dusanpetkovic / Getty Images This happens most frequently when a company is positioned to release significant information that may affect the market price of its securities. It also happens when the exchange believes the security may no longer meet listing requirements. Nonregulatory halts are imposed when an imbalance exists between buy and sell orders for a particular security. This is done to notify potential buyers and sellers that the imbalance has occurred, and give the designated specialists time to notify the market of the price range in which trading can resume as part of their function to ensure that the market remains “fair and orderly.”
How Do Trading Halts Work?
The purpose of stock exchanges is to provide a market for securities in which buyers and sellers can get both fair and efficient prices. In an effort to ensure this occurs, regulatory authorities including the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), as well as the exchanges themselves, have rules in place designed to reduce extreme volatility and correct order imbalances. Trading halts are one way of accomplishing these objectives. Trading halts are primarily implemented to prevent extraordinary market volatility because of the release of new information. They are common; researchers found that 98% of trading days between 2012 and 2015 saw some form of trading halts. Often, multiple trading halts can be imposed during a single trading day.
Types of Trading Halts
Trading halts can be imposed on individual stocks or on an entire market. In addition to being enacted in anticipation of the release of material news, they can be imposed due to price movements. Trading halts imposed due to price movement are called “circuit breakers.”
Market-Wide Circuit Breakers
A market-wide halt is triggered when the S&P 500 index declines by a significant amount within a single trading day. This happened on several days in March 2020. The decline is measured relative to the previous day’s closing price, and there are three levels:
Level 1: 7% decline in the index value during a single trading dayLevel 2: 13% decline in the index value during a single trading dayLevel 3: 20% decline in the index value during a single trading day
Level 1 and 2 circuit breakers will cause trading to be paused for 15 minutes. If a Level 3 circuit breaker is triggered, then trading will not resume for the remainder of that trading day. Level 1 and 2 circuit breakers can only be triggered once per trading day. For example, after trading resumes following a trading halt due to a Level 1 circuit breaker, the market must fall by an additional 13% before another trading halt is imposed.
Individual Security Circuit Breakers
Although broad-market circuit breakers are only triggered by price declines, trading halts on individual securities can be triggered by increases and decreases due to the Limit Up-Limit Down (LULD) mechanism. Limit up-limit down prices are typically set at percentages above and below the average trading price over the previous five minutes, and update continually throughout the trading day. If there is an offer to buy a security at the lower price limit (limit down) or an offer to sell at the upper price limit (limit up), then the security will be placed in a limit state for 15 seconds. If all orders are executed or cancelled within the 15-second limit state, then trading will continue. If this condition isn’t met, a five-minute trading halt occurs. The trading halt is continued in five-minute increments until the primary listing exchange is able to resume trading within a new price band.
What It Means for Individual Investors
If you own a security, it is possible a trading halt is triggered and you will be unable to sell the security until trading resumes. You may also be unable to purchase a security you wish to purchase if a trading halt is imposed. While a trading halt is inconvenient, the intent is to stabilize the market and reduce panic.
