Limit Up–Limit Down: an effective response to the “Flash Crash”?

Abstract

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 trading (HFT).

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 insufficiency when facing orderly but fast price momentum ignited by manipulative HFT such as “spoofing”.

Practical implications

The findings may provide assistance to lawmakers and regulators to improve LULD regulation.

Originality/value

This paper is the first 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.

Citation

Dalko, V. (2016), "Limit Up–Limit Down: an effective response to the “Flash Crash”?", Journal of Financial Regulation and Compliance, Vol. 24 No. 4, pp. 420-429. https://doi.org/10.1108/JFRC-04-2016-0040