Stock halts are a common mechanism that exists in trading and investing. If you happen to purchase a stock that gets halted it’s important to understand how stock halts work and how they can impact your position. If you happen to trade stocks that are very volatile, chances are high that you will experience a stock halt
Summary
- A trading halt is a temporary suspension of trading for specific security due to news, volatility, or regulatory reasons
- In most cases trading halts happen before the stock market opens
- Trading halts are in place to give protection to investors and traders
What is a Trading Halt?
A trading halt is a temporary suspension of trading for specific security due to news, volatility, or regulatory reasons. Trading halts can happen multiple times per day if deemed necessary by FINRA, and usually, last up to an hour. If companies are set to release material news that can impact the price of the stock, they are supposed to call the exchanges, 10 minutes before any news is released for the exchange to halt the stock before the news is released.
Stock halts are in place to give investors and traders time to review the news and make a more informed decision on the stock. When trading is halted, any pending or open orders may be canceled and any new orders will typically be rejected by the broker.
Why Do Stock Trading Halts Happen? Common Reasons
Extreme Levels of Volatility:
Extreme levels of stock volatility can cause circuit breakers to kick in on single stocks depending on the exchange it trades on. The current stock halt rules on the S&P500 Index and the Russell 1000 Index include:
- 5-minute time frame – 30% move in the value of a security whose price is equal to or greater than $1/share
- 5-minute time frame – 50% move in the value of a security whose price is LESS than $1/share
If this kind of movement happens in the stock within a 5-minute time frame, the stock will be halted for approximately 15 minutes. After the 15 minutes, trading will resume.
Trading Suspension by the SEC:
When security gets suspended for trading by the SEC, it is typically for non-compliance with the exchange’s listing requirements. This can include failing to file financial statements, paying listing fees, specific registrations, and more.
Trading halts of this type usually last much longer. It can be a few weeks to a few months, or until they satisfy the exchange’s listing requirements before trading in the stock can resume.
Trading suspensions are issued by the SEC. You can see a long list of past trading halts[1] done by the SEC dating back to 1995 on the website. They are more common than most people think.
News Pending Announcements:
A stock can be halted to allow vital news information to be disseminated by traders and investors that may have a significant impact on the price of the stock. These types of trading halts can be initiated by the company making the news announcement, the underlying exchange, or the regulator. An example would be a mergers and acquisition announcement. These types of trading halts can last a few hours.
What To Do If a Stock You are Trading Gets Halted
The most important thing to NOT DO if a stock you are trading gets halted is to panic. First, it’s important to find out what kind of stock halt it was. Once you know what kind of stock halt it was then you will know how long it will be halted for. If you’re unsure about how to find this information it’s highly recommended that you contact your brokerage’s support center and find out.
You can also check out resources online which can typically give you an idea of how long the stock halt will last. If you happen to get caught in a stock halt that will last more than a few days, then it’s recommended you contact your broker to get further information.
Example of a Stock Getting Halted (ISIG) (12/6/2021)
In this example, Insignia Systems Inc (ISIG)[2] stock got halted due to hitting a LULD (Limit-Up/Limit Down). As you can see, this created a price gap in the chart from when the stock was halted and after it reopened for trading. Stock gaps are very common when stocks get halted. Different types of gaps have different implications on price.
What is Limit Up-Limit Down (LULD)
The Limit Up-Limit Down plan was filed by FINRA [3] along with other financial organizations and was designed to help address sudden price movement in equities. The plan provides market-wide limit up and limit down mechanisms to prevent trades in NMS stocks from executing outside of specified “price bands”.
The LULD mechanism creates temporary trading pauses to accommodate more normalized price moves in volatile equities. The LULD is in place to protect investors and create less volatile markets. Check out the full details of the LULD plan.
Advantages of Halting Trading
If you hold a position in a stock that is in the middle of a halt, it can cause quite a bit of uncertainty for investors. However, they are in place to protect investors and traders and give them time to react to news or volatility and make a better investment decisions. Some of the advantages of stock halts include:
- Allowing traders and investors to be informed about sensitive company news
- Eliminating arbitrage opportunities and price manipulation
- Trading halts prevent panic-selling
Different Trading Halt Codes (NASDAQ)
Some exchanges have their own set of halt codes to help traders identify the type of halt specific security is under. The NASDAQ has the following stock halts:
- T1: News Pending Halt – This means that trading is halted pending the release of significant news
- T2: New Released Halt – Trading is halted to give investors and traders time to consume the news released
- T5: Single Stock Trading Pause in Effect – This means that trading is halted due to a 10% move in the price of security within a five-minute period (depending on the exchange)
- H10: SEC Trading Suspension Halt: A stock is halted by the SEC pending further investigation into the stock (typically the longest)
For a full list of stock, halts check out the TradeHaltCodes from NASDAQ.
How Exchange Circuit Breakers Work
Exchanges reserve the right to take the necessary measure to prevent panic selling by invoking Rule 48 and halting trading when the overall stock market has experienced an aggressive downfall. Below are some of the different circuit breaker thresholds on the S&P500, relative to the previous day’s closing price.
- Level 1 – 7%
- Level 2 – 13%
- Level 3 – 20%
Circuit breakers are in place to prevent additional market volatility. If Level 1 and 2 are breached, trading is halted for a minimum of 15 minutes. If level 3 is breached, trading is halted for the remainder of the day.
FAQ’s
Are Trading Halts Good?
Stock halts are in place to help market participants get up to speed on recent news about a company so they can make a more informed investment decision. They are good in that they help to provide investors with additional time to make a decision about the stock. It’s worth noting that stock halts can turn ugly pretty quickly. This depends on the type of stock halt that has been issued. It will also depend on the type of information released by the company.
What Happens When a Trade is Halted?
Investors will not be able to purchase or sell shares of particular security until the halt is over.
Who Decides to Halt Trading?
The majority of the time trading is halted directly by the exchanges. In unique cases, the SEC can halt trading for specific security if there is a pending investigation.
Can you Buy or Short a Stock During a Halt?
When a stock is halted your broker will reject orders and cancel any limit orders you may have in place. Orders will be accepted once the stock opens back up for trading.
How Do You If a Stock Has Been Halted?
If a stock has been halted the price of the stock will not be updated. There will usually be some sort of warning next to the ticker symbol which indicates trading has been halted.
Article Sources
[1] U.S Securities and Exchange Commission : Trading Suspensions – https://www.sec.gov/litigation/suspensions.htm
[2]NYSE Trading Halts : Regulatory Halts –https://www.nyse.com/trade-halt-current
[3] FINRA: Limit up-Limit Down Plan – https://www.finra.org/filing-reporting/trf/limit-uplimit-down-luld-plan
