What is Limit Down?

Limit down refers to a drop in a futures contract or stock price significant enough to impose exchange-mandated trading limits. Limits on the rate at which market prices fluctuate, either up or down, are intended to reduce excessive volatility and give traders time to respond to any news that could influence the market. Circuit breakers are another name for trading restrictions set off by abrupt changes in price.

Limit down quantifies the drop from a reference price, typically the closing price from the previous session. Still, it’s not always the case—usually stated as a percentage of the reference price, the limit down is sometimes given as an absolute dollar amount.

Understanding Limit Down

Limiting self-reinforcing price dips and surges based on other market participants’ actions and reacting to late-breaking information is the goal of trading restrictions, including limit-down halts.

Trading limits begin to apply when the limit-down price is achieved. These can be as short as five minutes or as long as the entire day’s trade halt. Specific regulations allow trading to proceed with a minimum price limit.

Limit Down in Futures Markets

Due to erratic trading in nickel futures, the London Metal Exchange implemented a limit-down rule in March 2022 that limited trade to a predetermined percentage decrease from the previous closing price.

Energy futures from CME Group impose a two-minute trading halt when market movements exceed ten percent in an hour.

The CME Group establishes the limit for agricultural and lumber products as a change in dollar terms from the settlement price from the previous session. The limitations are reset twice a year using a percentage of the average price for the 45 days prior.

Market Circuit Breakers for Stocks

Severe daily drops in the S&P 500 index cause trade limitations on U.S. stock markets in the following ways:

• A 7% decrease from the previous day’s close before 3:25 p.m. For all stocks, a 15-minute trading halt begins at Eastern time.
• A 13% decrease from the previous day’s close before 3:25 p.m. ET mandates a 15-minute break in trading for all equities transactions.

During the COVID-19 pandemic-related sell-off in March 2020, the S&P 500 index decreased by 7% intraday four times, which forced the U.S. stock markets to halt trading for the remainder of the day if there was a 20% decline from the previous day’s close at any point during the trading day.

Lower Limit for Specific Stocks

Since 2012, stocks exhibiting high volatility have been subject to trading starts lasting five to ten minutes, per the Limit Up-Limit Down rule.

The trading pause begins for equities that are part of the Russell 1000 or S&P 500 indexes and some exchange-traded products when the price swings up or down by at least 5% relative to the average price for the previous five minutes. This applies to shares that are valued at more than $3. If the price of any other stock rises by 10% from the same reference point, there will be a five-minute halt.

The S&P 500 circuit breakers and the Limit Up-Limit Down rule were implemented following the 2010 “flash crash,” which resulted in an intraday low of over 9% for the S&P 500.

Conclusion

• A limit down is a drop in the price of a futures contract or a stock that causes trading limitations to be triggered.
• Trading halts ranging from five minutes to the length of the session can be imposed. They can also permit trading at prices no lower than the limit.
• The Limit Up-Limit Down rule seeks to attenuate unexpected price movements in individual equities.
• Large intraday drops in the S&P 500 index set off market-wide circuit breakers.