Last Updated on 11 September, 2023 by Samuelsson
The trading job is complex. The more an investor learns about it the more confident he will be in making better decisions. One important situation every trader should be familiar with is when a trading halt occurs. What does that mean? When there is a trading halt, the activity on the stock is suspended. Trading halts usually occur in case of some major news announcement, for correcting an order imbalance, or because of technical glitches and regulatory concerns.
Trading halts are unexpected and can be uncomfortable. The stocks are being halted freeze and the traders need to wait until the halt is over. A trading halt is not necessarily a negative situation, and the stock price may go up once it’s over. The impact a trading halt can create depends on the reason why exactly it has occurred. Nevertheless, it requires calm and patience to get through it: an investor can either lose money or make a profit from the stock once the halt is over.
Why do trading halts occur?
Most commonly, stocks are halted if there’s some very important news coming up about them. It is usually interpreted that halts happen due to some bad news coming up, but that’s not actually the case all the time. For example, consider a company having some drug pending approval in the FDA. There can be a trading halt on that stock while the decision is announced by FDA, no matter if it’s good or bad. In case of approval, the price of the stock will rise high after the halt is over. But, if the drug is rejected, the stock price will go down significantly.
Similarly, the halts may happen because of changes in company’s financial condition, announcement of a merger, or if it is planning restructuring or acquisition. All these will definitely impact the stock’s direction and that calls for a halt.
How long does a trading halt last?
A trading halt really has no time limit. Most of the times, it lasts for just a few minutes, especially if the reason behind the trading halt is not very serious. However, a trading halt can even last longer as well.
Rarely, there are times when trading halts last more than 10 days. This is the worst halt to be caught in. When a trading halt exceeds 10 days, it’s called a trading suspension. In this case, a trader has the funds trapped in that halt, which can be quite uncomfortable. In this situation, there is nothing much you can do about it but wait and think about the next steps you will take once the halt is over.
How a trading halt impacts the price of a stock?
When a stock is being halted, there are two main possibilities: the price of that stock will either move up or down after the halt ends. This is influenced by many factors, but the most important one is the reason of the halting.
When a trading halt occurs, check to see what the reasons of the trading halt are. If there is just a change within the company, the price of the stock has more chances to go up after the halt ends. If you are lucky, you can gain a nice profit after such a trading halt is over.
However, when there is a more serious reason behind the trading halt, such as frauds being discovered within the company, the need to clarify financial aspects and so on, the trading halt may last longer and have serious consequences on the stock’s price. If you find yourself in that situation, prepare your steps ahead and make sure you exit the trading as soon as it is resumed. You will lose some money, but usually these situations are about damage control.
What should traders do when a halt strikes?
Traders and investors can’t do much about a halt but to wait for the halt to end and the trading activity to be resumed. It’s not a pleasant situation, but sometimes the price of the stock can see an upward spike once the halt is lifted. Patience, assessing the damage, and working out your appropriate next steps before the halt is lifted can help a lot.
When assessing the situation, it is really important that you identify the actual reason behind the halt. The halts are usually enacted by the very stock exchange where the stock is listed, the SEC, or on the request of the company when some major news is imminent. The stock that is being halted will receive a code that indicates the reason of the halt. For example, the T1 stands for news pending while the H4 halt is due to non-compliance of the company with listing requirements of the exchange. You can usually find this information online (ex: nasdaqtrader.com).
When you are in the middle of a trading session and a halt occurs, just wait for a few minutes. Most of the times, this is how long the halt lasts, so there is no need to panic. Sit back and wait for this period of trading inactivity to be over.
Even though you cannot identify exactly the moment when a halt will be over and the trading will resume, you can prepare in advance. Think of your options and decide what you will do if the price of the stock goes up after the trading resumes. Similarly, make up your mind as to how you will react if the price of the stock goes down after the trading resumes. It’s important to be ready to face either of these situations so you can make it work for you.
Trading halts will pause certain stocks and create insecurity and uncertainty for investors. Trading halts can be bad and they can be good as well. Your job as a trader is to seize the moment and observe the potential. The market itself is volatile, which is a great trigger to play the game in the first place. When you are in the middle of a trading halt, remember to assess the risks, gain an overview of the situation, and try to make it a win for you.