What Is Limit Down?
Let me explain limit down to you directly: it's when the price of a futures contract or a stock drops so much that it hits exchange rules triggering trading restrictions. These limits on how fast prices can move up or down are there to tone down wild volatility and give you, the trader, some time to react to big news. We sometimes call these trading curbs circuit breakers.
We measure limit down from a reference price, which is usually the closing price from the last session, but not always. It's often a percentage of that reference, though sometimes it's a straight dollar amount.
Key Takeaways
These restrictions might mean halting trading for anywhere from five minutes to the whole rest of the session. Or they could let trading go on, but not below that limit down price. There's also the Limit Up-Limit Down rule that tries to smooth out sudden jumps in individual stock prices. And don't forget market-wide circuit breakers that kick in on big drops in the S&P 500.
Understanding Limit Down
You need to know that trading curbs like limit down halts are built to stop those chain-reaction plunges or surges in prices that feed on themselves, whether from other traders' actions or late news. Once you hit that limit down price, the restrictions start. That could be a quick five-minute halt or one that lasts all day. Some setups even allow trading to keep going as long as prices don't dip below the limit.
Limit Down in Futures Markets
Take the London Metal Exchange: they put in a limit down rule in March 2022 after wild nickel futures trading, restricting moves to a set percentage drop from the prior close. Over at CME Group, energy futures get a two-minute pause if they move more than 10% up or down in an hour.
For things like lumber and ag products, CME sets limit down in dollars from the previous settlement, resetting limits twice a year based on a percentage of the average price over the last 45 days.
Stock Market Circuit Breakers
In U.S. stock markets, severe daily drops in the S&P 500 trigger these restrictions. A 7% decline from the prior close before 3:25 p.m. ET means a 15-minute pause for all stocks. Same for a 13% drop before that time—another 15-minute halt. If it's 20% anytime, trading stops for the day.
Examples of Stock Market Halts
- U.S. markets halted for 15 minutes four times in March 2020 during the COVID-19 sell-off after 7% intraday S&P 500 drops.
Limit Down for Individual Stocks
Since 2012, the Limit Up-Limit Down rule has been in place, requiring 5- to 10-minute trading starts for stocks with too much volatility. For S&P 500 or Russell 1000 stocks and some exchange-traded products over $3, a 5% move from the five-minute average price triggers a five-minute halt. For other stocks above $3, it's a 10% move.
Both this rule and the S&P 500 circuit breakers came after the 2010 flash crash, where the S&P 500 dropped nearly 9% intraday on May 6.
The Bottom Line
At the end of the day, limit down in markets is there to stop panic selling and crashes. It's the flip side of limit up, setting the max drop allowed in a security's price for one session.
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