Limit Down
What Is Limit Down?
Limit down is a decline in the price of a futures contract or a stock large to the point of triggering trading limitations under exchange rules. Limits on the speed of market price developments, up or down, aim to hose unusual volatility and to give traders time to respond to market-moving news, if any. Trading curbs triggered by extreme price developments are some of the time called circuit breakers.
Limit down measures the decline from a reference price, typically however not generally the prior session's closing price. The limit down is regularly communicated as a percentage of the reference price, yet at times in absolute terms as a dollar value.
Understanding Limit Down
Trading curbs including limit down halts are intended to limit self-building up plunges and floods in market prices in light of the behavior of other market participants and in response to late-breaking information.
When the limit down price is reached, trading limitations kick in. These can go from a trading halt as short as five minutes to one that goes on until the end of the day. A few rules permit trading to go on with limit down as the base price.
Limit Down in Futures Markets
The London Metal Exchange adopted a limit down rule confining trading to a pre-set percentage decline from the prior closing price in March 2022, in response to unstable trading in nickel futures.
CME Group energy futures impose a two-minute trading stop when markets go up or down over 10% in 60 minutes.
For stumble and agricultural products, CME Group draws the line down as a change in dollar terms from the settlement price in the prior session. The limits are reset two times per year founded on a percentage of the average price over a first 45-day period.
Stock Market Circuit Breakers
U.S. stock markets are subject to trading limitations triggered by extreme daily declines in the S&P 500 index as follows:
- a decline of 7% from the prior day's close before 3:25 p.m. Eastern time starts a 15-minute trading stop for all stocks
- a decline of 13% from the prior day's close before 3:25 p.m. ET likewise requires a 15-minute trading stop in all equity trading
- a decline of 20% from the prior's day's close whenever during the trading day halts trading until the end of the day
U.S. stock markets were halted for 15 minutes after a 7% intraday drop in the S&P 500 index on four events during the sell-off started by the COVID-19 pandemic in March 2020.
Limit Down for Individual Stocks
The supposed Limit Up-Limit Down rule, in effect beginning around 2012, requires trading begins enduring 5 to 10 minutes for stocks encountering unnecessary volatility.
For stocks remembered for the S&P 500 or the Russell 1000 indexes and certain exchange-traded products, the trading stop begins once the price goes up or down something like 5% from the average price in the first five-minute period for securities priced above $3. For different stocks priced above $3, a move of 10% from a similar reference price is justification briefly halt.
The Limit Up-Limit Down rule and the S&P 500 circuit breakers were adopted after the 2010 "streak crash," which saw the S&P 500 drop almost 9% at the intraday lows of May 6, 2010.
Features
- Broad circuit breakers are triggered by large intraday declines in the S&P 500 index.
- Limitations can be through trading halts going from five minutes to the remainder of the session. They can likewise permit trading to continue at prices no lower than the limit down.
- The Limit Up-Limit Down rule endeavors to hose sudden price moves in individual stocks.
- Limit down is a decline in the price of a futures contract or a stock adequate to trigger trading limitations.
