Price limits are often used in futures markets to put the brakes on trading when markets become too volatile and to prevent market manipulation. When prices hit the upper or lower price limit, trading is temporarily suspended, which helps to stop panic selling and buying.
Definition
Price limits are the maximum daily change allowed (either up or down) from the prior day's closing or settlement price. For example, if corn settled at $3.25 a bushel and its trading limit is 25 cents, the next day it could rise as high as $3.50 or fall as low as $3. When a market hits a price limit, it often becomes a "locked limit" at that floor or ceiling until the next trading day.
Regulation
Price limits are set by the exchange on which the commodity is traded but must be approved by the Commodity Futures Trading Commission (CFTC), a federal regulatory agency. The CME Group owns the Chicago Board of Trade (CBOT), and the CME sets price limits for the agricultural commodities and financial contracts traded at the CBOT.
History
The CBOT adopted daily on commodities in 1925 after investigating wild price swings in the wheat market. Wheat prices nearly doubled between July 1924 and January 1925, when they rose to above $2 per bushel. A few months later, they collapsed to $1.36. A Congressional investigation found traders had manipulated the market for profit.
Warning
When an agricultural commodity is trading in its delivery period (usually shortly before the contract expires), the contract trades without any .
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