Stock markets are giant organisms that see a stupendous amount of money changing hands on a daily basis. Due to the unpredictability and volatility of the influencing factors, it is not possible to accurately predict any specific upswing or downswing. Moreover, with such huge amounts of transactions being conducted, a robust and comprehensive regulatory mechanism needs to be in place. All the stock markets are governed by such compliance authorities which issue and monitor strict adherence to their guidelines to safeguard investor money and avoid improprieties. In India, it is the Securities and Exchange Board of India (SEBI). In the US, it is the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA). These independent regulatory authorities report directly to their respective central/federal governments and maintain order and harmony in their respective securities and commodity markets.
Trading Halt Meaning
One of the control mechanisms in the arsenal of such regulatory authorities is a ‘trading halt’. This means a temporary suspension of trading for a specific stock/security or a bunch of stocks/securities. This may happen in one particular exchange or in a collection of exchanges. As per the orders of the regulatory bodies and as deemed fit, these trading halts may happen more than once a day and at any time during the day. There is no fixed rule regarding the frequency or the duration of such a halt.
Why Do Trading Halts Occur?
There are, typically, two types of trading halts. The most common one is known as the ‘regulatory’ trading halt and can be issued based on a few different reasons. The principal one among them is in anticipation of a news or media announcement. All companies are required to provide timely and accurate information about their business and financial affairs to the general investors. The regulatory authorities monitor such information constantly, and whenever it is deemed that the information being released may impact the price of the associated securities, a trading halt can be issued. This is to maintain the principle that all investors should be privy to the same information at the same time. This trading halt can remain in place till the time it is considered fit for investors to be able to properly peruse the released information or announcement. The lifting of a trading halt is referred to as ‘trade resumption’ and commences business as usual.
Another reason for invoking a trading halt for security can be when the respective regulatory authority is uncertain about the company’s assets under management (AUM), financial health, or doubts its reported figures. In such a case, based on the magnitude of suspicion a ‘trading suspension’ may be issued till the time the inaccuracies are duly clarified. This may last much longer than a typical trading halt.
In the case of the market experiencing a severe drop or a series of continuous drops amounting to a large cumulative factor, the entire exchange may impose a trading halt. This is referred to as a ‘trading curb’ and is applicable for all securities being traded on that exchange. Whenever you refer to a headline mentioning ‘NSE Trading Halt Today’, it is likely to have occurred due to one of the two aforementioned reasons.
The second category of trading halts is known as a ‘non-regulatory’ trading halt. These can be imposed when there is a serious imbalance observed between the buyers and sellers in a particular stock/security or a group of stocks/securities. These are a little uncommon in today’s markets. But if imposed, then trade resumption can happen only after the regulatory experts have determined and defined the appropriate price range for the stock/security to trade in.
Impact of Trading Halts
As we observed in the previous section, one of the most common reasons for a trading halt is in anticipation of critical news or announcement from a company. A common practice that most companies follow is to release such news at the end of the trading day. This is with the objective to give the investors sufficient time to absorb and understand the impact and possibly avoid a consequent trading halt. However, the flip side of this practice is that it can frequently lead to a significant imbalance between buy orders and sell orders in the lead-up to the market opening of the subsequent day. In such an instance, the exchange may impose a delay or a trading halt as soon as the market opens. These delays are usually very short and are intended to restore the balance between buy orders and sell orders. This is also referred to as ‘held at open’ because trading has been halted at the time of market opening. Trading halts also come in handy when there is a situation of panic selling in the market. The ceasing of trades for a temporary period to restore parity in the situation. There are predefined guidelines and limits which determine the applicability of a trading halt. For instance, in the case of companies which are a member of Standards and Poor’s (S&P) 500 Index than a 10% change in the value of such security within 5 minutes can invoke this break in trading.
To summarize, through this blog we learnt a trading halt’s meaning, that it is a temporary pause of trading for a particular stock / security or a group of stocks / securities at one exchange or across several exchanges. Trading halts are most commonly enforced prior to a critical or sensitive news announcement. However, they may also be imposed in order to correct a demand-supply imbalance and for a few other reasons as well, which have been described at length in the earlier sections.