Limit Up-Limit Down (LULD) is a market mechanism designed to mitigate excessive volatility by pausing or restricting trading in a security or cryptocurrency when its price movement exceeds predefined thresholds within a specified timeframe. This circuit breaker system aims to prevent flash crashes and promote orderly price discovery.
Mechanism
The LULD mechanism functions by establishing dynamic upper and lower price bands around a reference price, typically calculated as the average price over the preceding five-minute interval. If the last executed trade price for a security moves outside these bands for a predetermined duration, trading is either paused entirely or transitions to a limit state, prohibiting transactions beyond the established range.
Methodology
This framework relies on dynamic price bands that adjust in real-time, calculated and disseminated by a central exchange system, to accurately reflect prevailing market conditions. The strategic intent is to afford market participants sufficient time to react to significant price movements, thereby preventing irrational market behavior and preserving both liquidity and fairness across traditional and cryptocurrency exchanges.
Next-generation circuit breakers provide surgical, security-specific volatility control, replacing the blunt, market-wide shutdowns of traditional halts.
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