Trading Halts: What Are They, What Causes Them And How Can They Affect You?

If you find that trading has stopped, don’t panic. Trading halts are normal in the investing world. While it’s natural to get nervous, a stock market halt may benefit you. The point of them is to protect you, the investor, and to make it more fair between those who have more knowledge of the latest news and those who don’t.

Let’s take a look at what a trading halt is and how it may affect investors.

What Is A Trading Halt?

When a trading halt (or market halt) happens, trading on a certain security stops completely for a certain amount of time. During a trading halt, brokers are forbidden to trade on the stock in question until the halt is lifted. Any open orders may be canceled.

In most cases, trading halts happen when there is pending news to be announced that can significantly affect a stock price. Public exchanges like the Nasdaq and the New York Stock Exchange (NYSE) have thousands of stocks which are traded daily. Companies with publicly traded stocks agree to provide information to these exchanges before telling the general public.

Therefore, these exchanges may choose to enact a trading halt based on information they receive to promote fairness in trading.

Regulatory Vs. Nonregulatory Trading Halts

Regulatory trading halts occur when public exchanges determine from looking at corporate reports that its impact requires one. It also happens when there are responses to major events such as natural disasters that affect businesses or concerns due to a security’s compliance with listing standards.

Nonregulatory trading halts, on the other hand, occur when there is the potential for extreme volatility, such as when there’s an order imbalance of buyers and sellers detected. Some might happen automatically when a security has exceeded its allotted trading contracts or daily trading limit.

In some cases, an exchange may delay opening trading for a security the next day if there has been significant news released after trading closes. The point would be to help correct any imbalances due to orders during the off-hours.

What Causes A Trading Or Stock Market Halt?

Trading halts happen at the beginning of the trading day and are put in place by one of the major stock exchanges or the Securities and Exchange Commission (SEC). They typically happen when there is important business-related news that could significantly affect a security’s price. Examples of pending news include:

• Changes in a business’s financial stability.
• Company restructurings or mergers.
• A company’s product being recalled.
• Personnel changes in upper management of a company.
• Legal announcements regarding a company or its personnel.

Exchange circuit breakers can also occur — either halting the entire market or individual stocks. According to the law, when an individual security experiences a 10% change in value within five minutes and it’s a member of the S&P 500 Index, Russell 1000 Index or QQQ ETF, a trading halt could be triggered.

Plus, trading halts can occur if an individual security whose prices are less than a dollar per share experiences a 50% change in value, and ones that are at least one dollar per share experiences a 30% change in value.

How Can A Trading Halt Affect Me?

For those who invest in stocks, new orders can still be placed. However, new or existing orders will not be processed until trade resumes. Remember, halts are implemented to give investors time to learn more information about the securities in question and make informed market decisions. Take this opportunity to look at information on an exchange’s website to help you make informed investing decisions when the market or a security opens up.

Trading halts can affect exchange-traded funds (ETFs) as well. Since their net asset values (NAVs) are based on the prices of the securities they hold, a halt can result in bad pricing. This is due to the fact that it’s virtually impossible to seek accurate information on the ETF’s underlying securities, therefore the ETF can’t price their fund with confidence.

How Long Do Trading Halts Typically Last?

A trading halt typically lasts for an hour before trade resumes, though it can happen for longer at any time of the day. For instance, if a market decline leads to the S&P index to drop at least 10%, trading will be halted for 15 minutes.  The SEC also has the power to suspend any publicly traded stock for up to ten days if it believes that there is a risk of the stock continuing to be publicly traded.

Examples Of Halted Stocks

The following are some well-known examples of trading halts in the stock exchange:

• The National Stock Exchange of India (2020): The stock exchange was halted for 30 minutes due to falling oil share prices related to the COVID-19 pandemic.
• Nasdaq (2016): DryShips, Inc. stocks saw a 1,500% price surge over the course of a week, prompting Nasdaq to halt trading pending new information regarding the company.
• Australian Stock Exchange (2010): After their CEO and chairman were killed in a plane crash, Sundance Resources Ltd. requested a trading halt while news of the tragedy was properly circulated.

The Bottom Line

Trading halts, even for a few minutes, can affect your investments, whether that’s individual securities or ETFs. Their intention is to make it more fair to all investors, especially when news about a publicly traded company can significantly affect stock prices. If you diversify your investments and hold on for the long-term, funds tend to correct themselves.