Exchange Rules Every Trader Should Know Before a Catastrophe

11/05/2010 12:01 am EST


At times there may be special circumstances or unusual market conditions that require a specific exchange protocol. As a trader, it’s important to be familiar with these special rules. Rulebooks for the exchanges are available on their respective Web sites, and you can get more detail there, but we’ll cover some key rules to be aware of here.

No-Bust Range

While rare, sometimes there are problems with market functionality and prices need to be readjusted. When errors do occur, it can be difficult to react to because one doesn’t know if the price shown is a good price. A CME Group rule that covers the “no-bust range” for various products allows the Globex control center to adjust or cancel trades that occur outside the specified range.

According to the CME Group rulebook, “This rule authorizes the Globex control center to adjust trade prices or cancel (bust) trades when such action is necessary to mitigate market-disrupting events caused by the improper or erroneous use of the electronic trading system or by system defects.”

For example, if the E-mini S&P 500 futures trade wildly out of alignment with the price of the big S&P 500 futures, the no-bust range would be used to determine how many trades might be cancelled or adjusted to the correct price. It is important to know and understand the ranges, or at least know where to find information quickly, if required.

All Globex markets have listed no-bust ranges. Erroneous prices outside this range can be adjusted, but the exchange does have discretion in that regard. Below are a few examples of no-bust ranges in various markets:

Futures Contract

No-Bust Range


2.5 basis points

US Treasury Bond 


S&P 500

6 index points


10 cents a bushel



Major currencies

40 ticks

Stop with Limit Orders

Most traders are familiar with a standard stop order. A stop order is a buy or sell order that occurs at a price outside or beyond the current price. For example, a stop order to buy gold at $1,340 an ounce when the market is currently trading at $1,325 becomes a market order when the first trades occur at $1,340. You may be filled above that price, or far above if there is limited liquidity. Traders use stops to join the trend at a certain price, or to exit a position when they are losing.

The stop with limit order is similar except that it converts to a limit order instead of a market order when the stop is triggered. It effectively puts a limit on the amount of slippage that would be accepted to fill to order. If the order cannot be filled within the limit, the transaction does not occur.

Lind-Waldock requires that all stop orders on the ICE exchange have a limit.

Let’s say gold is currently trading at $1,340 and you put on a buy stop limit order at $1,350. If the next trade takes place at $1,351, your order would not be filled until the market came back and hit $1,350. Your trade could get skipped over; you still have a position even though the market traded past your desired level.

So you can see, a stop order doesn’t guarantee a specific price, and a limit order doesn’t guarantee a fill. Below is an illustration of how these orders work.

Click to Enlarge

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Globex Price Protection Limits

The CME Group has a similar concept as the stop with limit; it’s called a “stop with protection.” All stop orders are implemented with this approach. Unlike a conventional stop order, where customers are at risk of having their orders filled at extreme prices, stop with protection orders are filled within a predefined range of prices (the protected range).

A stop with protection order is triggered when the designated price is traded on the market. The order then enters the order book as a limit order with the limit price equal to the trigger price, plus or minus the predefined protected range. On the CME Globex platform, the protected range is typically the trigger price, plus or minus 50% of the no-bust range for that product.Many traders are not aware of price protection limits. When you place a stop order, if the market trades through the stop price and no trades occur near that stop trigger price, it becomes a limit order at the price protection limit. If the market opens beyond your stop, then your order becomes a limit order. It has not been executed, you now have a limit order waiting to be filled, and you could face some pricing risk.

Market with Protection

At CME Group, market orders are implemented with a “market with protection” approach. Unlike a conventional market order, where customers are at risk of having their order filled at extreme prices, market with protection orders are filled within a predefined range of prices (protected range). The protected range is typically the current best bid or offer, plus or minus 50% of the product’s no-bust range. If the entire order cannot be filled within the protected range, the unfilled quantity remains on the book as a limit order at the limit of the protected range.

If you place a market order, the fill can be no worse than half of the no-bust range. This is particularly important if you are transacting a particularly large order. If a market order pushes part of an order to the price protection limit, the remaining portion of that order will continue to work as a limit order. This can be dangerous for traders who assume their entire order was filled when a portion of the order failed to be filled within the price protection limit.

Daily Price Limits

We have seen daily price limits in action in the grains markets in the past few weeks. The daily limit is a maximum price increase or decrease allowed by the exchange for the market to move, based on the previous day’s settlement price. Typically, there is an accumulation of orders waiting to be filled.

The exchange has the right to increase the limits as it sees fit. Usually, if a market is locked at a limit, an adjustment occurs (often after the market closes) so it can move with a greater limit the next day and the pending orders can be filled. Price limits help get the market back to equilibrium, but they also act to protect brokerage firms. The firm now has time when no trading is taking place to collect margin from customers. Clients are put drastically at risk if the market moves too far, too fast. These limits give traders time to think about what a reasonable price is for the market given all the information in the marketplace.

Not all markets have limits, and some are wider than others. If you are short and the market locks limit up, you can find yourself in a position where you want to get out of your position, but can’t buy the contract back because there are no sellers at the limit price. You may have to wait until the next day, and the market can remain in a limit for a number of days. Back in the 1980’s, sugar was locked limit up for more than ten days in a row. Thankfully, those are rare and extreme cases.

Here are some current limits in a few markets:

S&P 500 futures: 5% limit after hours, 10% daytime down only

DJIA futures: 5% limit after hours, 10% daytime down only

CBOT wheat: $0.60

CBOT corn: $0.30

ICE cotton: $0.04

Wash Trades

According to exchange rules, no person shall place or accept buy and sell orders in the same product and expiration month, and, for a put or call option, the same strike price, where the person knows or reasonably should know that the purpose of the orders is to avoid taking a bona fide market position exposed to market risk. These are known as “wash trades.”

In essence, you can’t trade against yourself. You can’t buy in one account and sell in another account to create the illusion of market activity or liquidity without actually changing your position. This is a rule that some traders aren’t aware of, but it’s actually illegal to engage in wash trades where there is no beneficial change in ownership in the transaction. This rule is particularly important when a trader has multiple accounts at multiple firms.

Force Majeure

This French phrase means “superior force” and defines an act that occurs beyond either party’s control that prevents meeting the terms of a contract. It’s impossible to predict extreme acts of nature such as hurricanes and earthquakes, or extreme geopolitical events that might impact trading activity, such as terrorism or war. This doesn’t include a change in normal market forces or the economic climate.

If there is a war and your delivery point is disrupted, you obviously can’t deliver through that point. If the government changes the legal framework unexpectedly, it could have unpredictable implications for a contact. Damage from weather events can be impossible to predict.

One recent example occurred during Hurricane Katrina, when the Henry Hub natural gas delivery point was shut down. Natural gas could not be delivered through that hub. Therefore, the exchange changed the terms of the contract so those wishing to deliver natural gas could do so. The timing or location of delivery may be changed. This rule helps to prevent traders from taking advantage of extreme circumstances to push up market prices knowing that the sellers can’t possibly deliver on the original contract terms. This clause is common in any type of commodity requiring delivery. The exchange has every intention to maintain the spirit of the contract without making it unreasonable to execute the contract. There is a clear process for declaring a force majeure that requires an unbiased committee to make a reasonable and fair decision.

There are many other rules that come into play in the markets. Traders are encouraged to take a look at the exchange rulebooks so you can be prepared for virtually any situation, or at least know where to find the information you need during extreme trading conditions. Alternatively, traders can work with a Lind-Waldock market strategist who deals in the futures markets everyday and is familiar with market complexities.

By Aaron Fennell of Lind-Waldock

Aaron Fennell is a Senior Market Strategist based in Lind-Waldock’s Toronto office, and is serving clients in Canada. If you would like to learn more about futures trading you can contact him at 877-840-5333, or via email at

Please feel free to contact Aaron for more information on how to uncover trading opportunities in Canada.

The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. Please carefully consider your financial condition prior to making any investments. Not to be construed as solicitation.

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