# Limit Down: Definition and How It Works for Stocks and Futures

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> **Definition**
>
> Limit down refers to a significant decline in the price of a stock or futures contract that triggers trading restrictions to mitigate volatility and allow traders to respond to market changes.

## What Is Limit Down?

Limit down is a decline in the price of a [futures contract](https://www.investopedia.com/terms/f/futurescontract.asp) or a stock large enough to trigger trading restrictions under exchange rules. Limits on the speed of market price movements, up or down, aim to dampen unusual [volatility](https://www.investopedia.com/terms/v/volatility.asp) and to give traders time to react to market-moving news, if any. [Trading curbs](https://www.investopedia.com/terms/t/tradingcurb.asp) triggered by extreme price movements are sometimes called circuit breakers.

Limit down measures the decline from a reference price, usually but not always the prior session's closing price. The limit down is typically expressed as a percentage of the reference price, but occasionally in absolute terms as a dollar value.

### Key Takeaways

*   Restrictions can be in the form of trading halts ranging from five minutes to the remainder of the session. They can also allow trading to proceed at prices no lower than the limit down.
*   The Limit Up-Limit Down rule attempts to dampen sudden price moves in individual stocks.
*   Market-wide circuit breakers are triggered by large intraday declines in the S&P 500 index.

## Understanding Limit Down

Trading curbs including limit down halts are designed to limit self-reinforcing plunges and surges in market prices based on the behavior of other market participants and in response to late-breaking information.

Once the limit down price is reached, trading restrictions kick in. These can range from a trading halt as short as five minutes to one that lasts for the remainder of the day. Some rules permit trading to continue with limit down as the minimum price.

## Limit Down in Futures Markets

The [London Metal Exchange](https://www.investopedia.com/terms/l/londonmetalexchange.asp) adopted a limit down rule restricting trading to a pre-set percentage decline from the prior closing price in March 2022, in response to volatile trading in nickel futures.

CME Group energy futures impose a two-minute trading pause when markets move up or down more than 10% in an hour.

For lumber and agricultural products, CME Group sets the limit down as a change in dollar terms from the settlement price in the prior session. The limits are reset twice a year based on a percentage of the average price over a preceding 45-day period.

## Stock Market Circuit Breakers

U.S. stock markets are subject to trading restrictions triggered by severe daily declines in the [S&P 500 index](https://www.investopedia.com/terms/s/sp500.asp) as follows:

*   a decline of 7% from the prior day's close before 3:25 p.m. Eastern time initiates a 15-minute trading pause for all stocks
*   a decline of 13% from the prior day's close before 3:25 p.m. ET also requires a 15-minute trading pause in all equity trading
*   a decline of 20% from the prior's day's close at any time during the trading day halts trading for the remainder of the day

U.S. stock markets were halted for 15 minutes after a 7% intraday drop in the S&P 500 index on four occasions during the sell-off sparked by the COVID-19 pandemic in March 2020.  

## Limit Down for Individual Stocks

The so-called Limit Up-Limit Down rule, in effect since 2012, requires trading starts lasting 5 to 10 minutes for stocks experiencing excessive volatility.

For stocks included in the S&P 500 or the [Russell 1000](https://www.investopedia.com/terms/r/russell_1000index.asp) indexes and certain [exchange-traded products](https://www.investopedia.com/terms/e/exchange-traded-products-etp.asp), the trading pause starts once the price moves up or down at least 5% from the average price in the preceding five-minute period for securities priced above $3. For other stocks priced above $3, a move of 10% from the same reference price is grounds for a five-minute halt.

The Limit Up-Limit Down rule and the S&P 500 circuit breakers were adopted after the 2010 "flash crash," which saw the S&P 500 drop nearly 9% at the intraday lows of May 6, 2010.

## The Bottom Line

A Limit Down in financial markets is designed to prevent panic selling and market crashes. It is the opposite of a Limit Up. A limit down sets a maximum amount of a securities price drop allowed in a single trading session.  

> **Article Sources**
>
> 1.  CME Group. "[Product Examples for Daily Price (Trading) Limits](https://www.cmegroup.com/confluence/display/EPICSANDBOX/Product+Examples+for+Daily+Price+%28Trading%29+Limits)."
>     
> 2.  CME Group. "[Understanding Price Limits and Circuit Breakers](https://www.cmegroup.com/education/articles-and-reports/understanding-price-limits-and-circuit-breakers.html)."
>     
> 3.  LME. "[Changes to Daily Price Limits for Nickel](https://www.lme.com/api/sitecore/MemberNoticesSearchApi/Download?id=2315779f-dd04-4652-9870-87c4a6b51bc3)," Page 1.
>     
> 4.  CME Group. "[Grain, Oilseed, and Lumber Price Limit FAQ](https://www.cmegroup.com/education/brochures-and-handbooks/grain-oilseed-and-lumber-price-limit-faq.html)."
>     
> 5.  Investor.gov. "[Stock Market Circuit Breakers](https://www.investor.gov/introduction-investing/investing-basics/glossary/stock-market-circuit-breakers)."
>     
> 6.  Securities and Exchange Commission. "[Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Extend the Market-Wide Circuit Breaker Pilot to April 18, 2022](https://www.sec.gov/rules/sro/nasdaq/2022/34-94433.pdf)," Page 4.
>     
> 7.  Limit Up Limit Down. "[Plan](https://www.luldplan.com/)."
>     
> 8.  U.S. Commodity Futures Trading Commission, U.S. Securities and Exchange Commission. "[Findings Regarding the Market Events of May 6, 2010](https://www.sec.gov/files/marketevents-report.pdf)," pp. 1-8.