Last Updated on 14 October, 2021 by Samuelsson
As a trader, you should know that trading in any stock can get halted at any time — as was the case with GameStop (NYSE: GME) several times on the 27th and 28th of January 2021. When a stock exchange halts trading in a stock, your broker will not be able to buy or sell any position in the stock during that period.
There are a few reasons why an exchange can halt trading in a stock, and they include anticipation of a news announcement, extreme market volatility, a technical glitch, or regulatory concerns. The essence of halting trading is to protect the stock from potential market manipulations.
In this post, we will discuss all you need to know about a trading halt, including why it happens, the benefits, and how it can impact the price of the stock, but first, let’s find out what a trading halt is.
What is a trading halt?
A trading halt, also known as a stock halt, refers to a situation where there is a temporary suspension of trading for a particular security at one exchange or across numerous exchanges. The decision could arise on account of different factors, such as the anticipation of a news announcement, to correct an order imbalance, the presence of a technical glitch, or the imposition of regulatory actions. Also, in situations where a company goes for merger and acquisition, trading may be halted for the time being till the merger or acquisition is over.
When an exchange places a trading halt on a stock, open orders may be canceled and the brokers cannot buy or sell the stock during that period. However, options still may be exercised.
Why does trading in a stock get halted?
Typically, three conditions may lead to halting trading in a stock, and they are as follows:
- Big announcements
- Extreme volatility in the stock
- A trading suspension by the Securities and Exchange Commission (SEC)
An exchange may, at the request of a company, halts trading in the company’s stock when a big announcement that can greatly affect the price of the stock is to be made. The essence is to ensure equal dissemination of information and also give investors time to absorb the news before trading resumes in the stock. These are some of the announcements that may warrant a trading halt in a stock:
- Major corporate transactions, such as a merger or acquisition, restructuring, etc.
- A public announcement about the company’s products or services, including product recalls.
- Regulatory or legal developments that may affect the company’s ability to do business, including not meeting regulatory listing requirements
- Significant changes to the company’s financial health, including debts and personnel changes to upper management
Most of this sensitive information is released after the day’s market close to give investors enough time to evaluate the information. However, this often leads to a huge imbalance between buy and sell orders by the time the market opens the next morning. So, the exchange may decide to enforce an opening delay or halt trading immediately after the market opens. When the trading halt is initiated at the official open of trading, it is called held at open. These sort of trading halts or delays often last a few minutes, until a balance between buy and sell orders are restored.
Another reason for halting trading in a stock is when the stock’s price movements become exceptionally volatile — the price moves higher or lower quickly and unpredictably, especially when there is no news coming from the company that would explain the change. For this kind of situation, the exchange has a mechanism in place to automatically halt trading for a few minutes when the stock spikes up or down by a certain percentage within five minutes — as happened several times with GameStop trading on Jan. 27 and 28, 2021.
A trading suspension by the Securities and Exchange Commission
The SEC has the power to suspend trading in any publicly traded stock for up to ten days if it suspects a foul play in trading activities, or what is called market manipulations. The essence is to protect the investing public from the market manipulations, which, according to the laws that govern the stock market, occur when some investors try to create excitement and activity in a particular stock specifically to entice people to buy that stock and drive up the price.
When that sort of a thing happens and those same initial investors then sell the stock at a higher price, SEC would suspect a market manipulation, often known as a “pump-and-dump” scheme, and may initiate a trading suspension in the stock. Sometimes, those investors may be connected to the company and have access to certain information before the investing public — a situation called insider trading. This can also lead to an SEC investigation and possible trading suspension.
A unit of Citigroup was accused by the SEC of using the pump and dump scheme to hype the price of their mortgage-backed securities (MBS) in an effort to unload it at an inflated price during the financial crisis of 2007/2008. There are concerns in some quarters that the recent extreme volatility in the GameStop stock was triggered by a pump and dump scheme initiated by a group of investors in a Reddit forum, and the SEC has said that they are monitoring the situation and are poised to investigate the more controversial issue where several brokers, including Robinhood, Ameritrade, and Charles Schwab, restricted trading of GameStop and a few other stocks on their platforms.
Examples of trading halts in the past
Apart from the multiple temporary halts in GME stock trading on Jan. 27 and 28, 2021, there have been many other examples of trading halts on different stock exchanges around the world in the past. Let’s take a look at some of them:
- The Toronto Stock Exchange, in June 2018, halted trading in the stock of Northview Apartment Real Estate Investment Trust due to the release of material news – the trust’s acquisition of a 623-unit portfolio of six apartment properties.
- Nasdaq, in 2016, halted trading in the stock of DryShips Inc. (DRYS) after it made a price surge of 1500% in one week, pending additional information from the company.
- The Australian Stock Exchange, in 2010, halted trading in the stock of Sundance Resources Ltd (SDL) at the request of the company following the news that the company’s CEO and Chairman went missing after a flight accident in South Africa.
The benefits of halting trading
While investors in a stock that is halted may get panicky, trading halts are part of the exchange’s efforts to protect investors and enforce a level playing ground between investors who are up to date on the news and those who are simply not informed about the latest happenings. Some of the benefits of temporarily halting trading in a stock include:
- Giving all market participants the opportunity to be informed about any news
- Preventing arbitrage opportunities and potential illegal transactions
- Buying time for other exchanges to receive the news and halt trading of that stock on their own marketplaces
How a trading halt impacts the price of the stock?
Expectedly, there are two possible effects a trading halt can have on the stock price: it can either make the stock price go up or spike down after the halt ends. The direction the stock takes when trading resumes will be hugely dependent on the primary reason for halting trading in the stock. If the reason is something that can affect the stock positively, the price will likely surge when trading resumes, but if it’s something that can negatively affect the company, the price is likely to decline.
What can you do when a halt strikes?
There is nothing much you can do when a trading halt happens other than to wait for trading to resume again. Obviously, you may get anxious and panicky, but you just have to be patient and wait for the halt to end. While you wait, assess the potential damage, in case the market moves against you when trading resumes, and plan what you will do when the halt is lifted.
The first thing in your assessment is to check to see the reasons for the trading halt. If it is just a change within the company, the price of the stock may go up on resumption of trading, and you stand a chance of making some money. However, if it is a case of fraudulent activities within the company, the trading halt may last longer and have serious consequences on the stock’s price. If that is the case, you will likely lose money, but you can prepare to control the damage the much you can.
What market-wide circuit breakers?
There are situations when an exchange initiates market-wide trading halts. For the NYSE, under 2012 rules, market-wide circuit breakers can kick in when the S&P 500 index drops 7% (Level 1) and 13% for Level 2. A Level 1 or 2 circuit breaker that is triggered before 3:25 p.m. Eastern Time will halt trading for 15 minutes, but if it occurs at or after 3:25 p.m., there will be no trading halt.
A market decline of 20% in a day triggers a Level 3 trading halt, which means that the market would be closed for the rest of that day, to open again the next trading day.