Categories
Reader Questions Answered

Limitations on market price movements

For those not already aware, there are a number of different things which put limitations on how far prices can move within a given time period. A question related to that hit my inbox the other day.

Hi John,

I have a question:
Why do asset prices have a normal daily-range-limitation – unless there are special material price-moving events/news?

For SGD/USD, I understand that it is because of the managed-float orchestrated by Monetary Authority of Singapore (MAS).

For stocks in USA, from Bloomberg news on 2012-06-02, I read that “SEC Approves Exchange Proposal to Adjust U.S. Trading Curbs”.

But how about
1) Other currency pairs such as EUR/USD?

2) Gold prices?

3) Oil prices?

Anything to do with human psychology?

Best regards!

Paul

The simplest way of answering Paul’s starting question is to avoid excessive volatility and disorderly markets. Exchanges and regulators have put daily maximum moves in place to avoid the situation of runaway markets (and more recently, Flash Crash type of situations). Daily limits have long been the case in the US futures markets, and following the Crash of 1987 there were new curbs and other “circuit breakers” introduced in the stock market as well – and modified since. These restrictions are things you’ll want to be aware of for the market(s) you trade.

As to Paul’s market-specific question, generally speaking there are no limits on the freely traded spot forex or commodity markets, though can be where they are traded via futures. That said, there are regulatory things which can create artificial barriers and whatnot. A good example is the floor in EUR/CHF that has been enforced by the Swiss National Bank. Of a less rigid nature, the Brazilians have bought a lot of USD over the last couple years to keep USD/BRL from falling to rapidly (meaning the Brazilian real getting too strong) and central bankers are often seen “jawboning” the markets to keep them from going too aggressively in a direction they don’t want. As you can imagine, one must be well aware of this sort of thing.

Leave a Reply

Your email address will not be published. Required fields are marked *