In May 2012, the SEC established the “NMS Plan to Address Extraordinary Market Volatility,” a mechanism designed to prevent exchange-listed stocks from trading outside of specified price bands. Known as “limit up–limit down” (LULD), this pricing mechanism triggers a trading pause in any stock that experiences a sharp increase or decrease in its price. The LULD mechanism assigns a price band around a reference price for a stock. If the national best bid and offer price equals or exceeds the price band, a trading pause will be triggered.
The reference price for any stock is equal to its average price over the previous five-minute period. The price band is a set of prices equal to some percentage above or below the reference price. If the national best bid and offer price matches either the upper or lower band’s limit points, it is called a limit state. If a limit state continues for 15 seconds, a five-minute trading pause will be triggered. The band width depends on the type of security, the price of the security, and the time of day according to the table below. Price bands are calculated using the following formula:
