Variable Price Limit
Candlefocus EditorA VPL, or “limit up/limit down”, is put in place when a commodity’s price hits a predefined maximum or minimum, known as the fixed limit. At that point, the commodity’s future trading will be suspended until the enabling of a VPL. This limits the downside risk that a sudden dropping of prices can cause.
When the VPL is enabled, the price of the commodity will have an expanded range of acceptable pricing, allowing it to move more than the defined limit until the end of the day. A VPL does not set a definite highest or lowest price the commodity can reach; instead, it functions as a buffer against market volatility and wide price movements that could cause distress in the market. To confirm that the VPL has been triggered, a double-sided auction is held during which the VPL is independently computed by an auction mechanism. In addition, the VPL will usually be continually adjusted throughout the day as the daily volume of trades dictates.
With a VPL, the exchange is able to prevent abnormal losses from price shock, as well as protecting investors from rapid changes in the market. It also permits markets to become more efficient and reach equilibrium faster by allowing a wider range of market transactions to occur. This makes it easier for exchanging parties to come to an agreement on prices, since the VPL assists in the discovery of fair market values.
Overall, a VPL is an important tool for commodity exchanges and traders, allowing them to trade with greater flexibility and confidence in the marketplace. By helping to control market volatility, variable price limits can be an essential part of a modern futures trading system.