Lock Limit

What Is a Lock Limit?

A lock limit is a predefined price movement determined by a exchange that, in the event that penetrated brings about a trading halt of that instrument past the lock limit price. "Lock limits" commonly allude to the futures markets, with the connected terms "curbs" or "circuit breakers" utilized in the stock markets.

Lock limits assist with managing markets and keep them more quiet and orderly. Traders might in any case have the option to execute at the lock limit price, or inside of it, however trading is halted outside of the lock limit price. Lock limits halts might be brief, like five minutes, or they might be in place for the afternoon. Every futures contract has lock limit specifications appended to it.

Lock limits are moderately uncommon in practice and might be regulated and founded diversely among various exchanges.

Understanding a Lock Limit

Lock limits are utilized across exchanges to control the volatility of trading instruments. They are utilized in futures markets, as well as stocks, albeit in the stock market the term circuit breaker is more normal. The concept is something similar.

Lock limits are in place consistently and are applied to both upside and downside moves. For instance, in the event that the limit on corn is $0.25, a $0.25 go up or down from the prior close will trigger a lock. Assuming that the price has dropped, trading won't happen below the lock limit. This is called limit down. Assuming the price arrives at the upper limit, the futures contract is limit up. At the point when this happens, trading can't happen over this level during the lock.

Contingent upon the futures contract, trading might be halted completely during a lock limit, or just inside the lock limit price. For instance, in the event that the price is limit down, a big buyer could step in and buy from the sellers at the lock limit price, and afterward bid the price up to push the price away from the lock limit. Trading would then happen as expected as long as the price stays over the lock limit. In different cases, the futures contract might be suspended for the day once the limit is reached.

The next day, another lock limit price would be initiated, and trading can resume up/down to the next lock limit price.

How Lock Limits Work

Commonly associated with the futures market, a lock limit happens when the contract price of a commodity instrument moves past its allowable limit. At the point when this happens, trading stops for the day past that price. Limits can be limit up or limit down.

For instance, consider soybean dinner trading last closed at 300. The lock limit is 20, subject to change. That means that a solitary day move to 320 or 280 would trigger the lock limit. In the event that the market goes limit up, trading can't occur over 320. Assuming as far as possible down, trading can't occur below 280.

A few futures likewise have expanded or variable limits. This means that on the off chance that numerous contracts, for various months, go limit up/down, the next day the limit is expanded. On account of soybean dinner, the expanded limit is half, which builds the limit the next day to 30. Assuming the market was limit down at 280, the next day the limit down price will be 250 and the limit up price 310. The limit stays at the expanded rate on the off chance that the price goes limit up/down once more, yet contracts back to 20 in the event that the expanded lock limit isn't hit.

A few traders will utilize options or exchange traded funds (ETFs), if available, to trade around a lock limit situation.

Real World Example of a Lock Limit

Expect a lumber trader needs to understand what the limits depend on the current price, as a major news announcement is due out today. In light of the current price, the limit is 19, which is subject to change over the long haul, however at the hour of the trade is 19.

Accept that wood is trading is 319. That means the upside limit price is 338, and the downside limit price is 300.

Stumble likewise has an expanded limit of 29. This too is subject to change, however at the hour of the transaction, the expanded limit is 29, and that means that this limit will happen tomorrow provided that timber settles at the limit up or down price today.

Accept the trader is interested in light of the fact that they own timber futures at 310.

The news is terrible and the price promptly drops to 300. The market is currently limit down, and trading doesn't happen below this. This additionally means the trader can't escape their position. They can try to sell at 300, however they are probably not going to track down buyers. In the event that they do, the price might be starting to go up and away starting from the limit price.

Assuming contracts for various months settle limit down, the next day the new limit is 29. That means the new limit down is 271 (300 - 29). The price opens at 290 and our trader can escape their position with a loss.

Assuming the market proceeds to drop and settles at 271, the expanded limit stays in effect, and the next day the limit down is 242 (271 - 29). In the event that the price settles over 271 (and below 329) the expanded limit hasn't been triggered and the 19 limit is reinstituted above and below the closing price.

Other Financial Uses of the Term "Lock"

Different types of locks likewise show up in the financial world:

A loan lock is the point at which a predetermined interest rate is held for a customer by a lender for a specific lock period.
A mortgage rate lock float down holds a predefined interest rate for a loan with an option to diminish the rate in the event that broad market rates fall.
A Treasury lock is an agreement to lock in a predetermined rate. Normally executed as a derivatives contract for a predetermined period of time.
A lock-up agreement is a contractual provision forestalling insiders of a company from selling their shares for a predefined period of time. They are commonly utilized as part of the initial public offering (IPO) process. Lock-up periods regularly last 180 days, yet once in a while can be basically as brief as 90 days or up to one year.
Locking in profits alludes to the realization of beforehand unrealized gains accrued in a security by closing all or a portion of the property

Features

Lock limits can likewise be variable, meaning the limit amount changes the next day in the event that a market settles at the limit up/down price.
Lock limits can last five minutes or the entire day, contingent upon the specific contract being referred to.
This halt allows traders the day to process the news and ideally draw in new liquidity.
A term essentially utilized in futures markets, a lock limit is a price move, either up or down, that briefly halts trading in that contract.