Limit Down

Limit Down: Definition and How It Works for Stocks and Futures

What is a limit down?

A limit down is a predefined maximum decline in the price of a futures contract or a stock that triggers trading restrictions. These rules are designed to reduce extreme, self-reinforcing price moves, give market participants time to assess news, and restore orderly trading. The threshold is usually measured as a percentage (or occasionally a fixed dollar amount) relative to a reference price—commonly the prior session’s close or a short-term average price.

Why limit down rules exist

• Dampen abnormal volatility and panic selling.
• Prevent cascading liquidity problems and disorderly markets.
• Provide a pause for traders and market makers to reassess information and adjust quotes.

How restrictions work

When the limit down threshold is reached, exchanges apply one of several responses:
* Short trading pause (e.g., 5–15 minutes).
* Extended halt for the remainder of the session (for very large moves).
* Continued trading allowed but not below the limit price (in some markets).

Market-wide circuit breakers (U.S. equities)

U.S. exchanges use market-wide circuit breakers tied to the S&P 500 index to curb system-wide crashes:
* 7% decline from prior close (before 3:25 p.m. ET) → 15-minute trading pause for equities.
* 13% decline (before 3:25 p.m. ET) → 15-minute trading pause for equities.
* 20% decline at any time → trading halted for the remainder of the day.

Example: During the March 2020 COVID-19 sell-off, U.S. markets triggered the 7% pause multiple times.

Limit down for individual stocks (Limit Up–Limit Down, LULD)

The Limit Up–Limit Down plan, implemented after the 2010 “flash crash,” prevents erratic single-stock moves by using dynamic short-term reference prices:
* For S&P 500, Russell 1000 constituents and certain ETPs (securities priced > $3): a 5% move from the five-minute average price triggers a pause (typically 5 minutes).
* For other securities priced > $3: a 10% move from the same reference price triggers a 5-minute halt.
* Pauses can last 5–10 minutes, after which trading resumes under normal or adjusted parameters.

Limit down in futures markets

Futures exchanges use price limits tailored to each product:
* London Metal Exchange: adopted percentage-based limits (notably tightened for nickel in 2022).
* CME Group energy futures: a 10% move within one hour can trigger a two-minute trading pause.
* Agricultural and lumber futures: limits often specified as dollar changes from the prior settlement; many are reset periodically based on recent price averages.

Rules vary by exchange and by contract, reflecting differences in liquidity and historical volatility.

Practical implications for traders and investors

• A limit down can prevent immediate execution at extreme prices but may delay trade execution.
• Market orders during or immediately before a limit trigger can fill at unfavorable prices once trading resumes—consider using limit orders.
• During extended halts, pricing information may be limited, increasing uncertainty.

Key takeaways

• A limit down caps how far a security’s price can fall in a session to limit panic and disorderly trading.
• Responses range from short pauses to full-day halts; some markets permit trades only at or above the limit price.
• Market-wide circuit breakers address system-wide stress; LULD handles extreme moves in individual stocks.
• Rules differ across exchanges and products; know the specific limits for securities you trade.

Sources and further reading

Organizations and rules referenced include CME Group, London Metal Exchange, the Limit Up–Limit Down plan, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and investor education resources on market-wide circuit breakers.