Limit Up

Limit Up refers to the highest amount to which a stock price is allowed to rise during a given day. When this upper limit of price movement is specified, the exchanges halt the stock's trading as and when the specified limit is reached. This ensures that there is no artificial manipulation and volatility of stock or futures pricing by traders or brokers.

The limit up mechanism helps to maintain amicable and orderly trading environments by routine adjustments through exchanges per market conditions. In the process, the prices of stocks are derived from the primary market fundamentals of demand and supply.

Limit up means the maximum movement allowed for a stock price in a day. This concept holds prominence in futures contracts. A futures limit up has been used basically for commodities futures markets, allowing regulators to stop volatility from breaching the extreme ends. Using this method, the stock exchange tracks the trading of every futures contract and puts its trading on hold automatically if it reaches its limit-up price.

It works using a trigger approach, whereby any security or futures contract reaching its limit up price has its trading halted until a predetermined duration. However, the limit rules are different for different futures contracts. This means that trading of one contract might be put on hold because it has reached a specific limit, while the other might witness continued trade even above that limit.

As a result, traders and investors are able to reevaluate the situation and make the correct, informed decisions about trading. Moreover, exchanges can even stop if the prices of stock securities or futures continue to go beyond the cut-off level.

For instance, Chicago wheat limit up and bursa limit up specifications prove to be beneficial in terms of maintaining market stability by preventing market panic, excess price movements, and excessive losses. Further, it provides traders a cooling period in case of any market-affecting events or news so that they can make the right trading decisions without any loss. Many large exchanges like NASDAQ and the New York Stock Exchange (NYSE) use the mechanism to prevent the market from crashing.

Let us use a few examples to understand the topic.

Example #1

An article published on May 10, 2024 covered details of Kobay Technology Bhd's share price reaching its limit, whereby Bursa Malaysia issued a query to the firms regarding unusual market activity (UMA) of its share price. The query was directed at disclosing any secret corporate development or any other strong reason for the surge. The share price increased to RM2.50 and to RM2.40 at closing, showing an unprecedented hike of 29.50% & 24.35%, respectively.

As compared to its 30-day average trading volume of 1.22 million, its trading volume hiked to 26 million shares. Moreover, Kobay's valuation stood at RM782.83 million without any coverage by institutional analysts. It faced a similar UMA query in June 2021 during its acquisition of stakes in healthcare firms.

Example #2

Let us assume that stock A on the Old York exchange experiences a sudden hike in its trading volume. Stock A, usually traded at $50, jumped to the upper limit of $65 per share with a jump of 30%. Therefore, the exchange immediately halted the trading of stock A as it triggered an upper limit scenario. It issued a formal query to the stock A issuing company to learn about the reason for the rapid surge in its stock price.

Stock A's company fails to answer the exact reasons for the sharp rise in stock price or any undisclosed business development. However, it was able to hint at a possible tie-up with a multinational company for medical supplies in a country's COVID-19-hit markets.

Several benefits to traders, investors, and markets as a whole, as follows:

• It prevents extreme price rises, ensuring the formation of speculative bubbles to protect investors buying securities at manipulated high prices.
• It provides market stability and boosts investor confidence by capping on daily maximum price rises.
• Investors and traders are protected from trading at artificially higher prices. 
• It forces traders to stay in markets using trading strategies.
• It prevents the detachment of prices from their derived fundamentals, promoting and improving market efficiency.
• It helps markets adhere to regulations and leads to a transparent, fair, and orderly market.