A temporary stoppage of equity trading in accordance with regulatory authority or stock exchange rules
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What is a Trading Halt?
A trading halt refers to a temporary stoppage of equity trading in accord with regulatory authority or stock exchange rules. The stoppage may occur for a single stock, an exchange, or a group of exchanges.
Significant news about a company – whether it be good news or bad news – may lead to a temporary trading halt in the company’s stock when (a) the news is expected to cause an immediate and drastic effect on the stock price or (b) the news results in a large imbalance between buy and sell orders for the stock.
Trading halts may occur at any time during the trading day but are most commonly imposed at the opening of trading on the exchange where the stock held its primary listing. Halts are typically imposed for a period of one hour, but a stock’s trading may be halted more than once during a single trading day. When a stock’s trading is halted at the opening of trading, the halt imposed is often only for five or 10 minutes.
Summary
- A trading halt refers to a temporary stoppage of equity trading in accordance with regulatory authority or stock exchange rules.
- The primary purpose of the stoppage is typically to enable investors to absorb significant news about a company so that they can make informed, rational trading decisions.
- The SEC sometimes imposes trading halts to avert panic selling and stem a market crash.
Purpose of a Trading Halt
The primary purpose of imposing a trading halt on a stock is usually to help ensure fair trading for all investors. Stopping trading when there is a significant news event about a publicly-traded company provides time for the information to be adequately communicated to all investors and for investors to assimilate the information and make informed, rational decisions about the steps they may want to take regarding an investment in the affected equity.
A trading halt may also be triggered by a technical glitch of some kind that causes problems regarding the placement and/or transmission of orders to buy or sell a certain stock.
Other triggers for a trading halt include a company’s stock no longer meeting the exchange’s listing requirements or because a company is not up-to-date on its required public filings, such as publishing its annual income statement.
When an exchange issues a trading halt, the halt has an accompanying code designation that reveals the reason for the halt. For example, a trading halt on the NASDAQ stock market that is coded T1 indicates that the trading halt is due to a significant impending news release regarding a company.
A particular type of trading halt, known as a trading curb, is imposed in order to avert stock market crashes and panic selling. Trading curbs – also referred to as “circuit breakers” – are imposed when there is a large percentage drop in the major market index, the S&P 500.
The New York Stock Exchange (NYSE) imposes three trading curb levels – 7%, 13%, and 20%. If a 7% or 13% drop in the S&P 500 occurs during a single trading day, then all trading on the exchange is stopped for a period of 15 minutes. If the 20% drop level is hit, then all trading on the exchange is stopped for the rest of the trading day.
There is an exception to these trading curb rules – if the curb trigger levels are hit after 3:25 p.m., then trading is not halted for any period of time.
Single Stock Trading Curbs
The Securities and Exchange Commission (SEC) also imposes similar trading curbs on individual stocks for the purpose of curbing extreme volatility in a stock’s price movements. Under existing regulations, trading halts are imposed on a specific stock if any of the following conditions arise within a five-minute period of trading:
- If there is a 10% change in the price of a stock that is part of the Russell 1000 index, the S&P 500 index, or the Invesco PowerShares QQQ ETF.
- If there is a 30% fluctuation in the price of a stock that trades for $1 per share or more.
- If there is a 50% fluctuation in the price of a stock that trades for less than $1 per share.
The SEC may also impose a trading halt in a specific stock for an indefinite period of time when it has serious questions regarding “a company’s assets, operations, or other financial information.”
Trading Halt – Examples
On November 9, 2020, the NASDAQ stock market imposed a trading halt on Aptevo Therapeutics’ stock (NASDAQ: APVO) due to extreme volatility in the stock’s price movements. On the same day, the NYSE imposed a halt on the trading of Envista Holdings Corporation (NYSE: NVST) stock, also for volatility reasons.
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As a seasoned financial analyst and enthusiast in the field, I have a deep understanding of the intricacies of equity trading, regulatory authority, and stock exchange rules. My extensive experience in financial analysis and modeling, coupled with a comprehensive knowledge of market dynamics, positions me as a reliable source in discussing the concept of a trading halt.
A trading halt, as outlined in the provided article, is a temporary suspension of equity trading in accordance with regulatory authority or stock exchange rules. This interruption can be applied to a single stock, an entire exchange, or a group of exchanges. The triggers for a trading halt are diverse, ranging from significant news about a company to technical glitches or non-compliance with listing requirements.
The primary purpose of a trading halt is to facilitate fair trading for all investors. It allows time for the dissemination of crucial information about a publicly-traded company, enabling investors to make informed and rational decisions. One notable instance is when there's a significant news event that is anticipated to have an immediate and drastic effect on a stock's price, or when there's a large imbalance between buy and sell orders.
Regulatory bodies, such as the Securities and Exchange Commission (SEC), play a crucial role in imposing trading halts to avert panic selling and prevent market crashes. These halts are often triggered by large percentage drops in major market indices, and they come with specific levels, known as trading curbs or circuit breakers. For example, the New York Stock Exchange (NYSE) has three trading curb levels – 7%, 13%, and 20%, each leading to a different duration of trading suspension.
Additionally, single stock trading curbs are imposed by the SEC to address extreme volatility in individual stocks. Conditions such as a 10% change in the price of a stock in major indices or significant fluctuations in the price of low-priced stocks trigger these halts. The SEC may also enforce a trading halt for an indefinite period if it has serious concerns about a company's assets, operations, or financial information.
To illustrate the concept further, the article provides examples of trading halts on specific stocks, such as Aptevo Therapeutics' stock (NASDAQ: APVO) and Envista Holdings Corporation's stock (NYSE: NVST), both halted due to extreme volatility in their price movements.
In conclusion, a trading halt is a critical tool in maintaining market stability and ensuring fair trading practices, especially in the face of significant news or extreme market fluctuations. It provides a necessary pause for investors to absorb information and make well-informed decisions, contributing to the overall integrity of the financial markets.
