A trading halt represents a temporary suspension of trading activities for specific securities, either on a single exchange or across multiple exchanges. This interruption can occur due to various reasons - anticipation of a news announcement, correcting an order imbalance, suffering a technical glitch, addressing regulatory concerns, or significant price movements that activate exchange-specific rules. Once a trading halt is enforced, open orders may be canceled, although options may still be exercised.
Trading halts differ substantially from trading suspensions mandated by the Securities and Exchange Commission (SEC). Under U.S. securities law, the SEC can halt public trading in any stock for up to 10 days to safeguard investors and the public interest.
Key Takeaways
- A trading halt is a brief discontinuation in trading activities for specific securities, possibly across multiple exchanges.
- These halts often occur ahead of news announcements, to adjust order imbalances, or following substantial and sudden changes in share price.
- Market-wide halts can be enacted due to severe intraday declines in the S&P 500 index, as per circuit breaker rules.
How a Trading Halt Works
Trading halts may be categorized as regulatory or non-regulatory:
Regulatory Halts
Regulatory halts happen when a security might no longer meet listing standards, gifting market participants time to process significant news. An example could be awaiting a decision from the U.S. Food and Drug Administration regarding a new drug application.
Such halts ensure wide dissemination of potentially price-moving news, avoiding first-access advantages. Key developments warranting regulatory halts might include corporate acquisitions, structural changes, regulatory impacts, or management alterations.
Once the primary U.S. exchange enforces a regulatory trading halt, other U.S. exchanges honor the halt.
Non-Regulatory Halts
In contrast, non-regulatory trading halts can emerge on the New York Stock Exchange (NYSE) to rectify significant buy-sell order imbalances. These halts usually last a few minutes until balance is restored, and trading resumes.
Companies often divulge sensitive information post-market hours, allowing investors ample reaction time. However, this can create heavy order imbalances at market opening; in such cases, exchanges might implement an opening delay or early trading halt until balance is re-established.
Under U.S. federal securities law, the SEC also wields the authority to suspend trading in any public stock for up to 10 days if they find an impending risk to public and investor interest. This is generally activated when companies fail to furnish periodic reports like quarterly or annual finances.
Circuit Breaker Trading Halts
U.S. securities exchanges have predefined rules for market-wide trading halts when drastic price declines pose threats to market liquidity:
- A cumulative 7% and 13% drop from the prior day’s S&P 500 closing level triggers a 15-minute halt if occurring before 3:25 p.m. ET.
- A 20% drop from prior-day close halts the stock market for the entire remaining trading day, regardless of the time.
Circuit breakers can also apply to specific stock trading under U.S. rules. For stocks over $3 included in S&P 500, Russell 1000, or specific ETFs, a 5% move in 15 seconds mandates a five-minute halt. Alternative thresholds exist – 10% for other stocks above $3, and 20% for stocks priced between $0.75 to $3.
Understanding the essence and mechanisms of trading halts helps investors appreciate and navigate the stock market, ensuring informed and timely decision-making.
Related Terms: market liquidity, order imbalance, regulatory concerns, circuit breaker, share price.
References
- U.S. Securities and Exchange Commission. “Trading Suspensions”.
- U.S. Securities and Exchange Commission. “Fast Answers: Trading Halts and Delays”.
- FINRA. “When Trading Stops: What You Need to Know About Halts, Suspensions and Other Interruptions”.
- U.S. Securities and Exchange Commission. “Investor Bulletin: Delinquent Filings”.
- Investor.gov. “Stock Market Circuit Breakers”.
- Limit Up Limit Down. “Overview”.
