Market Extra: Dow futures soared nearly 5% and knocked on the door of ‘limit up’ trading rules Tuesday—here’s how that works

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U.S. stocks have been experiencing some of the most volatile trade in recent memory and that trend appeared to continuing into Tuesday morning as the three main stock-index futures flirted with the 5% limit-up rule.

Futures for the most-active Dow Jones Industrial Average YMH20, +3.18% for March were up 4.7% at their intrasession peak Tuesday, at 25,001, while S&P 500 futures ESH20, +3.24% reached an intrasession high at 2,879, up 4.8%. Nasdaq-100 futures NQH20, +3.42% soared 4.96% to a intraday peak at 8,346.

Futures have pulled back from early highs but remain solidly higher.

The volatility rule, which took effect on Monday, is triggered when stock-index futures see a 5% swing in either direction during premarket or after-hours trading, outside U.S.’s 9:30 a.m. Eastern Time to 4 p.m. trading period, according to the CME Group’s website.

When indexes hit such levels, known as “limit up and limit down,” they aren’t allowed to move any higher or lower. Equity-index futures have different rules than other futures contracts.

On Monday, stock-index futures hit the daily downside limit that pinned their declines at 5% ahead of a brutal selloff sparked by a punishing slide in crude-oil prices CL00, +8.60% and worries about the spread of COVID-19. The S&P 500 dropped 7% near the start of yesterday’s trading. That fall triggered a separate circuit-breaker rule that pauses trading during regular session for 15 minutes.

If the S&P 500 index SPX, -7.59% were to fall 13% on the day in the regular session once trading resumes after a 7% halt, it would trigger another 15-minute halt. Trading wouldn’t stop if the decline occurred after 3:25 p.m. A 20% drop in the S&P 500 would trigger what’s known as a level three circuit breaker, which would stop trading for the remainder of the session.

Some experts say the unpredictable and violent moves in stock benchmarks lately reflects a new regime of uncertainty fostered by the COVID-19 outbreak, the infectious disease that was first identified in Wuhan, China in December and has infected 115,000 and claimed more than 4,000 lives, according to data compiled by Johns Hopkins University.

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