Limit Up–Limit Down:
an effective response to the
Department of Finance, Hult International Business School,
Cambridge, Massachusetts, USA and Harvard University, Cambridge,
Purpose – The purpose of this paper is to assess the US Securities and Exchange Commission’s new
regulation, Limit Up–Limit Down (LULD), against the background of manipulative high-frequency
Design/methodology/approach – This paper examines the background of HFT and related
manipulative tactics by reviewing 43 articles of empirical research. It also examines areas in which
LULD is effective and those in which LULD fails. The assessment of LULD is completed with a
comparison between computerized regulation and legal enforcement in the contemporary reality of
electronic trading platforms.
Findings – The paper points out the effectiveness of LULD in regulating wild price volatility as well as its
insufciency when facing orderly but fast price momentum ignited by manipulative HFT such as “spoong”.
Practical implications – The ndings may provide assistance to lawmakers and regulators to
improve LULD regulation.
Originality/value – This paper is the rst attempt to assess LULD regulation against a
comprehensive background of manipulative HFT. The paper is of value to other researchers concerned
about the instability to the equity market that manipulative HFT can create. The paper is also of interest
to policymakers in designing effective regulation in the high-frequency era.
Keywords Manipulation, Computerized regulation, Flash crash, High-frequency trading,
Limit Up-Limit Down, Spoong
Paper type Research paper
In today’s complex electronic markets, we need an automated and appropriately calibrated
way to pause or limit trading if prices move too far too fast.
US Securities and Exchange Commission (SEC) Chair, Mary Schapiro (SEC, 2015).
1. “Flash crash”
Equity investors and traders in the US stock exchanges watched in shock when the
“Flash Crash” occurred on the New York Stock Exchange (NYSE) on May 6, 2010. At
2:42 p.m., the Dow Jones Industrial Average (Dow) was down more than 300 points; the
index then started to fall at faster speeds. In the next 5 min, it lost more than 600 points.
The author thanks Dr Xin Yan for inspiration and Dr Michael H. Wang for helpful discussions.
The author gratefully acknowledges the insights provided by Editor John Ashton and the
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Journalof Financial Regulation
Vol.24 No. 4, 2016
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