Limit up-limit down (LULD): what is it and how does it work?

Limit up-limit down is a mechanism that prevents trades on stocks, stock index futures and commodity futures from occurring outside of specific price bands. A limit up is the maximum amount that the price can increase in a single session, while a limit down is the maximum amount it can fall.

The bands are set at a percentage level above and below the average reference price of the security or commodity over the previous five-minute period.

The aim of limit up-limit down is to address extraordinary market volatility. It is designed to limit the impact that market behaviour can have on prices, preventing rapid plunges and surges.

Limit up-limit downs are just one type of protection for traders in the market. Other mechanisms operate to address different situations, including:

• Market-wide circuit breakers (MWCB) – these halt all stocks on a particular exchange when there are excessive declines in a single day. These levels are set at 7%, 13% and 20%
• Clearly erroneous (CE) rules – these are for single executions that are caused by input errors, or ‘fat finger trades’

Limit up-limit down was introduced by the Securities Exchange Commission (SEC) in May 2012 as a way of controlling excessively high volatility levels.

It was in response to the Dow Jones (Wall Street) crash on May 6 2010. Over 16 billion futures contracts were sold in a two-minute window, and the index fell 1,000 points in less than ten minutes. The flash crash was caused by a $4.1 billion sell order, but markets were already on edge amid the European debt crisis.

The limit up-limit down mechanism was created to prevent similar crashes from happening in the future.

The London Metal Exchange adopted limit up-limit down measures in March 2022, in response to volatility in nickel futures. The daily price limits aren’t applied as standard to markets, but the exchange reserves the right to apply them as needed.

Different exchanges will have different rules for what happens when a limit up or limit down is hit, and these will vary from product to product. But usually, there’s a trading halt that can range from two minutes until the session ends.

An exchange can also allow trading to continue but prevent orders beyond the limit that’s been reached – so higher than the up limit or lower than the down limit.

The price limits of limit up-limit downs vary from product to product. Here’s a breakdown of price limits by exchange. For more information, you can look at the relevant exchange’s website.

*Trigger levels vary from open to 3.35pm and 3.35pm to close. Visit the Nasdaq for more.
Note: the information in this table is correct as of December 2022.

Price limits are calculated using historical data, but the exact method will vary from market to market.

For example, e-mini S&P 500 futures’ limits are based on the previous trading day’s volume-weighted average price of the lead month contract. Whereas corn futures’ limits are calculated twice a year based on daily futures settlement prices for each product, averaged over a 45-day period.

Let’s assume that company XZY is trading on the NYSE. It’s a tier-1 security, trading on the S&P 500, with a previous closing price of $25. This means that it falls into the first percentage parameters of the NYSE’s limit up-limit down mechanism.

XYZ therefore has an upper and a lower price band of 5%. So, should the price rise to $26.25 or fall to $23.7, a limit state would be in play.

No orders can be executed for prices beyond the limit, but orders can be executed at prices within the bands to bring the price back toward its centre. If the price has not corrected within 15 seconds, then the exchange can declare a five-minute trading halt.

The trading halt can be extended for another five minutes but afterwards, all trading can resume.