A protection meant to limit volatility in the futures market has been triggered 9 times this year


The U.S. stock market has experienced dramatic shifts higher or lower on a daily basis in recent months, and so has the futures market. But those swings could have been even wilder were it not for measures in place to moderate the more extreme moves.

When the stock market is open, from the hours of 9:30 a.m. to 4 p.m. in New York, steep declines could trigger circuit breakers, which are brief pauses in trading. There are similar protections in place in the futures market, where traders buy or sell futures contracts for the major U.S. stock indexes that allow them to wager on the future value of those benchmarks. Unlike with circuit breakers, however, the limits in the futures market apply to moves both up and down.

In recent months, news has broken related to the coronavirus pandemic during times when the stock market is closed — and that's resulted in some big swings in the futures market. So far this year, the up-or-down limits of 5% for S&P 500 futures contracts have been triggered in nine overnight trading sessions. Before that, the last time one of these limits was used was on election day in 2016, according to information from CME Group.

One such example was the overnight session between March 23 and 24, when U.S. stock futures hit their 5% "limit up" levels as lawmakers neared a $2 trillion deal to rescue the economy. 

The S&P 500 ultimately rose more than 9% on that same news March 24, and the Dow Jones Industrial Average surged more than 11% for its best day since 1933.

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Here's what you need to know about these protections in the futures market.

Limits overnight versus during the day

The stock futures market is open during much longer hours than the regular stock market. When it comes to price limits for futures contracts, like those for the S&P 500, there are two different time periods to consider: The overnight hours when only the futures market is open, and the daytime hours when both the stock and futures markets are open.

Futures trading begins at 6 p.m. on Sundays in New York and the market remains open until 5 p.m. on Fridays, with a trading halt every day from 4:15 p.m. to 4:30 p.m. Here are the price limits for futures, depending on the time:

  • Overnight hours, when the stock market is not open: These contracts have 5% price limits up or down, but can remain open for trading at that level.
  • Regular hours, when the stock market is open: Price limits for futures contracts match the circuit breakers for both the New York Stock Exchange and Nasdaq. Those are triggered at 7%, 13%, and 20% declines when trading pauses for 15 minutes, continues as normal or ceases for the day, depending on the extent of the losses and time of day. (For more details, read our explainer on circuit breakers.)

A spokesperson for CME Group — the exchange that oversees U.S. stock index futures trading — tells Grow that it "has several measures in place to ensure that our markets continue to work in an efficient and orderly manner during volatile market conditions. Price fluctuation limits and circuit breakers ... help restrict the market from moving too far or too fast in a specific period of time."

Futures limits and the broader stock market

Because futures contracts are more speculative in nature and inherently have a shorter investing time frame, these assets don't typically make sense in the portfolio of long-term investors. However, big price jumps that occur in the U.S. stock market often are foreshadowed by futures trading, which might reflect moves in other markets around the globe overnight.

That's why experts pay attention to this market.

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Understanding the price limits for futures trading, like the circuit breakers, can be helpful for broadening your understanding of how the market works. And because traders have the opportunity to react to major news immediately in the futures market, when the up-or-down limits are triggered, there will likely be similar moves when the market opens.

Still, it's important to appreciate the short-term nature of futures contracts and these price limits. Don't let this type of information affect your long-term investment strategy but use the knowledge to embrace your role as an investor.

Thinking like an investor and learning more about your portfolio will help you to appreciate the market's long-term track record of success. And, in turn, that can help encourage you to continue adding money to your accounts whether the market is looking down or up.

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