What is a 'limit up' and 'limit down'?
‘Limit up’ occurs when the price of an asset appreciates to the upper limit set by an exchange, ‘Limit down’ occurs when the price reaches the lower limit. It’s not possible to sell a security below the ‘down limit’ price, though you may buy at the limit. Likewise, it’s not possible to buy a security above an ‘up limit’ price, though you may sell at the limit.
In theory, these limits provide a cooling off period for markets in periods of excessive volatility.
An asset trading at its ‘down limit’, suggests the fair market value, or at least the value the market is assigning to the asset at the time, is less than that of the price limit. For this reason, we do not allow online trading on a market when a price limit is reached, even though one-sided trades can still be placed on the market. If you call our dealing desk, we may be able to facilitate buy orders at limit down or sell orders at limit up.
Current limit up/limit down bands
The limit up and limit down thresholds are fixed by the exchange on which the products trade, per the type of product and are thus subject to change.
For more information on these and to get the updated threshold prices, you can look directly on the exchange’s website.
Limit down example
For an example of a limit down, we’ll look at an index.
There are a series of specific bands in which an index’s price can move – taken from a reference price of the index (which is itself set based on an exchanged-based rule, in this case a Volume Weighted Average Price). These bands are different depending on the index and the time of day.
For the S&P 500, the limit down is set at -5% outside of market hours (from the close to the open of the US main session). If this limit is reached, trading will halt until the next US session, or until the price once again moves above the price limit.
The S&P has three further Circuit Breakers in the main session, set at -7%, -13%, and -20%.
Please note: limit up and down thresholds stated on this page are accurate as of March 2020.
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 $0.40 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.
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 severe in American markets, with the Dow Jones Industrial Average (DJIA) losing around 1000 points in less than ten minutes. The reason for the drop was uncertain at first, but it was later discovered that it was caused by a $4.1 billion sell order by an American mutual fund.
Investors’ nerves were already jittery on the back of riots in Greece, European countries requesting loans and bailouts, the wider European debt crisis, a general election being held in Britain and the Deepwater Horizon oil spill, which affected the oil futures market. The large sell order was the final straw that triggered a mass sell-off.
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 (FINRA) 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.
