Limit Down Definition & How It Affects Margin

Limit Down Definition

Limit down is the maximum amount a futures contract can move in one trading day.  Limit downs have been put in place to prevent markets from collapsing on themselves.  Many markets will halt trading in a contract or slow down the flow of orders until the price backs away from the limit down level.  Trading can continue at the limit down level for two reasons:

1. if a trader needs to exit or hedge a position and does not have the cash
    
2. the underlying cash market is indicating a futures price near the limit down level and the cost of hedging a position in the cash market is greater than the difference of the futures contract and the limit down level

Limit Moves in Other Markets

There are limit down rules for not only futures but stock markets as well.  The Tokyo Stock Exchange, Taiwan Stock Exchange and Shanghai Stock Exchange all have limit-down rules which will halt trading in these markets.

Limit Down and How it Affects Margin

Limit down has more implications than just halting trading.  Due to the increased volatility, traders are required to deposit more cash in order to meet the minimum margin requirements to participate in the market.