Stock markets are similar to highways without stop, they are moving up and down and that moving stream, feel like never ending but sometimes even in best highway, crashes are irrepressible. In Finance halts are like crashses, they are break point for buying and selling and it stops or freezes in a certain period of time.
What is Halt?
A stock halt is the pausing of trading for a specific security. The halting is temporary and usually based on a significant factor like regulations, current or expected volatility, or a lack of liquidity.
Trading halts happen often, but brokerages rarely halt stocks. Typically, major indexes like the Nasdaq or New York Stock Exchange halt stocks due to issues around regulations, volatility, and liquidity.
Brokerages have halted trades in extreme cases when their liquidity cannot meet trading demand.
Why Trading Halts are Occurs?
Trading halts can occur for several reasons, three of the most popular being:
1. News Is Released That Could Impact Stocks
2. Security No Longer Meets Listing Requirements
3. Trading In All Securities Suspended
Common Causes of Trading Halt
Circuit Breaker Halts
When an exchange like the Nasdaq or NYSE halts trading for a security, it’s usually triggered automatically. There are three levels of market wide circuit breakers that trigger widespread halts to protect the market from panicked selloffs:
Level 1: 15-minute halt due to a 7% decrease from the S&P 500’s previous close
Level 2: 15-minute halt due to a 13% decrease from the S&P 500’s previous close
Level 3: Day-long halt due to a 20% decrease from the S&P 500’s previous close
Future Halts
In after hours trading, the S&P 500, NASDAQ 100, and DJIA futures contracts trigger trading halts when they fall 5% below (lock limit down) or 5% above (lock limit up) their respective closing prices. However, this still enables stocks and ETFs to continue trading in the after hours sessions. The S&P 500, NASDAQ 100, and DJIA exchange-traded-funds (ETFs) trading prices can give a better indication of where the markets are trading even when the futures are frozen. (Source)
News Halts
News halts pertain to “News Pending” related catalysts or events that can have a sharp and material impact on stock prices. These types of halts are usually requested directly from the underlying company in anticipation of potential price volatility in reaction to a pending announcement.
Some of the more common events can be earnings-related (i.e., earnings guidance raise or cuts), corporate actions (i.e., CEO resignation/replacement, acquisitions/mergers), FDA drug approvals/rejections, legal rulings/judgments (i.e., patent settlement) and tender offers/solicitations. Specifics can often be found on an 8-K filing that often proceeds the announcement.
News related trading halts can last from 15-minutes to overnight depending on when the trading halt enacted and the type of news. For example, a trading halt for a biotech stock ahead of an FDA advisory panel vote could last a full day, whereas an earnings warning could last until 15-minutes after the announcement.
Volatility Halts
Volatility halts are single stock circuit breaker halts that trigger 5-minute halts on fast price spikes or drops that exceed the acceptable trading price range (ATPR) for 15-seconds. The ATPR is calculated as the average price of the previous 5-minute trading period.
Different stocks have different ATPR ranges. Volatility halts trigger when shares exceed 5% of the ATPR for Tier 1 National Market Systems (NMS) listed securities on the S&P 500 and Russell 2000 priced above $3.00-per share between 9:45 am EST to 3:30 pm EST market hours and 10% of the first 15-minutes and last 25-minutes of market hours.
Tier 2 stocks halt above 10% of ATPR between 9:45 am EST to 3:35 pm EST and 20% of ATPR in the first 15-minute and last 25-minutes of market hours. Other stocks’ prices between $0.75 and $3.00-per shares triggered volatility halts above 20% of APTR between 9:45 am EST to 3:35 pm EST and 40% in the first 15-minutes and final 25-minutes of market hours.
Compliance Halts
Compliance halts can be originated by regulatory bodies, including the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), or the stock exchanges (NYSE, AMEX, and NASDAQ). Stocks can be halted for any number of non-compliant filing issues (i.e., failure to file or non-current 10-Q), de-listing, or requests for more information (i.e., unusual trading activity) from the stock exchanges. An SEC suspension trading halt can be devastating to shareholders as the implication/accusation of fraudulent activity could result in total loss of value.
Stock Halts Codes and Their Meanings
LUDP or LULD: Volatility trading pause (high volatility can be risky for investors and investing institutions)
T1: News pending (good or bad material may be awaiting publication, in which case a stock is halted to give investors of all echelons a fair amount of time to make an educated decision of whether to buy or hold out)
H10: The SEC causes this one (it’s commonly seen with penny stocks)
Examples of stock halts in 2021
Brief trading halts occur daily. On June 23, stocks like SharpSpring (SHSP) and Gaucho Group Holdings (VINO) were halted for news pending and volatility, respectively.
More noteworthy halts have occurred over the year as well.
On Jan. 22, GME automatically triggered a circuit breaker based on volatility to help curb panic sales. It was halted another nine times on Jan. 25.
On Jan. 28, AMC, GME and other stocks were briefly halted for trading volatility. Trading app Robinhood allowed investors to sell their positions, but forbade buying during that period.
On Mar. 10, GME was halted for volatility. On June 2, the NYSE imposed a volatility trading halt for AMC.
Notice a trend here? The meme stock enthusiasm seems to have put the market out of whack, causing stock halts left and right. This just goes to show that social sentiment can reach far, and the 231-year-old U.S. stock market may have to evolve with the times. (Source)
Final Thoughts - Are trading halts good?
To a large extent, trading halts are good for the market. Besides, they help traders reflect on the reason for the substantial movements of stocks and other assets. They also help prevent panic-selling among worried traders. In fact, it is not uncommon to see a stock rise shortly after a halt has ended.
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