which limits will be expanded by the amount they are initially set.
**Price limits for the E-mini S&P 500 futures are set at 10% down only, 20% down only, and 30% down only during the hours that coincide with the regular trading day for securities, and 5% up or down for overnight trading. These limits are coordinated with price limit policies in the primary securities markets; for example, price limits on the New York Stock Exchange. The Exchange’s price limits are reassessed quarterly rather than established at fixed levels to be more responsive to ongoing market fluctuations.
