What is Stock Halt?

How Does it Work?

  • A stock halt is a rare scenario where a stock exchange will announce a prohibition on trading a particular share. During this phase, brokers will not be allowed to trade on the stock, i.e., buy or sell the security for themselves or retail investors like us. There are limited pre-prescribed scenarios when an exchange can announce a trading halt, and again there is a fixed set of rules which need to be followed for the stock to trade again after the halt.During exceptional events, an entire exchange may also halt trading. The main purpose is to match the demand and supply of the stock, i.e., to match the buyers and sellers for the particular security and ensure smooth execution of the trade.Both NASDAQ and NYSE have got the best of their interest to keep trading smooth and orderly. It is the motto of all exchanges around the world. Thus when there is some big and significant news based on security that can lead to trading orders going out of balance, exchanges can freeze or halt the trading of a particular stock to prevent investors from suffering considerable financial losses. It is primarily done so that the investors don’t blame the exchanges for such huge losses.

Examples of Stock Halt

A few examples are as follows:

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#1 – NSE(India)

Due to the CoronaVirus pandemic, when oil prices went for a toss and hit rock bottom level stock market took a hit, and stocks were getting impacted badly by falling share prices. The entire exchange was halted for trading for thirty minutes to get back to a balance of buy and sell and again resume after 30 mins.

#2 – Sundance Resource Limited (Australia)

In a tragic accident in 2010 due to a plane crash, the CEO and Chairman were victims of the accident. The share was halted immediately from Australian stock exchanges to prepare the investors to confront the news and not create a panic situation, which would have led otherwise to excessive selling of the stock.

Rules

There are generally few scenarios when the trading halt occurs, and securities are coded with a unique identification number. When a share is halted from trading by exchange, it will issue an announcement to all the brokers and the market about the suspension of the stock from trading. When a stock is trading at more than one exchange, the halt applies to all exchanges. Brokers then cannot quote the stock price or do trading from their accounts. Again when the exchange plans to lift the halt, they will issue another announcement a few minutes before they lift the halt. As discussed, when a halt takes place, a stock gets marked by a code which is as follows:

  • T1: Significant news is pending, and shares are halted pending the release of the news.T2: News is released, and trading is halted for investors to get adjusted to the news and prevent them from panic selling.T5: Trading takes a halt because a stock has more than a 10% change in its price within five minutes.H10: This type of halt occurs when the Security Exchange Commission or SEC imposes restrictions on a particular share from trading.

Triggers of Stock Halt

  • The trading halt is primarily an effect of news and price volatility.When the price of a stock is changing, impacting its prices by 10% or more within five minutes, it is a situation when a stock halt scenario gets triggered, and an exchange can put a halt to its trading.The stock price can fluctuate up and down and get halted from trading due to frequent changes in volatilityVolatilityVolatility is the rate of fluctuations in the trading price of securities for a specific return. It is the shift of asset prices between a higher value and a lower value over a specific trading period. read more or circuit breaker scenarios. SEC can suspend many penny stocks from trading when they doubt any stock promotion or fraudulent activity.Also, a type of T12 halt is applied, which is considered a bad halt, for the share, which had traded a lot, but there was so much ground for the long run. Generally, in these cases, when the halt is lifted, the stock comes crashing down.

What Happens When A Stock Is Halted

When trading is halted, the particular security will no longer be able to trade on the stock exchanges. It has been listed till the time the halt is lifted back. It means brokers and retail investorsRetail InvestorsA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making.read more will not be able to trade in that particular stock, i.e., buy or sell the securities for a specific period. Also, on rare occasions, after a share halt is implied on a share like, for example, a T12 category halt, stock prices will generally come crashing down after the lift is halted. A T12 halt is a bad halt applied to overstock, which has gained the long run for no concrete reasons. Thus after the halt, the market will make corrections, which leads to the downfall of its prices.

Reasons for Halt

  • Merger and acquisition.Important news or information, be it positive or negative, about the company in the market.SEC may impose regulatory imposition and prohibit the stock from doing business on rounds of doubt or fraudulent activities.An occasion when massive or materialistic changes happen to the company’s financial health.

Advantages

  • To provide the entire market participant to be aware of some vital information about a stock or security.To eradicate any illegal practice of arbitragePractice Of ArbitrageArbitrage in finance means simultaneous purchasing and selling a security in different markets or other exchanges to generate risk-free profit from the security’s price difference. It involves exploiting market inefficiency to generate profits resulting in different prices to the point where no arbitrage opportunities are left.read more options.To provide other markets or exchanges, receive the news simultaneously.To protect investors from suffering substantial monetary losses.To prevent the stock from becoming a victim of panic buying or panic selling.

Disadvantages

  • There are specific scenarios when the share price comes plummeting down after a halt is lifted.A long halt may lead to losses in the form of interested investors to the share who lose the opportunity of trading.The investor is at a loss as they cannot buy the stock at rock bottom prices and profit from the rise in the stock price.

This article has been a guide to the stock halt and its definition. Here we discuss examples, rules, triggers, and how stock halt works. You may learn more about financing from the following articles –

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