Limit Up-Limit Down (LULD) is a market mechanism designed to prevent extreme volatility and sudden price swings in securities trading. It establishes price bands within which a stock is allowed to move during a trading session. If a stockís price reaches the upper or lower limit of this band, trading is paused temporarily to maintain orderly market behavior and protect investors from erratic price movements.

Under the LULD mechanism, each security is assigned a reference priceóusually the average of recent trades. Based on this, a permissible price range or ìbandî is calculated. For example, if a stockís reference price is ?100 and the limit band is 10%, it can move only between ?90 and ?110. When the price hits either limit, trading is halted for a short period, giving the market time to stabilize before trading resumes.

The primary objective of the LULD rule is to reduce the impact of high-frequency trading errors, market manipulation, and panic-driven buying or selling. It ensures that stock prices reflect genuine demand and supply dynamics rather than short-term speculative activity. In India, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) apply similar mechanisms through circuit filters and dynamic price bands to safeguard market integrity.

Globally, the Limit Up-Limit Down system was introduced by U.S. exchanges after the 2010 ìFlash Crash,î when stocks experienced extreme, momentary price drops. Since then, the system has been effective in enhancing market stability and investor confidence. For Indian investors, understanding LULD is crucial, as it helps them recognize when and why a stockís trading may be halted, enabling better decision-making and risk management in volatile market conditions.