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Wednesday, June 6, 2012

Equity Regulatory Alert #2012 - 7
Limit Up-Limit Down Plan Approved by the SEC, Effective February 4, 2013

Markets Impacted:

Contact Information:

What you need to know:

  • The Securities and Exchange Commission (SEC) has approved, on a pilot basis, the proposal to create a market-wide Limit Up-Limit Down mechanism, intended to address extraordinary market volatility in NMS Stocks, as defined in Rule 600(b)(47) of Regulation NMS under the Exchange Act.
  • All trades occurring on NASDAQ, BX, PSX, NOM, PHLX and BX Options will be impacted by this change.
  • Phase 1 is effective February 4, 2013.

What has the SEC approved?

On May 31, 2012, the SEC approved, as part of a one year pilot, the Limit up-Limit Down (LULD) plan to address extraordinary market volatility with a mechanism to prevent trades in NMS securities from occurring outside of specific price bands. The bands (detailed below) will be set at a percentage above and below the average reference price of the security over the immediately preceding five-minute period. To accommodate more fundamental price moves, there will be a five minute trading pause - similar to the pause triggered by the current single stock circuit breakers - only if trading is unable to occur within the specified price band after 15 seconds.

Additional details will be communicated soon.

When is the change effective?

In order to provide appropriate time to develop and test the technology necessary to implement the plan, including market-wide circuit breaker testing, the implementation date is February 4, 2013.

The plan will be implemented as a one-year pilot program in two phases: Phase I will apply immediately following the initial date of plan operations; Phase II will commence six months after the initial date of the plan.

What securities will be impacted in Phase 1?

Phase 1 will apply to Tier 1 NMS securities only - S&P 500, Russell 1000 and selected exchange listed products (see Appendix A - Schedule 1 for full listed of ETPs).

Phase 2 will include Tier 2, which includes all NMS securities.

Will the LULD plan replace the Single Stock Circuit Breakers?

Yes, rolled out in phases.

What are the limits and what price levels apply to each band?

Securities Time Period Price Band Percentage
Tier 1 and Tier 2 NMS Securities
Reference Price
> $3.00		 Outside Market Open/Close 5% (Tier 1)
10% (Tier 2)
Tier 1 and Tier 2 NMS Securities
Reference Price equal to $0.75
up to and including $3.00		 Outside Market Open/Close 20%
Tier 1 and Tier 2 NMS Securities
Reference Price Less than $0.75		 Outside Market Open/Close The lesser of $0.15
or 75%
Tier 1 and Tier 2 NMS Securities
Reference Price
> $3.00		 During Market Open/Close (Phase 2 Only)

9:30 a.m. and 9:45 a.m. ET

3:35 p.m. and 4:00 p.m. ET 		10% & 20%

Note: Band % is doubled during these times.
Tier 1 and Tier 2 NMS Securities
Reference Price equal to $0.75
up to and including $3.00 		During Market Open/Close (Phase 2 Only)

9:30 a.m. and 9:45 a.m. ET

3:35 p.m. and 4:00 p.m. ET 		40%


Note: Band % is doubled during these times.
Tier 1 and Tier 2 NMS Securities
Reference Price less than $0.75 		During Market Open/Close (Phase 2 Only)

9:30 a.m. and 9:45 a.m. ET

3:35 p.m. and 4:00 p.m. ET 		Lesser of $0.30 or 150%
(upper band only)

Note: Band % is doubled during these times.

How are the limit bands calculated?

Limit bands are calculated off of a reference price that will be continuously updated off of the arithmetic mean price based on eligible reported transactions, i.e., only those transactions eligible to update last sale price.

When will the LULD functionality be in effect during the trading day?

During Phase 1, the price bands will be calculated and disseminated 15 minutes after the start of Regular Trading Hours. No price bands will be calculated and disseminated less than 30 minutes before the end of Regular Trading Hours.

In Phase II, the price bands will fully apply to all NMS stocks beginning at 9:30 a.m., ET, and ending at 4:00 p.m., ET, each trading day, except in cases of an early scheduled close.

Is NASDAQ OMX planning to provide a Compliance Tool for firms to track Limit Up-Limit Down?

Yes. NASDAQ OMX is planning to introduce a compliance tool that helps firms track trades that trade outside limits on the FINRA/NASDAQ Trade Reporting Facility (TRF) and also track trades that take place near a band change. In addition, the tool will have a historical look up feature to track pricing band changes. Please contact Athena Lai at +1 301 978 5262 for questions.

Who should I contact for more information?


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