What is Trading Halt?

Stock exchanges not only act as a trading platform but are also responsible to safeguard investors’ interests. To accomplish this, stock exchanges may need to take stringent actions. One such measure is the announcement of a trading halt by the exchange.

What is Trading Halt?

A trading halt, also called a stock halt, is the temporary suspension of trading in one or more securities. A trading halt may be a regulatory or a non-regulatory requirement.

Understanding Trading Halts

1. Occurrence – Trading halts can be enacted at any time and there is no limit on the maximum number of trading halts that can be announced.
2. Cause – A trading halt is authorized to correct order imbalances, in anticipation of a news announcement, due to regulatory concerns, or as a result of a technical glitch.
3. Applicability – A trading halt may be instituted for an individual security, multiple securities, for an entire exchange, or multiple exchanges. Exchange or market-wide trading halts are less common.
4. Period – Trading halts usually last for an hour but are not limited to that duration.
5. Repercussions – Stock exchanges will cancel all unexecuted portions of market orders. Although orders may be placed and held for when trading is resumed. However, options may be exercised during the period of the trading halt.
6. Trade Resumption – This is when trading resumes after it has been shut down or halted for some time.

Instances of Trading Halts

Trading halts are usually announced in the following situations:

1. Significant News Announcement

   The stock exchange may institute a trading halt when an unusual announcement or important information would imminently affect the stock price. Trading is halted until enough time has passed to disseminate the information to all market participants. Such halts tend to be non-regulatory and are instituted by the stock exchange.

2. Regulatory Requirements

   Another instance of trading halts is regulatory irregularities such as delay or failure in public filings, and discrepancies in the listing requirements. These trading halts are regulatory and enacted by the market regulator. Halt may last from 10 days to indefinitely. It also considers stock manipulation or material changes to the company’s assets and operations which may pose a risk to the investing public.

3. High-Volume Trading

   Trading halts may also occur when there is an imbalance between the demand and supply of securities leading to a steep market decline. Circuit breakers are triggered if the percentage change in stock prices crosses a predetermined threshold.

Circuit breakers automatically shut trading to calm the markets and prevent severe losses. It is also referred to as trading curbs and prevents panic selling.

Common Reasons for Trading Halt

Some of the common reasons for trading halt include:

1. Corporate transactions such as mergers, acquisitions, restructuring, or related news
2. Material changes to the financial health of the company
3. Regulatory or legal announcement
4. Personnel change in the upper management
5. Significant new patents or developments
6. A sudden spike in the volume of security for no apparent reason
7. Indicators of stock manipulation

In March 2020, SENSEX fell by 10% and NIFTY plunged by 9.40% due to the pandemic. This led to the circuit breaker trigger on both exchanges with a trading halt for an hour. In this case, trading was halted across all brokers on both exchanges.

Similarly, in March 2021, HDFC securities halted trading in the cash segment for NSE transactions due to a technical glitch. In this case, there is no impact on the trading activities through other brokers.

How a Trading Halt Works

More often than not, a trading halt is a result of a potential announcement that will affect the stock price. The news may be positive or negative. As there are numerous companies listed on any stock exchange, each company agrees to pass on the news to the exchange before the announcement to the general public.

Exchanges may decide to halt trading temporarily before the release of such information to promote equal distribution of information and fair trading. If the material development affects multiple securities, then the exchange can stop trading in all affected securities.

Investors learn about trading halts through brokers or news channels. This information is also available online from the market regulator.

Trading Halts at Market Open

Most companies tend to wait until the end of a trading day to release sensitive information to the public. This allows investors sufficient time to evaluate the information and analyze its significance. On the flip side, this leads to a large imbalance between demand and supply at the time of market opening. It may even lead to a trading halt at the market opening.

This imbalance is usually for a few minutes till the balance between demand and supply is restored. If the halt happens before the official open of trading it is referred to as ‘held at open’. Trading halts at the opening of a trading day is called trading delay. It primarily occurs due to three reasons:

1. Stock does not meet regulatory listing requirements.
2. There is an imbalance between the buy and sell orders before opening.
3. New information is expected in the market which will have a significant impact on the market price.

Bottom Line

Trading halts are temporary stoppages to prevent massive buying or selling of securities that may harm investors. However, after a trading halt, investors can trade in the security without any restrictions.