Price Limit Mechanism

What is the Contract Price Limit Mechanism?

• Mark Price: Typically calculated by the platform based on market data (e.g., spot market prices, index prices, etc.), representing a fair value of the contract and reflecting real-time market conditions.
• Threshold: A preset percentage used to define the maximum acceptable price fluctuation range, usually applied to control the impact of extreme price swings.

Formula for Contract Price Limit Mechanism

• Maximum Buy Price: For buying operations of market or limited orders, the maximum acceptable buy price is calculated using the mark price and threshold:
  • Maximum Buy Price = Mark Price × (1 + Threshold)
    • Mark Price: Current mark price of the contract
    • Threshold: Maximum allowed price fluctuation set by the platform (e.g., 5%, 10%)
• Minimum Sell Price: For selling operations of market or limited orders, the minimum acceptable sell price is calculated using the mark price and threshold:
  • Minimum Sell Price = Mark Price × (1 − Threshold)

Function of the Price Limit Mechanism

• Limit Orders: When a user places a limit order, the system checks whether the order price is within the allowed maximum buy price or minimum sell price. If it exceeds this range, the limit order will not be accepted. This prevents users from trading at extreme prices and reduces market volatility risk.
• Market Orders: Market orders are usually executed at the best available market price. However, during extreme price swings, market orders are also restricted by the price limit mechanism. For example, the buy price of a market order cannot exceed Mark Price × (1 + Threshold), and the sell price cannot fall below Mark Price × (1 − Threshold). Any portion exceeding this range will be canceled. This effectively reduces slippage risk caused by rapid market price changes.

Example: Application of Contract Price Limit Mechanism

• Maximum Buy Price: Maximum Buy Price = 5,000 × (1 + 1%) = 5,000 × 1.01 = 5,050 USDT
• Minimum Sell Price: Minimum Sell Price = 5,000 × (1 − 1%) = 5,000 × 0.99 = 4,950 USDT

• The user’s buy price from exceeding 5,050 USDT.
• The user’s sell price from falling below 4,950 USDT.

Purpose of the Contract Price Limit Mechanism

• Prevent Extreme Price Fluctuations: Limits help prevent traders from trading at excessively high or low prices during rapid market changes, reducing unnecessary risks.
• Reduce Slippage Risk: Slippage refers to the difference between the expected execution price and the actual execution price in fast-moving markets. The price limit mechanism helps mitigate slippage and protect traders’ interests.
• Improve Market Stability: By limiting extreme price swings, the mechanism enhances overall market stability, particularly in highly volatile environments.
• Protect Traders’ Interests: By restricting unreasonable price fluctuations, traders can trade within a reasonable range, avoiding losses caused by emotional or abnormal price movements.

Notes

• Price Limit Does Not Guarantee Execution: Although the platform sets price limits for market and limit orders, this does not guarantee that an order will always be executed. Rapid market movements may still prevent immediate execution.
• Threshold Settings Affect Range: The platform may adjust the threshold based on market volatility. During highly volatile periods, the threshold may increase, expanding the maximum buy and minimum sell price range.
• Scope of Application: Not all contracts use this mechanism; certain contract types or special cases may be exempt.
• Protection in Extreme Market Conditions: In extreme conditions, the price limit mechanism plays a critical role in protecting traders from executing trades at highly unfavorable prices.

Summary