On March 10, 2023, volatility resulting from concerns regarding runs on certain banks triggered trading halts in those banks’ stocks on the New York Stock Exchange (NYSE) and Nasdaq. March 13, 2023, saw additional trading halts on bank stocks. This post provides a brief explanation of the Limit Up Limit Down (LULD) rules that pause and prevent trading in a single security from taking place outside a specific range, either up or down, from the average trading price during the previous five minutes.
When there is single-stock, industry specific, or market wide volatility, trading halts are a way to create speed bumps to allow markets to absorb information and calm volatility. The Securities and Exchange Commission (SEC) took emergency action to halt trading in response to the 2008 financial crisis. More recently, as detailed in our 2020 post summarizing the overarching framework in which exchanges may halt trading, exchanges imposed trading halts in response to extreme market volatility with unprecedented magnitude and velocity triggered by the coronavirus pandemic. Our prior post explained that exchanges may utilize different types of regulatory halts during periods of market turmoil, particularly when individual stocks endure large fluctuations over short periods. Last week the securities markets experienced turmoil in one sector, regional banks, when shares in three banks experienced sharp declines following the announcement that another bank had been place in receivership with the Federal Deposit Insurance Corporation (FDIC).
Types of Trading Halts
Exchanges such as NYSE and Nasdaq may initiate different types of trading halts, such as market-wide circuit breaker halts (MWCB), which temporarily halt trading in all National Market System (NMS) securities in the event a MWCB is breached, but not all trading halts are the same. In the case of the March 10 trading halts, it was the LULD rules that triggered NYSE and Nasdaq single-stock circuit breaker halts.
Part of the SEC’s mission is to maintain fair, orderly, and efficient markets. To address extraordinary market volatility, in April 2019 the SEC adopted the LULD rules. The LULD rules prevent trades in NMS securities from occurring outside of specified price bands, which are set at a percentage level above and below the average reference price of a security over the preceding five-minute period. The previous day’s closing prices on the security’s primary listing exchange is used to set the bands for a given day. The price band percentage itself does not change intraday. The LULD rules apply during regular trading hours of 9:30 am ET – 4:00 pm ET.
The percentage levels for the price bands of a security’s circuit breakers are dependent on whether the security is a Tier 1 or Tier 2 security.
- Tier 1: All securities in the S&P 500, the Russell 1000 and select exchange traded products.
- Tier 2: With limited exceptions, all other NMS securities.
Per the LULD Operating Committee, the current price bands themselves are as follows:
Under LULD rules, there is a five-minute trading pause on an NMS security if trading is unable to occur within the specified price band after fifteen seconds. The trading pause may be extended for another five minutes and, thereafter, all markets may resume trading. If a security is in a trading pause during the last ten minutes of the exchange’s regular trading hours, the exchange will not reopen trading and will attempt to execute a closing transaction using its established closing procedures. Reg NMS Rule 611 provides certain exceptions to LULD price bands (i.e., Self Help, Not Regular Way, Open/Close, Crossed Markets, Intermarket Sweep, Benchmark, Flickering Quotes, and Stopped Orders) as well as other exemptions.
Reg SHO also imposes a single-stock circuit breaker. Instead of halting or suspending trading, it places heightened restrictions on certain types of trades. Rule 201 of Reg SHO prohibits short-selling at or below the national best bid in a security that declines 10% or more from its prior day’s closing price. Once triggered, the circuit breaker remains in effect for the remainder of the trading day and the following day. The circuit breaker can be retriggered on the following day. One of the primary policy goals of the Rule 201 circuit breaker is to allow long sellers a chance to sell without short sellers placing additional downward pressure on the price.
As the markets navigate the second-biggest bank failure in U.S. history, trading halts may continue in certain banking stocks and could have collateral consequences in other sectors.