Limit Up/Limit Down to Begin Pilot Period

The Plan to Address Extraordinary Market Volatility, also known as Limit Up/Limit Down (LULD), will begin its pilot period in 2013. LULD requirements are designed to prevent trades in individual securities from occurring outside of the specified Price Bands, across all US markets, while allowing the product to continue to trade. It is replacing the current system of single-stock circuit breakers that was established in 2010. Phase I of the one-year LULD  pilot will begin on April 8th, 2013 (start date is pending SEC approval).

Here is a brief summary of how LULD will work [1]

  • For each security, a Reference Price and Percentage Parameter will be used to establish lower and upper bands through which trading will not take place.
  • The security price used to determine the applicable percentage parameter is based on the closing price on the previous trading day, or, if no closing price exists, the last sale reported to the Consolidated Tape on the previous trading day.
  • Reference Price is the arithmetic mean of the trades taken place in the preceding 5 minute window.·
  • A security will enter a Limit State if the National Best Offer equals the Lower Limit Band or the National Best Bid equals the Upper Limit Band.
  • A security will exit a Limit State if the entire size of all Limit State Quotations are executed or canceled within 15 seconds.
  • If a security does not exit a Limit State within 15 seconds, the Primary Exchange will declare a VTP. The VTP will last for 5 minutes.
  • The next Reference Price will equal the Reopening Price of the Primary Listing Exchange.

For a more detailed description of Limit Up/Limit Down, please read the official SEC filing.

Tier 1 and Tier 2 ETPs:

In Phase I of the LULD pilot, only ‘Tier 1’ ETPs will be subject to the LULD regulations. Tier 1 ETPs are non-leveraged ETPs with a CADV over $2 million. An ETP’s primary listing exchange will determine whether or not the product meets this CADV threshold on a semi-annual basis, and will adjust the list of Tier 1 ETPs accordingly. According to these inclusion factors, approximately 407 ETPs would be eligible for Tier 1[2]. The percentage parameters for Tier 1 ETPs (as well as Tier 1 NMS Stocks) will be determined using their previous closing price, in accordance with the table below:

*This diagram is an example of the upper and lower limits of a tier I ETP, with a 5% percentage parameter.

 

 

 

 

 

 

 

 

Phase II of the LULD implementation will begin on August 1, 2013 (date subject to SEC approval). Phase II will expand LULD to include Tier 2 ETPs, which are all remaining ETPs not in Tier 1. The percentage parameter for Tier 2 ETPs will be based on the previous closing price and will follow the table below:

Leveraged ETPs will be included in Tier 2 and the percentage parameter will be determined using the table above, but multiplied by the leverage ratio of the product. For example, a 3x leveraged ETP with a previous closing price of $15.00 will have a percentage parameter of 30%.

1. Percentage parameters for leveraged products are calculated by multiplying the Tier 2 parameters by the leveraged ratio.

2. The security price used to determine the applicable percentage parameter is based on the closing price on the previous trading day, or, if no closing price exists, the last sale reported to the Consolidated Tape on the previous trading day.