A position limit is a specific level or position set by a regulatory agency to prevent an influx of options that could threaten market stability. It prevents one investor from gaining an unfair advantage over others and is enforced by the Commodity Futures Trading Commission in the US.
Sometimes referred to as a trade limit, a position limit is a specific level or position created by a regulatory agency and associated with a particular investment contract or option. The purpose of a position limit is to prevent an influx of options that could threaten the stability of a market and create widespread distress for investors. Various options and futures contracts will have a different position limit, depending on the nature of the investment and criteria set by the regulator.
In actual practice, a position limit serves to prevent any position associated with a given option from exceeding a prohibited maximum size. Doing so helps minimize the potential for any one investor or group of investors to corner a market and essentially undermine its stability. This does not mean that the position limit prevents someone from earning a return on their investments. What it does mean is that a large trader does not gain an unfair advantage over smaller traders, and is less likely to be in a position to engage in market manipulation that threatens to undermine the entire market.
The actual size allowed with the position will depend on a number of factors, including whether the entity holding the position is an individual investor, a group of investors or a corporation. The number of shares involved in the contract will often also play a role in setting the maximum share limit associated with the option that a given entity can hold. Other criteria may also apply, depending on the details of a specific futures contract.
In the United States, the tasks of determining this maximum number in connection with futures contracts fall under the auspices of the Commodity Futures Trading Commission, or CFTC. Decisions are frequently made in conjunction with various country-based exchanges. In other nations, it is not unusual for national regulatory agencies to also set a position limit that is independent of the criteria set by exchanges based in those countries, even though exchanges typically meet their standards to match those from the government regulator.
In situations where an investor has multiple contracts for the same investment with different brokers, those contracts are generally considered to be all under one contract. This creates a situation where it is still possible to enforce the position limit fairly and minimize the potential for an investor to gain an unfair advantage over others who are also interested in that investment opportunity. Failure to meet a position limit by taking steps to circumvent the system’s inherent checks and balances can lead to fines or possibly the loss of investment privileges with one or more exchanges.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
