Limit Up-Limit Down Bands

The 2010 Flash Crash showed how a stock's price could briefly detach from anything sensible — some names traded down to a penny and back within minutes, as algorithmic liquidity vanished all at once. Limit Up-Limit Down (LULD), adopted afterward, is the mechanism that now keeps that kind of move from happening to individual stocks: a continuously moving price band that trades are simply not allowed to occur outside of.

The band is calculated from a reference price — typically the average trade price over the previous five minutes — plus or minus a percentage that depends on the stock's tier and price. Actively traded, higher-priced stocks (Tier 1, the S&P 500 and Russell 1000, roughly) get a tighter 5% band under normal conditions; less liquid or lower-priced stocks get a wider 10% or 20% band, since their prices are naturally noisier and a tight band would trigger constantly on ordinary trading. If the national best bid or offer tries to move outside the band and stays there for 15 seconds, the stock enters a formal trading pause, which typically lasts five minutes before a reopening auction restarts trading.

The bands move continuously as new trades occur, so LULD isn't a single fixed line for the day — it tracks the stock's own recent trading, which is what allows it to accommodate a stock that's genuinely repricing on real news (like an FDA approval) while still catching a move that's clearly a malfunction or a liquidity crisis rather than a repricing based on information.

Worked example. A stock with a 5% band has a five-minute average reference price of $100.00, giving it a band of $95.00 to $105.00. A wave of erroneous sell orders drives the best bid down to $94.00. Because the bid stays outside the $95.00 lower band for 15 seconds, the stock enters a trading pause. Five minutes later, once order flow has had time to normalize, the exchange runs a reopening auction to establish a new price before continuous trading resumes — rather than letting the $94.00 bid simply trade through.