Wheat roars up again..

Wheat was up 60 cents (limit up) within a few minutes of the open today, and as I write there are over 23,000 contracts bid at that price, so there seems little prospect of any further movement today.

These kind of days probably cause frenzied excitement in the wheat trading pits, but are a bit boring for me, as they offer no day trading setups. What will be interesting is to see how the new limit rules work in the market. This is what the new rule says:

"There shall be no trading in wheat futures at a price more than $0.60 per bushel ($3,000 per contract) above or below the previous day’s settlement price. Should two or more wheat futures contract months within a crop year (or the remaining contract month in a crop year) close at limit bid or limit offer, the daily price limits for all contract months shall increase by 50 percent the next business day and an additional 50 percent each subsequent day two or more contract months within a crop year (or the remaining contract month in a crop year) close at limit bid or limit offer. Daily price limits shall revert back to $0.60 after no wheat futures contract month closes limit bid or limit offer for three consecutive business days. There shall be no price limits on the current month contract on or after the second business day preceding the first day of the delivery month."

Based on this, if the market closes limit up today it looks as though the limit will be expanded to 90 cents tomorrow, then to 135 cents the day after if another limit move occurs, and so on. If the limit moves to 90 cents tomorrow and this is sufficient to handle price variation without another limit move during the next three trading days, the limit will revert back to 60 cents.

As a day trader, it is vital to know exactly where the limits are, so the next few days will be very interesting if this new rule comes into application. I will be keeping a very close eye on this. It would be very handy if the exchange published the daily limits on their product information page before the open of each session.

The beauty of this mechanism is that wheat prices will no longer be unnaturally constrained by the limits, which will adjust automatically to market reality. Consequently, we shouldn’t see day after day of stunted activity as we did with the old 30 cent limit before the rule change. 

It is not clear to me whether the margins for wheat contracts will automatically expand along with the expanding limits. If so, it will further constrain wheat trading (especially for smaller accounts) during these periods of volatility. 

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