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What Is a Trading Halt?

Sebencapital

Published
03/01/24
What Is a Trading Halt?

DEFINITION:

A trading halt means temporarily stopping trading for a particular stock or the whole market. It happens when companies need to share important news, when there's a big difference between people wanting to buy and sell, or when prices change a lot.

Key Takeaways

  • Trading halts are put in place to make sure that prices are fair and trading happens in an organized way.
  • Trading halts happen when there's important news, when there's an imbalance in orders, or when prices move too much.
  • Stocks or whole markets can have trading pauses, like what occurred in March 2020.
  • Trading pauses can vary, such as five minutes for single stocks or 15 minutes for overall market halts. In some cases, trading might even stop for an entire day.

Definition and Examples of a Trading Halt

Trading halts briefly stop trading for a specific security or market. There are regulatory and non-regulatory trading pauses.

Note

If a security's main market stops trading for a regulatory reason, other exchanges also follow the same halt.

This often occurs when a company is about to share big news that could affect the stock's price. It can also happen if the exchange thinks the stock no longer meets its rules.

Non-regulatory halts happen when there's too much difference between people wanting to buy and sell a stock. This pause is to tell potential buyers and sellers about this difference. It gives market specialists time to set a price range for trading to start again. They do this to keep the market fair and organized.

How Do Trading Halts Work?

Stock exchanges exist to let people buy and sell stocks at fair prices quickly. To make sure this happens, groups like the U.S. Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and the exchanges have rules. These rules aim to stop big price swings and fix differences between people buying and selling. Trading halts are one way to do this.

Trading halts mostly stop extreme price swings caused by big news. They happen a lot—researchers found that 98% of trading days from 2012 to 2015 had some kind of halt. Sometimes, there can be more than one halt in a single day.

Note

To see current and past trading pauses, check the website of the specific stock exchange.

Types of Trading Halts

Trading pauses can happen for single stocks or the whole market. They're put in place before important news or because of price changes. When halts happen because of price shifts, they're known as "circuit breakers."

Market-Wide Circuit Breakers

A full market pause occurs when the S&P 500 index drops by a lot in one trading day. This occurred on multiple days in March 2020. The drop is measured compared to the previous day's closing price, and there are three levels:

  • Level 1: A 7% drop in the index value in one day of trading.
  • Level 2: A 13% decrease in the index value in a single day of trading.
  • Level 3: A 20% drop in the index value in one day of trading.


Level 1 and 2 circuit breakers stop trading for 15 minutes. If there's a Level 3 breaker, trading stops for the whole day.

Only one Level 1 or 2 breaker can happen each day. For instance, if trading restarts after a Level 1 pause, the market needs to drop by another 13% for another pause to occur.

Individual Security Circuit Breakers

Individual stock trading pauses happen due to increases or decreases through the Limit Up-Limit Down (LULD) system.

These limits are usually set as percentages above and below the average price in the past five minutes. They keep updating all through the trading day.

If someone wants to buy a stock at the lower limit (limit down) or sell at the upper limit (limit up), the stock gets paused for 15 seconds. If all orders finish or get canceled in this time, trading continues.

If not, trading stops for five minutes. This pause can go on in five-minute steps until the main exchange can start trading again within a new price range.

Note

To restart trading, there will be an auction where prices stay within a specific range known as the "auction collar."

What It Means for Individual Investors

If you own a stock, there might be times when trading stops, and you can't sell it until trading starts again. Similarly, if you want to buy a stock and there's a trading pause, you won't be able to buy it at that time. Though it's inconvenient, trading halts aim to calm the market and lessen panic.


Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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