Traders Are Flying Blind in S&P Futures After CME Limits Are Hit

(Bloomberg) -- Circuit breakers put a limit on a harrowing plunge in U.S. stock futures, but they’re also leaving traders in the dark as to how big losses may eventually get. Trading in other index price proxies suggested American stocks are at risk of the worst plunge since 2011.

In the midst of financial-market spasms as the day began in Asia Monday, trading in the world’s most popular equity contracts went quiet when declines reached 5%, setting off Chicago Mercantile Exchange limits that keep prices from falling further.

“These things are all designed to stop a market panic and cause a bit of a pause in trading,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors. “It can have the perverse effect of increasing the downward pressure on other markets, particularly until the U.S. market opens.”

E-mini futures on the S&P 500 Index sank 5% to 2,819 in early Asian trading and except for intermittent bursts have stayed there ever since. The curb means the contract can’t trade at a lower price for the remainder of the overnight session, although transactions at or above the threshold are allowed. An exchange-traded fund tracking the S&P 500 that isn’t subject to trading curbs was down 6.2% at 7:19 a.m. in New York.

“Most of these down opens have seen dip buyers come in -- we should know in the first 90 minutes of trading” if they are out of ammunition, said Michael O’Rourke, chief market strategist at JonesTrading. “If we don’t bounce quickly in those first 90 minutes, it sets up to be a long and likely ugly day.”

Contracts on indexes such as the S&P 500 and Nasdaq 100 are crucial elements of the global price discovery system, giving traders a price proxy and instruments to speculate on the world’s biggest stock market when regular exchanges are closed. Other options exist, including exchange-traded funds tied to the indexes, which begin trading when the premarket session opens in New York at 4 a.m. New York time.

Nasdaq 100 futures stopped falling when the contract reached 8,093.25, while the Dow contracts cannot trade below 24,534.

“It allows cooler heads to prevail,” JJ Kinahan, chief market strategist at TD Ameritrade, said by phone. “Particularly in the overnight sessions it’s a good thing to have because you just don’t have as many products at work. This is one rule that it’s been so long since we have seen it, but it’s proved effective over time.”

The last time futures selling tripped the limit down rule was the night of Nov. 8, 2016, as investors adjusted to news that Donald Trump would win the presidency. The price held at 5% below the prior day’s close around midnight and stayed there for about half an hour before turning higher. It erased the entire drop minutes after the opening of the regular trading.

But that might not be a model for this week.

“This time round things might be different and the market is behaving like a recession is due to happen,” said Margaret Yang, a strategist at CMC Markets Singapore Pte.

Nasdaq 100 futures will stop falling if the contract reaches 8,093.25, while the Dow contracts cannot trade below 24,534.

The cash equities market is subject to circuit breakers established by the New York Stock Exchange in the wake of the 1987 Black Monday crash. Trading will halt for 15 minutes if the S&P 500 falls 7% to 2,764.3 at any time before 3:25 p.m. in New York. Another 15-minute pause will happen if losses in the index reaches 13%, a drop that would put it at 2,585.96. If the decline hits 20%, or 2,377.9, markets will close for the day. Only the 20% rule applies in the final 35 minutes of cash trading.

--With assistance from Elena Popina, Luke Kawa and Ishika Mookerjee.

To contact the reporters on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net;Lu Wang in New York at lwang8@bloomberg.net;Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Christopher Anstey

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