ETP Update: Limit Up/Limit Down and Market-Wide Circuit Breakers

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.
  • Update: The first Reference Price will be either the opening price or the bid/ask midpoint of the opening quote on the primary listing market.
  • After the open, the 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 leveragedETP 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.

Market Wide Circuit Breakers:

Market Wide Circuit Breakers (MWCB) will be implemented on April 8th, 2013 (date pending SEC approval).   Under the current criteria, there would be a market halt of 30 minutes, should the Dow Jones Industrial Average change by approximately 1300 points. Under the new criteria, a 15 minute halt will be instituted should the S&P 500 change by more than 100 points (approximately). Here is the summary of changes to the MWCB from Colin Clark’s blog “Updating the Market-Wide Circuit Breaker”.

  • The DJIA index will be replaced with the S&P 500 index for determining whether circuit breaks are triggered
  • The markets will be halted based on a decline of 7% rather than 10%
  • The percentage decline calculation will be based on the change from previous day’s close instead of the last month of quarter average
  • The halt time will be shorter, only 15 minutes instead 30, 60, or 120 minutes.
  • Simplify the time when the trading halt is triggered from six to two relevant time periods.

For more information regarding market-wide circuit breakers, please read Colin Clark’s“Updating the Market-Wide Circuit Breaker” or the SEC Approval Order.

[1] This summary is designed to give a basic overview of Limit Up/Limit Down and excludes many additional details including how LULD will work under various different trading situations. For a full explanation of LULD, please read the recommended links imbedded in the blog.

[2] As of December 1, 2012.