What’s The ‘Limit Down’ Rule?

The S&P 500 tanked so hard this morning that it made the New York Stock Exchange temporarily halt trading. It wasn’t a glitch, but rather a feature to protect investors in volatile markets.

The “limit down” prevents excess selling that can take place after a market decline, which can in turn make that dip even worse. Instead of spinning out of control, the NYSE puts a cooling-off pause on trading.

It’s one half of the Limit Up Limit Down Rule. The New York Stock Exchange and the NASDAQ each have these rules to control trading beyond reasonable guardrails.

There are three levels to the limit down, which can be imposed during the regular trading day (9:30 a.m. to 4 p.m. Eastern time) and can apply to any number of securities (stocks, bonds, futures, options, etc.).

Here’s how Katherine Ross at TheStreet explains the levels:

The first level is if the S&P 500 drops 7%, then trading will pause for 15 minutes.

However, level two comes into play if the S&P 500 drops 13%, trading will again pause before 15 minutes IF the drop happens on or before 3:25 pm. There’s no halt after that.

And, finally, level 3 would be enacted if the S&P 500 [drops] 20% trading will halt for the remainder of the day.

The limit down “circuit breaker” was last used for stocks in December 2008; the futures limit down was used in 2016 when oil prices dropped dramatically in the wake of U.S. President Trump’s election. The 15% and 20% halts have never been used, according to Yahoo Finance.

Why the sudden decline? Continued discussion around the spread of the coronavirus has many investors nervous. Plus, the Federal Reserve announced today that it’ll provide some cash for banks’ short-term funding amid the volatility. That all combines into a bundle of worry for investors who may decide to sell now rather than wait to see how low the markets can possibly go.