Limit Up Limit Down (LULD) The SEC has recently approved the use of a Limit UP Limit Down (LULD) rule. This rule is designed to ensure that prices of individual securities reflect fundamental prices based on supply and demand and do not move outside of established parameters based on errors or manipulative actions. Upper and lower trading bands will be established based on the average reference price of the security over the preceding 5 minute period. The reference price is the algorithmic mean of all eligible transactions reported during the 5 minute period and does not include transactions reported at a volume weighted average price (VWAP).
Applying "Limit Up Limit Down Ciruit Breaker" to Securities Exams:
If the stock price moves outside of the established bands trading will be paused for 5 minutes if the stock cannot return to the limit price with in 15 seconds. During this 15 second period the stock will be subject to a limit state of limit up or limit down. If no trades take place at or inside the limit price the 5 minute trading pause will occur. Once fully implemented the LULD is intended to replace the single stock circuit breaker rule. Tier 1 and tier 2 securities will have trading bands of 5 and 10 percent respectively from 9:45 AM – 3:35 PM EST. To accommodate additional price discovery during the opening and closing of the market those bands will be expanded to 10 and 20 percent respectively from 9:30 AM – 9:45AM and from 3:35 PM – 4:00PM. Any aggressive orders placed outside of the price band will be re priced by the NASDAQ system to the price band limit price.