Limit up / limit down definition

What is a limit up?

A limit up is the maximum amount that the price of a stock index future or commodity future will be allowed to increase in a single trading session. A limit up is different to a limit down, but both are used to prevent certain assets reaching excessively high volatility levels.

What is a limit down?

A limit down is the opposite to a limit up, and it sets the maximum amount that the price of a stock index or commodity futures contract will be allowed to decrease in a single trading session.

Limit downs seek to prevent panic selling and market crashes. This is because, if more and more traders begin to sell in a panic, the price of the underlying asset will decrease in line with increased supply and lower demand in the market.

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Markets to trade during a limit up or limit down

Popular markets to trade during a limit up or limit down are exchange-traded funds (ETFs) which track the underlying market value. For example, if the NASDAQ has hit limit down, traders can still get exposure to the underlying market by opening a short position on the ProShares UltraPro QQQ ETF.

Alternatively, if an index has hit limit up and trading has been halted because of a sudden increase in value, a trader might want to open a long position on an ETF which tracks the value of that market.

Why was limit up/limit down introduced?

Limit up/limit down was proposed in response to the market volatility experienced on 6 May 2010. This was particularly irregular for the American markets because the Dow Jones Industrial Average (DJIA) lost around 1000 points in less than ten minutes.

It’s estimated that over 16 billion futures contracts were sold in a two-minute window, and many stocks experienced heavy declines in their prices. As a result of the crash, the limit up/limit down boundaries were implemented to prevent similar sell-offs happening in the future.

They were first proposed by a number of national American exchanges and the Financial Industry Regulatory Authority (FCA) in April 2011. The limits were eventually approved and introduced (at first on a pilot basis) by the Securities and Exchanges Commission (SEC) on 31 May 2012.

Limit down example

For an example of a limit down, let’s look at US stock index futures. A limit down will be triggered when an index future loses 5% of its value. If this happens, trading will be halted for 15 minutes to stem the risk of a widespread market sell-off.

Many US stock indices have limit downs including the Dow Industrials, S&P 500 and NASDAQ. All of these indices hit limit down on Monday 9 March 2020, which saw the Dow fall 7.8%, the S&P 7.6% and the NASDAQ 7.3%.

Limit up example

For an example of a limit up, we’ll look at commodity futures contracts. For corn futures, the limit up is a $0.30 price movement from the previous close. If the price of corn increases beyond this limit, then trading in corn futures is halted for the rest of the trading day.

This is to stop the price of corn futures – and other commodity futures contracts – from increasing dramatically compared to the price of the underlying asset, which the futures contract represents.

Limit up/ limit down levels

There are a series of specific bands in which a stock index’s price is allowed to move – taken from a reference of the average price in the previous five minutes. When talking about limit downs, if the price exceeds the lower band, trading is suspended for 15 minutes.

For tier 1 – which includes S&P 500-listed stocks, NMS securities and some exchange-listed products with a price greater than $3 – the band is set at a 5% decrease (or increase for a limit up) from the current price between the hours of 9.45am and 3.35pm.

However, between 9.30am and 9.45am, and 3.35pm and 4pm, the band is set at a 10% decrease (or increase for a limit up) from an average of the price in the previous five minutes. The full list of specifications for limit ups/limit downs on stocks and other exchange-traded products can be found below.

Specifications of the limit up / limit down bands
Acceptable up-or-down trading range (9:45am-3:35pm) Acceptable up-or-down trading range (9:30am-9:45am and 3:45pm-4:00pm) Security price, listing
5% 10% Tier 1 National Market System (NMS) securities: S&P 500- and Russell 1000-listed stocks, some exchange-traded products; price greater than $3.00
10% 20% Tier 2 NMS securities: other stocks priced over $3.00
20% 40% Other stocks priced greater than or equal to $0.75 and less than $3.00
Lesser of 75% or $0.15 Lesser of 150% (upper limit only) or $0.30 Other stocks priced less than $0.75

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