What is a Locked Market?
A locked market, also called a daily trading limit, is the maximum gain or loss allowed on a derivative or currency in one trading day.
How Does a Locked Market Work?
Let's say a forward contract on Company XYZ stock has a trading limit of X. Accordingly, if the price change exceeds X during the trading day, a 'locked market' occurs, and trading in the contract halts.
China has a daily trading limit of 0.5% on its national currency, meaning that if the price changes more than 0.5% in either direction during the day, trading is halted until the next day.
Why Does a Locked Market Matter?
Locked markets prevent extreme volatility or price manipulation in the markets. If trading approaches the upper level of daily trading limit, we say that the security had an 'up limit' day. Likewise, if trading approaches the lower level of the daily trading limit, we say the security had a 'down limit' day.
