Limits to Trading

Limits to trading are restrictions or difficulties that prevent investors from trading freely.

Even when investors identify mispricing, they may not be able to trade due to high costs, low liquidity, borrowing restrictions, or regulatory limits. These limits can reduce market efficiency.

Example:
Suppose a stock is trading at ₹400, but an investor believes its fair value is ₹450.

Potential gain:

₹450 – ₹400 = ₹50 per share

But if the stock has very low liquidity, the investor may not be able to buy enough shares at ₹400. By the time the order is executed, the price may already move to ₹440.

Now the possible gain is only:

₹450 – ₹440 = ₹10 per share

This shows how trading limits can reduce profit opportunities and slow down price correction.

So, fewer trading limits generally support better market efficiency.