Tame Bitcoin's Price Swings? There's a Plan for That

By Alexander Osipovich Features Dow Jones Newswires

CME Group Inc. is seeking to rein in the volatility of bitcoin.

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The Chicago-based exchange plans to impose limits on how much prices of its proposed bitcoin futures can fluctuate within a day, according to a company document seen by The Wall Street Journal. CME announced last week that it aims to launch the new futures market by the end of the year, subject to regulatory approval.

CME uses such limits in other markets, such as crude oil, gold and stock-market futures, to temporarily halt trading when price swings get out of control. They are a key way in which futures exchanges can try to damp the gyrations of prices.

But CME -- the world's largest exchange operator -- has never before dealt with something like bitcoin, which is notoriously volatile. It is also unclear how much impact CME's limits will have on bitcoin, since its futures market has yet to emerge and most trading in the digital currency is on exchanges outside of CME's control.

CME's trading limits would kick in when the price of its bitcoin futures move 7%, 13% or 20% up or down from the previous day's closing price, according to the document, in which the exchange operator spelled out specifications for its new contract.

The first two thresholds -- for 7% and 13% moves -- are for "soft" limits, which could potentially trigger a two-minute pause in trading of bitcoin futures, according to a person familiar with the matter. The 20% limit is a "hard" cap on how far CME's bitcoin futures could swing on any day, the person added.

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That is akin to the way CME controls volatility in its popular E-mini S&P 500 futures contract, which tracks the S&P 500 stock index. The E-mini also has three successive price-fluctuation limits at 7%, 13% and 20% during regular trading hours.

A similar nighttime limit kept S&P 500 futures from falling more than 5% on Nov. 8, 2016, when news of Donald Trump's upset win in the U.S. presidential election triggered wild volatility in stock-market futures.

But bitcoin could prove far wilder than the S&P 500. So far this year, there have been two days in which bitcoin's price swung more than 20% in a single day, according to CoinDesk. There were 11 days in which it moved at least 13%, and 69 in which it moved at least 7%.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

(END) Dow Jones Newswires

November 07, 2017 15:58 ET (20:58 GMT)