Guardrails for Market Volatility

Fluctuation of market indexes and stock prices is normal, with gains and losses occurring daily. This movement is called volatility; the greater the price swings, the higher the level of volatility. However, there are guardrails in place that help protect securities markets against periods of extreme volatility, both in individual securities and the market as a whole.

Single Stock Trading Pauses

Trading in individual stocks is sometimes halted or delayed for various reasons. For example, exchanges have rules requiring trading in individual stocks to be halted during the trading day or delayed at the beginning of the trading day to allow the market to digest any significant new information about the company.

The exchanges and FINRA are also participants in the “Limit Up/Limit Down” or “LULD” Plan, which pauses trading in individual listed stocks when short-term price swings in those securities reach certain price levels. The LULD Plan was designed to moderate market volatility by preventing trades in listed stocks from occurring outside specified price bands.

The price bands for a given stock are set at a predetermined percentage level above and below the average price of the stock over the immediately preceding five-minute trading period, continually calculated on a rolling basis. If a stock’s price moves to the designated upper or lower price band, the stock enters into a “Limit State.” Generally, if the stock price doesn’t move within 15 seconds of entering the Limit State, trading in the stock is paused for five minutes.

The percentage parameter used to calculate the price bands varies depending on the security’s designation as a “Tier 1” or “Tier 2” security and the previous closing price. 

The percentages that apply during most of the regular trading session are as follows: 

• For securities in the S&P 500 or the Russell 1000 Index and some exchange-traded products (ETPs) (known as Tier 1 securities): 
  • 5 percent if priced greater than $3.00;
  • 20 percent if priced from $0.75 up to and including $3.00; and
  • the lesser of $0.15 or 75 percent if priced less than $0.75.
     
• For all other securities (known as Tier 2 securities):
  • 10 percent if priced greater than $3.00;
  • 20 percent if priced from $0.75 up to and including $3.00; and
  • the lesser of $0.15 or 75 percent if priced less than $0.75.

The LULD Plan applies during regular trading hours from 9:30 a.m. to 4:00 p.m. Eastern Time (ET). The LULD price band percentages double for all Tier 1 stocks, as well as for Tier 2 stocks priced at or below $3.00, between 3:35 p.m. and 4:00 p.m. ET, when trading volume tends to be heaviest. Rights and warrants are excluded from LULD rules. The LULD rules also don’t apply to non-listed stocks, known as over-the-counter (OTC) equity securities.

Information about current trading pauses for exchange-listed stocks is published daily by each listing market. A trading pause must be observed by all other markets and also applies to off-exchange trading in listed stocks in the OTC market. The pause across all markets allows time for buyers and sellers to assess the situation and act accordingly. A pause is set to last five minutes, but the listing market for the paused stock can extend it another five minutes if there’s a significant imbalance between buy and sell orders. 

If a security is in a trading pause during the last 10 minutes of regular trading hours, the primary listing exchange won’t reopen trading and will attempt to execute a closing transaction using its established closing procedures. 

Market-Wide Circuit Breakers

Sometimes, market-wide volatility is so severe that exchanges and FINRA halt all trading rather than just pausing activity in a single stock. These halts that apply to the entire stock market, known as market-wide circuit breakers, may suspend trading temporarily or may close the markets before the normal close of the trading session.

Market-wide circuit breakers are triggered by severe market declines as measured by the decrease in the S&P 500 Index from its closing price the previous day. There are three circuit breaker thresholds that can trigger a market-wide trading halt:

• Level 1: 7% Market Price Decline
• Level 2: 13% Market Price Decline
• Level 3: 20% Market Price Decline

A Level 1 or Level 2 decline that occurs before 3:25 p.m. will halt trading in all listed stocks for 15 minutes, but a similar market decline at or after 3:25 p.m. won’t trigger a trading halt. However, a Level 3 decline that occurs at any time during the trading day will suspend trading in all listed stocks for the rest of the trading day. If a market-wide circuit breaker is triggered, trading is suspended on all exchanges, as well as for listed stocks in the OTC market.

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