Price limits in commodities have been a hot topic of late due to several limit up price moves in grains and the tropical softs (cotton, sugar, coffee, cocoa), and especially with Cotton being limit up on Monday for the third time in a week as the proverbial short squeeze seemed to be on, then back limit down (-600, or -4.63%) today.
According to Futures Magazine legendary CTA and managed futures expert Paul Tudor Jones weighed in on this topic during a presentation at the CME Group Global Financial Leadership Conference in Naples, FL. this past weekend. Mr. Jones discussed why he was an advocate for more stringent price limit rules – saying that increased price regulation could have prevented the Black Monday stock crash of 1987 and the more recent Flash Crash of 2010. (click here to see the story)
Of particular interest to us was his comment that exchanges might want to re-consider the current practice of allowing options markets to continue to trade after trading in futures has been halted. His argument is that once the futures lock limit traders just move into the options and synthetically push the market higher (or lower) by trading deep in the money calls or puts…in other words the futures limits don’t apply to everyone as long as you know the proper workaround in the options markets. In addition, according to Mr. Jones, it is the hedgers and farmers who get hurt the most as a spike in implied volatility via long options can put them on margin call and out of the family business.
Managed futures as an asset class probably wouldn’t care if there were more stringent price limits, and limits across derivatives (futures and options), given that most don’t have too much exposure to any one market and that most have a longer time frame for their trades in which a limit move is just part of the bigger picture. But it is worth noting that one of the founding fathers of managed futures is looking out for the little guys who depend on the commodity markets for more than just speculation.
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