I've just started reading Hull, which has made mention of price limits employed by futures exchanges 'to prevent large price movements caused by speculative excess [to protect the interests of producers]'.

Surely, since there are no price limits applied to spot markets, this would cause the price of the contract and its underlying asset to become temporarily mis-aligned? Would this not cause a crash in the futures market when trading re-opened the next day, and the futures price reconciled with the price of the underlying asset?

  • $\begingroup$ The conventional thinking (I don't know if true or not) is that there is less leverage in the Spot market, less trading, and it is restricted to Producers and Consumers of the commodity (no speculators) so limits on price change are not required. These days financial players are getting involved in the Spot market also, so who knows... $\endgroup$ – noob2 May 2 '19 at 14:55
  • $\begingroup$ So it's fair to say that trading in futures market moves the spot price of the asset more than trading in the spot market. Does that not just mean that you could wait for the futures price on an asset to hit its lower price limit, and then just trade the 'bounce' in the spot market that this would presumably result in? $\endgroup$ – J. Chapman May 2 '19 at 15:27

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