Do Price Limits Inhibit Futures Prices?

We investigate the effect of daily price limits, which trigger a trading halt if the limit is hit, in futures markets. Empirically, it has been observed that futures price limits are rarely hit. This could be because traders avoid putting in bid-ask quotes which could trigger a trading halt. If this is true, futures prices would cluster in a narrow region close to the limits without hitting them. We test this for the British pound futures contract for a period in which limits are imposed, by comparing the number of daily observations of futures prices which fall in the narrow region, with that predicted at the 99% confidence level by the distribution of the ‘true’ daily futures price. Our tests require that we calculate all possible combinations of a long time series, which we find we can do relatively efficiently with a parallel program.