Velocity Logic is a market integrity control measure used on the Chicago Mercantile Exchange. It looks for potential significant price movements within predefined upper and lower limits. The mechanism is intended to monitor futures price movements that would go too far, too fast. The goal is to curb potential extreme market movements and help retain a healthy trading environment on the exchange.
Once triggered, the Velocity Logic mechanism checks each arriving order against the predefined limits to ensure the price doesn’t significantly exceed them within the given trading period. If the system determines that a potential trade will violate any Velocity Logic limits (VL High or VL Low), the market enforces an immediate suspension in matching orders, effectively pausing trading. This sends the market into a Reserved state until fair prices can be re-established.
The temporary halt in trading also allows market participants to reassess the situation and make trading decisions based on current information rather than panic.
To learn more about Velocity Logic, please check out the full guide on our blog.