The market can be fun, but certain events can take the enthusiasm out of the landscape . One of those events is a stock halt (aka trading halt or circuit breaker).
The basis of a stock halt is all in the name, but its causes and effects dig a bit deeper. Here’s the rundown of root causes that can trigger a trading halt.
TL;DR
- A stock halt is the pausing of trading for a specific security.
- An exchange, broker, or the SEC can implement a stock halt.
- Trading halts can stem from multiple causes. Volatility and pending news are two of the most common reasons. Other causes include failure to document filings with the SEC, suspected fraud or market manipulation, and lack of funds to pay the clearinghouse.
- Short stock halts occur daily. Major halts are less common, but we’ve seen quite a few in 2021. Meme stocks in particular (like AMC and GME) have contributed to trading halts this year.
- How do you know if a stock halt is good or bad for your position? Look at what source halted the security, why they halted it, and when you can expect trading to resume.
What is a stock halt?
A stock halt is the pausing of trading for a specific security. The halting is temporary and usually based on a significant factor like regulations, current or expected volatility, or a lack of liquidity.
Trading halts happen often, but brokerages rarely halt stocks. Typically, major indexes like the Nasdaq or New York Stock Exchange halt stocks due to issues around regulations, volatility, and liquidity.
Brokerages have halted trades in extreme cases when their liquidity cannot meet trading demand.
Who does the halting?
If you notice that trading for a stock has been suspended, there are a few options for who’s behind the halting:
- The exchange the stock is listed on. This is the most common form of trading halts.
- A brokerage the stock is trading on. As seen during the GameStop frenzy.
- The SEC. The Securities and Exchange Commission can legally suspend trading of a stock for up to 10 business days. This is usually due to delayed filings or suspected market manipulation.
Look into the source of the suspension and you’ll be able to track down the exact cause of the stock halt at hand.
Common causes behind trading halts
When an exchange like the Nasdaq or NYSE halts trading for a security, it’s usually triggered automatically. There are three levels of market wide circuit breakers that trigger widespread halts to protect the market from panicked selloffs:
- Level 1: 15-minute halt due to a 7% decrease from the S&P 500’s previous close
- Level 2: 15-minute halt due to a 13% decrease from the S&P 500’s previous close
- Level 3: Day-long halt due to a 20% decrease from the S&P 500’s previous close
Exchanges can also halt individual stocks due to impending news they deem to be crucial to trading decisions, a “correction” or 10% drop within a five-minute period, or general volatility. Each of these causes has their own codes (we cover that below ).
When the SEC halts trading for a stock, the cause tends to be regulatory. In this case, there could be severe allegations of market manipulation or corporate fraud. The SEC takes document filings very seriously. A publicly traded company must stay updated with all filings or else risk temporary (or permanent) trading suspension.
Brokerages can halt trading of a certain stock, too. There is a lot of regulatory gray area here, but some brokers say the cause has to do with clearing firm costs. During times of high volatility, buy orders may be majorly higher than sell orders, in which case a broker can not afford the bill from the clearinghouse that executes the trades.
Stock halt codes to know
With so many reasons that trading halts can occur, you’re probably wondering how you find out what the cause is for a specific security’s halt.
Keep these codes on hand for when a trading halt on an individual stock occurs:
- LUDP or LULD: Volatility trading pause (high volatility can be risky for investors and investing institutions)
- T1: News pending (good or bad material may be awaiting publication, in which case a stock is halted to give investors of all echelons a fair amount of time to make an educated decision of whether to buy or hold out)
- H10: The SEC causes this one (it’s commonly seen with penny stocks)
How long do trading halts last?
Trading halt times vary depending on the reason for the halt and the severity of the issue. Severe issues (e.g. extreme volatility or major SEC investigation) mean the stock could take days to get back on its feet. Typical or automatically triggered suspensions could be over in a matter of five or 15 minutes, or the remainder of the trading day.
Where to see the latest stock halt updates
You can find current trading halts at Nasdaq Trader or NYSE Trading Halts. You can also look at the stock’s individual page on your broker’s app or website. Even if the broker is not at fault for the trading halt, they will comply with any automatic or instituted halts put in place by the stock’s exchange or SEC.
Examples of stock halts in 2021
Brief trading halts occur daily. On June 23, stocks like SharpSpring (SHSP) and Gaucho Group Holdings (VINO) were halted for news pending and volatility, respectively.
More noteworthy halts have occurred over the year as well.
On Jan. 22, GME automatically triggered a circuit breaker based on volatility to help curb panic sales. It was halted another nine times on Jan. 25.
On Jan. 28, AMC, GME and other stocks were briefly halted for trading volatility. Trading app Robinhood allowed investors to sell their positions, but forbade buying during that period.
On Mar. 10, GME was halted for volatility. On June 2, the NYSE imposed a volatility trading halt for AMC.
Notice a trend here? The meme stock enthusiasm seems to have put the market out of whack, causing stock halts left and right. This just goes to show that social sentiment can reach far, and the 231-year-old U.S. stock market may have to evolve with the times.
Stock halts aren’t inherently good or bad
Stock halts can occur because of impending or current bad news, but they can also occur because of good news. Then there’s the sheer wildness of meme stock and short squeeze volatility, for which news isn’t even to blame.
To know whether a specific trading halt is good or bad depends on the reason the stock is being halted. Find out the source, the cause, and when you can expect trading to resume. From there, you can respond with logic in mind.
It’s worth noting: Once a stock is halted, you have to deal with its market value once the suspension ends. Whether your position’s value goes up or down by that time is out of your hands. C’est la vie?
Bottom line
Stock halts often give investors an opportunity to get a new perspective on their position. Emotions can play a role in investing, especially in times of frenzied trading due to short squeezes or other black swan events. When you hit a trading halt, look behind the curtain and determine what’s best for your risk tolerance, your time horizon, and your portfolio as a whole.