Derivatives

Why daily price limit matters

Bavadharini KS | Updated on January 30, 2021

In stock market parlance, circuit breaker is a measure wherein trading is halted for a certain time period when either of the indices hits pre-defined levels, to contain severe volatility in prices in stock market (applicable to both equity and derivatives market). Though circuit filters are also applicable for individual stocks, it doesn’t apply to those scrips on which derivatives products are available.

However, for commodity derivatives, a similar measure is applicable. It is termed daily price limit, or DPL. Both circuit breaker and DPL are defined by SEBI, the market regulator.

DPL in commodity futures market defines the maximum range within which the price of a commodity futures contract can move in one trading session. This definition protects investors or traders from extreme price volatility.

Agri and non-agri categories have separate DPL. For instance, under non-agri category, for precious metals, metals and alloys and energy contracts, the base price limit will be +/- 6 per cent, enhanced price limit is +/- 3 per cent and aggregate DPL is +/- 9 per cent.

Consider Gold Mini contract in MCX. If the DPL of +/- 6 per cent is breached in this contract, trading will be halted for 15 minutes (the cooling off period). Post that, the DPL is relaxed up to +/- 9 per cent. However, trading shall be permitted within the previous DPL limits (6 per cent) during the cooling off period. In case the price moves more than the maximum daily price limit (of 9 per cent) because of increased volatility in international markets, DPL may be further relaxed in steps of 3 per cent, with a cooling off period of 15 minutes.

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Published on January 30, 2021
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