Limit Up-Limit Down: Investing Guide

Limit Up-Limit Down is a mechanism U.S. securities exchanges use to limit extreme changes in the prices of individual securities. It does this by stopping trades that would take place outside price bands. The bands range above and below a reference price, usually the average trading price during the previous five minutes. When an offer hits the lower edge of the band or a bid touches the upper edge, trading in that security stops for 15 seconds. If the out-of-band offers and bids are not executed or canceled during the 15-second pause, the halt can extend to five minutes. You can ask a financial advisor how to manage your portfolio during volatile market periods for a more personalized approach.

What Is Limit Up-Limit Down?

Limit Up-Limit Down is a volatility control measure approved by the Securities and Exchange Commission as a pilot program in 2012. The rule was a reaction to the exceptional market volatility that accompanied the 2008 financial crisis.

The rule temporarily halts trades in individual security outside specified price bands. The edges of the price bands are pegged as percentage variations from the security’s average trading price during the previous five minutes.

A Limit Up-Limit Down trading halt is intended to give investors a chance to pause and consider what is driving the price changes. It also lets them reconsider their positions or cancel any erroneous orders that could have set off the halt. After the cooling-off period, investors are expected to behave more calmly and avoid further extreme price swings.

The SEC made the Limit Up-Limit Down rule permanent in 2019. The rule is followed by all U.S. exchanges, including the New York Stock Exchange and Nasdaq. Most exchanges around the world have similar volatility control measures.

How Limit Up-Limit Down Works

Limit Up-Limit Down stops trades from taking place outside a specific range, either up or down, from the average trading price during the previous five minutes. It does this by halting trading in a stock or other security when a bid or offer price touches the upper or lower edges of the band. The initial halt is 15 seconds. It may be extended further, in 5-minute increments, if the out-of-band orders are not canceled or executed.

Different percentages are used to set the size of the band depending on the time of day, the security’s trading price and which one of the two tiers it occupies. Tier 1 securities are large companies that make up the S&P 500 Index and the Russell 1000 Index. Tier 2 securities are all the rest.

Here’s how the bands are set using these factors:

For Tier 1 securities that trade above $3: The price band extends to 5% above and below the reference price during all but the last five minutes of the regular trading day, that is, from 9:30 a.m. to 3:55 p.m. Eastern Standard Time.
For Tier 2 securities that trade above $3: The price band extends to 10% either side of the reference price for the entire trading day from 9:30 a.m. to 4 p.m.
For all securities with a previous closing price of $0.75 to $3: The band extends to 20% above and below the reference price for all but the last five minutes of the trading day.
For securities trading at less than $0.75: The band percentage is the lesser of $0.15 or 75% for all but the last five minutes.

Price bands are larger during the last five minutes of the day’s session, as follows:

For Tier 1 securities trading above $3: The band is doubled from 5% to 10% during the last five minutes, from 3:55 p.m. to 4 p.m.
For all securities trading from $0.75 to $3: The band is doubled to 20% during the last five minutes, from 3:55 p.m. to 4 p.m.
For all securities trading at less than $0.75: The size of the band is doubled to the lesser of $.30 or, for the upper band only, 150% during the last five minutes. The lower band is not used if the lesser of these two is more than $0.1.

Length of Trading Halts

A trading halt starts at 15 seconds and may be extended to five minutes. If the conditions that caused the halt aren’t relieved, the halt may be extended again.

For example, take a stock with a reference price of $20. If a market maker bids $21 at 10 a.m., this is 10% more than the last trade price so it triggers the Limit Up-Limit Down. The quote is flagged and trading pauses for 15 seconds. If the market maker cancels the flagged quote during that time, trading resumes after 15 seconds.

If the flagged trade is not canceled, a five-minute trading halt begins. When the five minutes end trading will resume unless there’s an imbalance in orders or the price band is still exceeded. In that case, the halt is extended another five minutes. Additional five halts occur until the trading price returns to the boundaries of the bands, which may be widened by the exchanges during the halts.

The Bottom Line

Limit Up-Limit Down is a procedure for reducing volatility by halting trading in individual securities when prices exceed bands. The price bands are based on the company size, stock price and time of day and may vary from 5% to 150% and below the previous closing price. The length of the trading halt starts at 15 seconds and may extend to five minutes or more.

Tips for Investing

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