Lock Limit Down S&P Futures: How It Works

Markets

Mar 08

Tonight, I was scalping MES when we went lock limit down. I thought I would share how it worked: because it the first time I had seen it in real-time. At the lock limit down price, there were about 300 contracts bid. Most of those were took out and we got a little bounce.

It looks like during the overnight the lock limits are set to +- 5% but see below for the full details. At the lock limit down price below 2819, the exchange does not permit placing a stop loss order or selling at market. I was anticipating we would get a pretty good bounce and that some of the moving averages would flatten out which would probably trigger the bots too– which is what happened.

I figured we were close to the limit down price as my stops were being rejected. And, then the market returned to the limit down price and we pegged limit down. When that happens, the offer starts to build and without a stop– it means you could be stuck in your position if you cannot exit at limit offer.

The buyers eventually came in and were able to eat through the limit offer at 3819. Unfortunately, in this case I did exit out a few ticks above the limit offer because I was concerned that I would get stuck in the position and have to watch it. I was not really sure what would happen. Of course, the market bounced and specifically in the way that I anticipated that it would.

But, now you know why traders may offer out at the limit down price– because of the risk of getting stuck and not being able to place stop loss order. I assume if that were to happen we might open at the limit price and there would be potential for a fast move down at the open or a gap down. I was not really sure which was why I exited given the chance.

As for how to handle this situation, while it may be possible to look for edges around this event. The prudent thing to do would be to avoid getting trapped in this sort of condition because I anticipated it could be possible for the market to gap or trade immediately down at the open.

One way that it could stay lock limit is because some correlated markets like CL do not have limits, and if some correlation trading algorithms determined the price of the S&P 500 off of it or simply any reason to cause people to panic. This would be the risk. Other commodity futures may have a higher tendency to lock, gap, and run in one direction– but for us S&P 500 traders it is rare occurrence to see that.

One possible lesson from this for systematic traders is to calculate your lock up/down and for any systematic strategies that trade overnight to make your your stop is below/above the lock limit price so that your stop loss order is not rejected.

Below are the limit down rules for S&P 500 futures:

https://www.cmegroup.com/trading/equity-index/faq-sp-500-price-limits.html

Update:
We are locked down again and holding. Offer volume is increasing on the limit — now up to 420.

Update:

We gapped down and now 7% circuit breaker has triggered during RTH with a 15 minute halt. So, you can see the risk of getting stuck in something like this. The current locked price is now 2759.5.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at curtis@beyondbacktesting.com.

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