Overnight trading gets price limits from 6 December, and the band switches off at 4 a.m. so that pre-market earnings news can move a stock as far as it likes
A stock traded at two in the morning currently has no ceiling and no floor.
From 6 December it gets both. The Securities and Exchange Commission approved the twenty-seventh amendment to the national market system plan that governs limit up-limit down, the mechanism built after the flash crash of May 2010, and the amendment extends price bands into the overnight session for the first time. Nasdaq filed it in May on behalf of eighteen participants, including every American equities exchange group and the Financial Industry Regulatory Authority. The Commission received no comments.
How the band is drawn
Overnight protected hours run from 9 p.m. Eastern on Sunday through Thursday to 4 a.m. the following morning.
The band is built from two reference prices rather than one: the official closing price reported by the listing market, and the consolidated last round lot sale as of 7:45 p.m. The lower band sits 20 percent below the lower of the two. The upper band sits 20 percent above the greater of the two. Where a stock closed below a dollar the minimum band is $1.00 from the reference price, and where it closed at a dollar or above the minimum is $3.00. A leveraged exchange traded product gets both numbers multiplied by its leverage ratio.
The participants told the Commission they chose 20 percent to match the static bands that alternative trading systems already apply overnight.
What happens at the edge
Nothing automatic. Unlike the daytime mechanism, hitting an overnight band triggers no trading pause. Trading centres are required instead to have written policies and procedures reasonably designed to prevent both trades and the display of quotes outside the band, which puts the obligation on every venue operating in those hours rather than on the listing exchange alone.
The listing exchange keeps a discretionary regulatory halt, and the order names two circumstances for it: orders consistently being placed outside the bands, or the bands themselves limiting price discovery. A halt overnight is terminal for the session. Orders are rejected while it runs, and the stock does not reopen until a later session.
Why it stops at four
The 4 a.m. cutoff is the most deliberate number in the document, and the participants explained it. Issuers release earnings and other price-sensitive information in the pre-market hours. A band calculated from the previous day's closing price would sit across that news. Ending the protection at 4 a.m. lets the price move on the announcement without the constraint.
So the protection covers the quiet part of the night and gets out of the way before the loud part.
What comes next
This is phase 1. The participants will report on how it works in the plan's quarterly reports, starting with the first full quarter of overnight trading, and will bring a second amendment that replaces these interim measures. The December start date is conditional on the tape processors completing their own systems work.
