What Is a Trading Halt? Definition, How It Works, and Causes

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What Is a Trading Halt? Definition, How It Works, and Causes

What Is a Trading Halt?

A trade stop is a brief cessation of trading for a specific asset or securities on one or more exchanges. Trading may be suspended in preparation of a news release, to rectify an order imbalance, owing to a technical problem, due to regulatory concerns, or because the price of the securities or index has changed quickly enough to warrant a halt based on exchange regulations. When there is a trading stop, open orders may be canceled and options can still be executed.

Trading halts are distinct from Securities and Exchange Commission-ordered trading suspensions (SEC).To safeguard investors and the public interest, the SEC may stop public trading in any stock for up to 10 days under US securities legislation.

Key Takeaways

  • A trade halt is a momentary suspension in trading for a specific asset or securities on a single exchange or across several exchanges.
  • Trading halts are often used before a news release, to remedy an order imbalance, or in response to a substantial and sudden shift in the share price.
  • Under circuit breaker regulations, large intraday drops in the S&P 500 index may potentially cause market-wide halts.

How a Trading Halt Works

A trade stop may be either regulatory or non-regulatory in nature. Regulatory halts are used when there is question that a security will continue to fulfill listing criteria, giving market participants time to consider crucial news, such as a U.S. Food and Medication Administration ruling on a new drug application.

A trade stop enables widespread access to price-moving news and prevents those who get it first from benefitting from others who are late to the information. Corporate acquisitions and restructurings, regulatory or legal rulings, or changes in management are examples of major events that may necessitate a regulatory trading suspension.

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Other US exchanges respect a regulatory trading suspension in a securities by its principal US exchange.

To address a substantial imbalance between buy and sell orders, the New York Stock Exchange (NYSE) (but not the Nasdaq) may impose a non-regulatory trading suspension. Such trade halts usually last just a few minutes until order balance is restored and trading restarts.

Companies will often wait until the market closes before disclosing critical information to the public, giving investors time to examine the material and judge its significance. This strategy, however, might result in a huge imbalance between buy and sell orders prior to the market opening. In such circumstances, an exchange may elect to implement an opening delay or a trading stop immediately after the market opens. These delays are normally only in force for a few minutes as the balance of buy and sell orders is restored.

A federal securities statute in the United States also gives the Securities and Exchange Commission (SEC) the authority to suspend trading in any publicly listed stock for up to ten days. The SEC will employ this authority if it deems that continuing trading of the stock puts the investing public at danger. It often uses this authority when a publicly listed firm fails to submit periodic reports such as quarterly or yearly financial statements.

Circuit Breaker Trading Halts

In cases when large price falls endanger market liquidity, US securities exchanges have long-standing procedures for market-wide trading halts. If the &P 500 index falls by 7% or 13% from its previous day’s closing level before 3:25 p.m. ET, the market will be halted for 15 minutes. A 20% drop in the S&P 500 from the previous day’s closing halts trade for the rest of the trading day, regardless of when it occurs.

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Circuit breakers may also apply to any stock traded under US trading laws. Trading is halted for five minutes for stocks priced above $3 and included in the S&P 500 or Russell 1000 indices, as well as certain exchange-traded products like ETFs, after sudden moves of more than 5% and lasting more than 15 seconds—up or down—from the average price over the previous 5 minutes. Other equities valued over $3 need a 10% abrupt price shift for a trading stop, while those priced between $0.75 and $3 require a 20% or greater quick gain or loss.

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