KIM FINANCE

Limit Up-Limit Down (LULD)

Definition

The Limit Up-Limit Down (LULD) rule is a mechanism designed to prevent trades in individual stocks from occurring outside of specified price bands. * It was approved by the SEC to address extraordinary market volatility, specifically in response to the "Flash Crash" of May 6, 2010. * It acts as a dynamic "speed bump" for individual stocks.

How it Works

Unlike a fixed daily limit, the LULD bands move with the stock price throughout the day. * Reference Price: The average price of the stock over the immediately preceding 5-minute period. * Price Bands: * Tier 1 (S&P 500, Russell 1000): $\pm$5% from the reference price. * Tier 2 (Other stocks): $\pm$10% from the reference price.

The Trigger Process

  1. Limit State: If the stock price hits the upper or lower band, it enters a "Limit State." No trades can be executed outside the band.
  2. 15-Second Rule: If the price stays at the limit for 15 seconds (meaning there are no buyers/sellers inside the band to relieve the pressure), a Trading Pause is triggered.
  3. Halt: Trading is completely halted for 5 minutes. Afterward, the primary exchange reopens the stock using a reopening auction.

Double Bands

During the market open (9:30 - 9:45 AM ET) and market close (3:35 - 4:00 PM ET), the percentage bands are doubled (e.g., 5% becomes 10%) to accommodate naturally higher volatility.