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Trading Halts: What Investors Need to Know

Trading halts are temporary suspensions in the trading of a particular stock on an exchange. They bring all buying and selling activity for that security to a complete stop for a period of time. While trading halts may seem disruptive, they are actually mechanisms used by stock exchanges to help ensure proper functioning of the markets and protect investors.

Why Do Trading Halts Occur?

There are several common reasons why a trading halt may be triggered for a stock:

  • News Pending: One of the most frequent reasons is when a publicly-traded company has a major corporate announcement or news pending that could cause its stock to experience high volatility after the news is released to the public. Halting trading allows investors time to properly digest the information before making trading decisions. Examples include a company announcing a merger/acquisition, spin-off, earnings surprise, bankruptcy filing, FDA decision on a key drug, etc.

  • Circuit Breakers: Stock exchanges use circuit breakers that automatically halt trading in a stock if the price moves up or down too quickly within a set period of time. These are intended to prevent panic selling or buying from feeding on itself in an unchecked spiral. For example, if a stock rises or falls 10% in 5 minutes, trading may be halted for 5-10 minutes to "reset" and let cooler heads prevail.

  • Order Imbalance: If there is a large imbalance between buy and sell orders for a stock that could lead to extreme volatility when the market opens, trading may be halted until the imbalance is resolved.

  • Technical Issues: Trading can also be halted due to technical glitches with a company or exchange's computer systems that require a "reboot."

  • Regulatory Concerns: Finally, regulators like the SEC can institute trading halts if they have concerns about the trading practices or public disclosures of a company.

There have been some calls to reform trading halt rules, such as having shorter halt periods or only allowing them in exceptional circumstances. But exchanges argue the current framework is critical for maintaining orderly markets.

What Happens During a Halt?

During a trading halt, current orders for the stock that have not executed yet are placed on hold. No new buy or sell orders can be placed until trading resumes. Investors are essentially in a holding pattern. While trading halts prevent activity during normal market hours, stocks can still trade in extended-hours sessions. This can create disparities between after-hours pricing and where the stock may open at the next day. The duration of trading halts can vary. For something like a corporate news event or order imbalance, halts typically last less than two hours while the information is disseminated. For more serious technical or regulatory issues, halts may be extended until the opening of the next trading day or longer. If trading in a stock is halted for an extended period like several days, investors may want to consider alternatives such as trading options on the stock instead of shares. Or they can move on to other opportunities if the situation is unlikely to be resolved soon.

Examples of Major Halts

Some high-profile examples of recent trading halts include:

  • GameStop in January 2021 amid the Reddit/WallStreetBets frenzy.

  • Boeing in March 2019 after the 737 Max plane crash.

  • Facebook in October 2021 after its services went offline globally for hours.

  • Major circuits breakers tripping during large declines like on Black Monday in 1987.

What Investors Should Do During a Halt

For most individual investors, the prudent move during trading halts is to exercise patience, do research to understand the situation, and refrain from making any rash decisions until trading resumes and the dust settles. Taking a deep breath and listening to official communications from the company and exchanges involved is advised rather than acting on rumors or incomplete information during the heat of the moment.

The Impact of Trading Halts

While intended to allow investors to reassess new information rationally, trading halts can sometimes have negative consequences or be abused.

  • Increased Volatility: In some cases, trading halts can actually increase volatility when trading resumes, as pent-up buying and selling interest is released at once. The initial price swings after reopening can be especially wild.

  • Market Manipulation Concerns: There are occasional allegations that some companies may intentionally try to get trading halted by leaking news in order to exploit the situation. However, clear evidence of such abuse is limited.

  • Trading the Halt: Some sophisticated traders look for opportunities to "play the re-opening" by trying to anticipate which direction a stock may go when the halt is lifted based on the news or situation. However, this is extremely risky for individual investors.

While trading halts can be disruptive in the short-term, they are important tools used by the exchanges to maintain orderly markets and protect investors. Understanding their purpose and causes can help lead to better investing decisions.

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