May 10, 2008 at 1:00 pm by Tom Lydon
We all know how oil futures and exchange traded funds (ETFs) that contain them operate. But if you’ve ever wondered if the markets could ever "stop the madness" that is the rising price of oil, the answer is "kind of."
The New York Mercantile Exchange (NYMEX) has circuit breakers in place when prices move by $10 in either direction for all months. If any contract is traded, bid or offered at the $10 limit, trading is halted for five minutes to allow traders to regroup. When it resumes, a new $10 limit is put in place and if that’s reached, trading halts for another five minutes, and so on.
So, it’s possible for oil to gain or lose $30 or even more in a day, but the five-minute breaks cool things off a bit before they pick up again.
It’s likely trading in ETFs that contain oil futures would halt for five minutes as well. At the very least, the bid/ask of those ETFs would widen out in those five minutes because market makers wouldn’t have a "live" price to use.
