What is a trading halt?
Have you ever attempted to trade a stock only to find out the stock couldn’t be traded at that time? If so, you’re not alone. Trading halts and delays are commonplace in the stock market.
Although these halts are often an annoying occurrence for many, they may actually signal opportunity.
After a trading halt, a stock’s price will move in one of the same three directions it always had — up, down, or sideways. The reason for the halt — and what happened while trading was halted — determines the direction and veracity of the movement when trading resumes.
What Is a Trading Halt?
Trading halts are actions that occur in the U.S. stock market when a stock exchange stops the trading of a specific security or an exchange shuts down trading altogether for a short period of time.
When these trading pauses are triggered, market participants are unable to buy or sell shares of stocks or exchange-traded funds (ETFs) included in the halt. In some rare cases, halts are triggered on an entire exchange or all exchanges in the U.S. The latter is known as a market-wide trading halt.
There are two different categories of halts:
- Regulatory Trading Halts. Regulatory halts are a FINRA requirement. They happen when the regulatory body or exchange notices unusual price movements or is informed that a company intends to release news during the trading session. Both the Nasdaq and New York Stock Exchange (NYSE), as well as over-the-counter (OTC) exchanges, comply with regulatory halts.
- Non-Regulatory Trading Halts. The NYSE is the only exchange that takes part in non-regulatory halts. The exchange places halts on stocks when it detects a large order imbalance between buys and sells.
How Trading Halts Work
There are several different types of trading halts, and each is triggered by a different type of event in the market. However, they’re all imposed in an attempt to protect investors by giving them adequate time to react to significant news, price changes, and other events.
The process starts with FINRA or a stock exchange noticing unusual activity or receiving word of news. For example, the U.S. Food and Drug Administration (FDA) may be planning to announce the results of a New Drug Application that will have a material impact on the biotechnology company behind the application. The FDA notifies FINRA of its plans to release significant news.
In this case, FINRA will notify securities exchanges and issue a “T1 News Pending” trading halt on the stock of the company that submitted the application. No news will be released for at least five minutes following the announcement of the halt.
Once the news is released, the halt becomes a “T2 News Released” halt. This halt gives investors adequate time to digest the news before FINRA notifies the exchanges to resume trading.
Types of Trading Halts
There are several different types of trading halts. Each type of halt is identified by a code, such as T1 or T2. You can view a full list of them on NasdaqTrader.com. The most common types of halts include:
- T1 News Pending. In most cases, material news is announced during premarket and after-hours sessions. This gives investors adequate time to react to the news before the market opens. A T1 news pending trading halt takes place any time material news is expected to be released during market hours. The halt gives investors notice that important news is on the horizon.
- T2 News Released. As soon as the news is released, a T1 halt becomes a T2. T2 halts typically last about an hour and give traders adequate time to digest the news before trading resumes.
- LUDP Single Stock Circuit Breaker. The LUDP halt tells you trading is moving too quickly. In most cases, LUDP halts are triggered when a stock moves more than 5% in a single minute. These halts typically last five minutes.
- T5 Single Stock Trading Halt. Exchanges place T5 halts on stocks any time a stock price changes by 10% or more in under five minutes. These halts typically last about five minutes and are designed to curb extreme volatility. T5 halts can happen several times during a trading day on a single stock.
- H10 SEC Trading Suspension. The U.S. Securities and Exchange Commission (SEC) has the right to suspend trading on any security for up to 10 days to protect investors. The SEC typically imposes these halts on stocks that represent companies that have failed to meet annual or quarterly filing obligations.
- MWC1, MWC2, MWC3, and MWC0. Although these codes are far less common, they’re important for investors to understand. These are market-wide circuit breaker codes, and their numbers correspond to how significant the event is. Of course, any time the entire market needs to shut down, it’s a significant event. However, MWC1 is the best of the bad situations, while MWC3 suggests the sky is falling on Wall Street. MWC0 is a market-wide halt that’s carried over from the previous trading session.
Examples of Trading Halts
Trading halts are a common occurrence, with tens of them taking place during the average trading session. Here are some real-world examples of trading halts:
- Bright Green Corp (BGXX). In late May 2022, BGXX stock climbed from $11.84 to $12.80 in a matter of five minutes. The 11.5% move for the top triggered a LUDP halt that blocked trades for 10 minutes.
- DryShips Inc. (DRYS). In 2016, DryShips stock climbed from around $5.10 per share to about $120 per share in a week. Nasdaq issued a T12 halt pending additional information from the company that could tell them why the stock was moving so irrationally. T12 halts are requests from Nasdaq for additional information from the company, typically occurring when a stock climbs dramatically for no apparent reason. The halt on DRYS lasted several trading sessions.
- PCSB Financial (PCSB). In late May 2022, T1 and T2 trading halts were placed on PCSB to allow investors to digest the news that the company would be acquired by Brookline Bancorp.
Reasons for Stock Halts
There are several reasons stock halts exist, which all center around protecting investors from undue losses. Some of the most significant reasons for stock halts are below.
Give Everyone a Fair Shot to Digest News
Company news like mergers, acquisitions, and management changes can move the market. That’s why it’s usually announced when the market’s closed. News released during market hours without trading halts could create an unfair advantage for investors with faster internet connections, faster news sources, or the ability to read quickly.
After all, big moves can happen in seconds when big news is released.
News-related trading halts give everyone the opportunity to get their hands on the latest news release, read it fully, and think about how it is going to affect the stock it’s related to. If this weren’t the case, those who received the news faster would have an unfair advantage over their peers.
Extreme volatility is one of the most common reasons for trading halts. Regardless of the direction of the volatility, extreme amounts of it are dangerous. After all, what goes up must come down.
Any time a price moves too quickly, it poses a threat to investors. That’s why LUDP and T5 trading halts exist. These halts give the market a few minutes to cool down and investors a break for rational thinking.
Securities Fraud Protection
The SEC works to protect investors from inadequate or false reporting of financial and operational data by publicly traded companies. Trading halts are one of the tools in the SEC’s toolbox to protect investors should it suspect any wrongdoing on the part of a security issuer.
What’s the Purpose of a Stock Trading Halt?
Stock trading halts are used to reduce the risks associated with erratic price movement, whether of a particular security or an entire market. In some cases, high levels of volatility can be curbed by simply stopping trading on a stock for five or 10 minutes. In other extreme cases based on regulatory concerns, protecting investors requires a multi-day trading halt.
No matter how you slice it, or what the halt is protecting investors from, every trading halt that takes place is designed to keep markets fair for participants.
What Do Trading Halts Mean for Investors?
You should pay close attention when trading halts happen. These events are designed to protect you from undue losses. They can also become big opportunities in stocks you may have considered diving into recently.
For example, say you’re following a cutting-edge medical technology company that creates prosthetic limbs for patients. You’ve been waiting for the right time to act, and a T1 halt could mean the time is here.
When the news is released, you find out another company has licensed the prosthetic limb technology, providing an upfront payment of tens of millions of dollars and tiered royalties to the company you’ve been watching. Having your finger on the pulse when trading resumes means you could be one of the first to dive into the stock as significant growth commences.
Conversely, say you own shares of a consumer staples company and a T1 halt takes place. When the news is released, you find out the CEO of the company has resigned, giving investors no reason for his resignation. The company will have to find a new leader, and investors will have questions. In this case, selling your shares as soon as the trading resumes could save you from significant declines.
In any case, pay close attention to market activity after the halt. Price movements tend to happen in a series of overreactions. If you bought into good news, you might try to sell near the peak and buy your shares back once the excitement dies off. If you sold on the news, consider the long-term opportunity the stock represents; you may be able to pick up shares at an extreme discount before the masses realize they’ve overreacted.
Trading Halt FAQs
Trading halts can be exciting for some and lean more toward annoying for others. No matter what side you land on, they’re a necessary tool to keep financial markets fair and equitable. They’re also confusing for many investors. Here are the answers to the most commonly asked questions to help clear that confusion up:
What Does It Mean When a Stock Is Halted?
When a stock is halted, it means the stock cannot be bought or sold on any stock exchanges for a period of time. Traders must wait for trading to resume to make any moves associated with halted securities.
How Long Do Trading Halts Last?
Most trading halts only last five or 10 minutes. However, it’s not uncommon for news-related halts to last for multiple hours. In some rare cases, when publicly traded companies fail to comply with securities regulations, halts can last days.
What’s the Difference Between a Trading Halt vs. a Trading Suspension?
A trading suspension is a form of trading halt that’s handed down by the SEC. A temporary suspension of trading can last up to 10 days as regulators investigate potential regulatory mistakes made by the company.
What Should I Do During a Trading Halt?
A trading halt can be concerning, especially when a stock you own is halted. Follow these steps when a halt occurs:
- Calm Down. Halts are a regular occurrence in the stock market and may even represent an opportunity. They don’t mean it’s time to panic.
- Find the Reason. Look for the reason the trading halt occurred. Has the stock been moving irrationally, is there news coming, or are there regulatory concerns?
- Assess the Situation. If news is released, read the news and assess the impact it will have on the stock. If there’s been irrational price movement, look into fundamental data to determine if the stock has moved into undervalued or overvalued territory and act accordingly. If regulatory concerns are the cause, find out what the company did wrong and make an educated guess as to how it will affect the stock.
- Act. Once you’ve gathered all information possible and come to an educated conclusion, wait for the halt to end and make your move.
What Is a Circuit Breaker in the Stock Market?
A circuit breaker halt is a volatility-related halt that can occur on a single stock or the entire market. Circuit breakers usually happen when a single stock gains or loses more than five percent of its value in a few minutes or less.
Market-wide circuit breakers are based on volatility in the S&P 500 index. MWC1, MWC2, and MWC3 halts are triggered by the index falling 7% or more, 13% or more, and 20% or more, respectively, in a single trading session.
Trading halts can be concerning if you own the stock that’s been halted, but they can also present opportunities. Don’t let your emotions control the situation. When a halt occurs, do your research, find out why the stock can’t be traded, and assess the situation.
Trading halts are often opportunities, even if you don’t own the stock that’s been halted.
Most news comes out in the premarket and after-hours trading sessions dominated by institutional investors, giving them the first crack at trading the news. However, even the institutional players can’t trade during a mid-session trading halt. That means time is on your side. Look into why the halts are happening, and make educated decisions to turn them into profitable trading opportunities.