One of the most dangerous market phenomena that stock traders must always keep in the back of their mind is a trading halt. Trading halts can be good, bad or neutral for a stock’s price action. However, they can leave traders literally helpless to exit a position, and they are nearly impossible to anticipate.
Here’s a look at the variety of reasons trading halts happen, what to do if a stock you own is halted and what to expect if a trading halt leads to a stock being delisted from a major exchange.
Reasons for Trading Halts
The most common reason for a stock to be halted is to allow the market to digest meaningful new information about a company. This information may be a new partnership or deal, a drug approval, a potential buyout, a development on the financial health of the company or another major news headline. In these instances, the major U.S. exchanges have the authority to review the news and determine whether or not it warrants a halt. As a rule of thumb, news-related trading halts typically only occur when the exchanges feel the news will result in significant volatility in the stock.
In addition to the exchanges themselves, the U.S. Securities and Exchange Commission can halt trading in a stock, or the companies themselves can request a trading halt. Trading halts typically last at least five minutes, but in certain circumstances they can continue on for much longer periods of time. For example, SEC suspensions can last up to 10 business days.
Finally, there are also what are called volatility “circuit breakers,” which automatically halt trading in individual stocks, or even the market as a whole, if prices move up or down past certain key thresholds. These circuit breakers are intended to prevent extreme swings in share prices over short periods of time, such as flash crashes. For example, the S&P 500 index is halted for 15 minutes if the index falls by 7 percent in a single trading session.
What Happens Once A Stock Is Halted?
Every time a halt is issued, the exchange must give investors a reason for the halt in the form of a trading halt code. For example, a T1 halt indicates pending news, whereas a H5 halt indicates a violation of listing requirements. Current trading halt codes can be found on websites such as NasdaqTrader.com.
Unfortunately, there’s nothing a trader can do to adjust a position in a halted stock until it resumes trading. The most important thing to do if one of your stocks is halted is make sure to identify and monitor the reason(s) for the halt. If the stock is halted for pending news, the company or the exchange must first publicly release the news before the stock resumes trading. Once the news is out, traders must be extremely vigilant as the stock resumes trading because there will usually be wild swings in share price in the short-term.
In cases of non-compliance or criminal investigations, certain stocks may never resume trading on major exchanges once they have been halted. In these instances, most stocks instead resume trading on the OTC market under a different ticker.
However, the SEC warns investors that stocks that have been suspended for non-compliance or other investor safety concerns typically resume trading at a steep discount. “While some investors may be willing to buy the company’s stock, they will do so only at significantly lower prices,” the SEC says.
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