The Magic of Trading in Limit Markets

The “Flash Crash” illustrated that high-speed algorithmic trading programs have the ability to move one market and can trigger a cascade across numerous, even unrelated markets such as ag contracts. Daily price limits also protect customers against unquantifiable potential margin calls. The specter of an “unlimited” single-day price move could force brokerage firms to restrict trading activities or impose lower position limits on some clients to reduce margin-call exposure.

Opponents of price limits point to the inefficiency in forcing traders to use options or spreads to execute orders outside the designated price limits. When corn was locked limit down on June 30, much of the volume spilled into the option pits and nearly swamped that boat, so to speak, while more volume headed for July futures.

Both sides of this debate have merit but I have long supported daily price limits for agricultural commodities and continue to do so. I do not even support the higher price limit on corn currently proposed by the CBOT. Customers that know how to utilize the two-step strategies to “bypass” price limits can do so, but no one is obliged to do so. The market will find its value in time, and patience is a virtue. So is knowing how to hedge when others can’t!

Diana Klemme is a longtime contributor to Feed & Grain. Contact her at Grain Service Corporation, Atlanta, GA, by calling (800) 845-7103 or e-mail at diana@grainservice.com.