Wheat Market Triggers Trading Limits

NEW YORK (AP) - It has been a wild month in the wheat market amid a stampede of foreign buying and speculative investment, forcing the Chicago Board of Trade to play stop-and-go with traders to curb volatility.

Financial markets thrive on the volatility inherent to trading. But given the potential for price swings to quickly gain momentum -- turning "volatility" into "market crash" -- stock and commodity exchanges quietly maintain trading limits that, if breached, can trigger a temporary suspension of market activity.

Wheat futures, for example, have risen or fallen the 30-cent limit seven times in September alone, according to research service DTN.

Agriculture futures can go years without reaching trading limits, but when extreme supply constraints hit the market -- as with wheat -- or when new demand emerges -- as with corn for ethanol -- maximum price swings can temporarily become the norm. The wheat market has recently been driven to extremes as shrinking world supplies and a weak U.S. dollar stoke demand for the grain.

The NYSE's trading limits, although rarely employed, are in place to prevent a plunge of the magnitude of "Black Monday." On Oct. 19, 1987, the Dow Jones industrial average lost 22.6 percent of its value in a single day. The decline was driven in part by a heavy degree of new "program trading" or "portfolio insurance" -- the precursor to today's computer-based trading.

The test of trading limits, put in place in 1988, came almost exactly one decade after the 1987 crash. Plunging stock prices set off the NYSE circuit breaker twice on Oct. 27, 1997, when the Dow dropped 554 points amid an economic crisis in Southeast Asia. At the day's end, the Dow was down 7.2 percent.

Currently, the NYSE's circuit breakers are triggered at 10 percent, 20 percent and 30 percent declines in the Dow and require trading halts of varying length. The Nasdaq says its controls mirror NYSE's triggers.

The trading limits are in place to protect investors from the kind of panic-driven tailspins that markets experience over time. But to limit trade or to not "is a philosophical question," said Ted Weisberg, president of Seaport Securities and a stock trader since 1969.

"There are those people that feel that market should basically be free-flowing and that supply and demand levels will be established by the market movement," Weisberg said. "On other hand, we all know that much of stock trading is driven by human emotion, and therefore it's possible that it's in everyone's best interest to say, 'let's just stop and give everybody a chance to catch their breath and figure out what's going on.'"

The New York Mercantile Exchange sets limits on the crude oil and gasoline markets but maintains no limit on movements in precious metals.

Gold and silver pricing parallels the currency market, and there are no limits on changes in foreign currency exchange, said Bill Purpura, senior vice president of the Comex division of Nymex.

The exchange decided in June 2006 to eliminate limits on price fluctuation because, Purpura said, "we wanted the market to be able to seek its own level without having any artificial restraints."