* Interval price limits aim to stop unwarranted price spikes
* System does not stop trading, but slows it down
NEW YORK, March 12 (Reuters) - IntercontinentalExchange Inc rolled out circuit breakers on Monday for certain futures products that are designed to prevent unintended price spikes, or flash crashes, associated with computer-driven trading.
ICE’s interval price limits (IPL) set a floor and a ceiling for a given market within a specific timeframe. Prices that move beyond those set amounts trip the circuit breaker, putting the market on hold for a pre-determined amount of time, giving participants a chance to decide if the move was warranted.
During the hold period, the affected futures contract can still be traded, but only within the IPL range. When the contract begins trading again, a new IPL range is set after the hold, based on the price at the end of the hold.
Massive price spikes, though rare, have raised questions about the stability of high-speed electronic markets that are dominated by computer-driven, algorithmic trade, which have largely replaced open pit trading.
“What ICE is doing is a methodology for slowing down markets if there are perceived trading strategies gone wild,” said Andy Nybo, head of derivatives at research firm TABB Group.
“In days gone by, you had a specialist on the floor who would say, ‘are you sure you want to do that,’ to a guy that he’s traded with for years, but in the electronic world, those kinds of safeguards don’t exist.”
Since ICE agricultural futures went electronic in 2007 the relatively small cocoa market, for instance, has experienced several violent and short-lived moves that appeared disconnected with any fundamental news, traders say.
Last March the ICE cocoa futures market plunged more than 11 percent in seconds before rebounding a minute later, and many suspected computer-generated dealings. ICE canceled some trades as traditional players complained of market distortion.
One veteran cocoa dealer said the circuit breaker system should help prevent those types of unwarranted spikes and canceled trades.
“You see it go down and you react quick enough and you’re able to buy something down there, very much on the cheap. You turn around and sell and think you’re making a profit on it, and then they cancel the trades at the lows and you’re short the market,” the dealer said.
The circuit breaker will only be beneficial to soft commodities on ICE, however, if the levels are set at what is deemed a reasonable level, he said.
ICE Futures products currently affected are the Russell 2000 Mini Futures, Russell 1000 Mini Futures, US Dollar Index Futures, Canola Futures, Milling Wheat Futures, Durum Wheat Futures, Barley Futures, and Western Barley Futures. IPL will later be extended to ICE Futures US agriculture markets.
Under IPL, when a circuit breaker is tripped, users of the system receive pop-up notifications saying that the market is in hold, what the price hold is at, how long the hold will last, and when the hold is over. After the hold period is over, the circuit breaker resets.
“I could see it being beneficial in almost any market,” said Hector Galvan, senior market strategist for brokerage RJO Futures in Chicago.
“You’re not limiting or capping the market, you’re just slowing the move. At least that will slow the market down enough to let people catch up and at the same time, make sure that everyone’s trades are legitimate in the end.”
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