What is Trading Halt?

Key Highlights

• The definition of a trading halt is the temporary suspension of equities trading as per certain guidelines of the market regulators.
• News, order imbalances, or price fluctuations outside defined zones can be the reasons for a trading halt.
• Trading can be stopped for specific stocks or the entire market.
• Trading halts can occur for small durations, like five minutes for a single security or fifteen minutes for market-wide circuit breakers. However, they might also last the whole day.

Understanding a Trading Halt

A trading halt is the temporary suspension of equities trading. A single stock exchange or a collection of exchanges may experience a standstill. Any significant news about a company, whether positive or negative, could cause a brief halt to trading in the company's stock. The news may affect the stock trading in two ways. First, there can be a significant imbalance between buy and sell orders for the stock. Second, it can lead to a drastic change in the stock price.

Trading halts can occur anytime throughout the day. However, they are often implemented at the start of trading. It is mainly done on the particular exchange where the stock has its primary listing. Trading halts usually last for one hour. Yet, there might be many halts for a stock in a single trading day. If a halt occurs at the start of trading, it generally last for five or ten minutes.

How does a Trading Halt work?

Stock exchanges declare a trading halt to prevent investors from incurring huge losses in unfavorable circumstances. During the pause, the stock exchange bans trading of a specific stock. No investor can buy or sell shares during this period. In rare instances, the whole exchange may be stopped from making transactions.

The listed firm informs the stock exchange of significant changes that might impact the stock price. The stock exchange halts trading a particular stock before disclosing it to the public. The aim is to guarantee fair trading opportunities. Trading resumes after a predetermined time. The restarting of the trade of a halted stock is called trade resumption.

Types of Trading Halts

Now that you know what is a trading halt, let’s look at its types. Generally, there are two kinds of trading halts. They include the following.

1. Regulatory trading halt: The most popular is a "regulatory" trading halt. It can be imposed for several reasons. A press release or other announcement is the key one among them. All businesses must give investors timely and accurate information about their business and financial situation. The regulatory bodies closely monitor this information. They suspend trade whenever they believe such information might affect the value of concerned securities. Here, the goal is to provide equal access to information for all investors.

Regulatory bodies sometimes doubt a company's financial data, assets under management (AUM), or overall financial stability. So, they may call for a trading halt for the stock. In this situation, the company has to explain the errors adequately. In this case, the halt may last much longer than normal.

Moreover, there may be several drops in the market. This can result in significant losses. Hence, the whole exchange may implement a trading halt. This is known as a “trading curb”. It applies to all the securities listed on the particular exchange. You may have seen headlines like ‘NSE Trading Halt Today’. It happens due to trading curbs.

2. Non-regulatory halt: It is the second type of trading halt. They are used if there is a significant difference between buyers and sellers in a particular stock or group. However, they are unusual nowadays. In this case, trading can only resume after the regulator has identified and established the proper price range for the stock.

Impact of Trading Halts

Trading halts can significantly impact the securities market. They generally have the following effects.

• Price Volatility: Large price swings may occur based on information or market sentiment when trading resumes. The trading halt allows investors to process the information. It may help them to make more careful and appropriate trading decisions.

• Market Confidence: Trading halts are implemented to ensure fair and orderly trade, which boosts market confidence. They also lower the possibility of market manipulation.

• Investor Protection: Trading is halted during critical periods to prevent investors from making impulsive decisions. This promotes a transparent trading environment.

• Trade and Market Stability: Halts are necessary to maintain market stability during periods of extreme volatility. Allowing time for risk assessment and informed decision-making helps in minimising panic buying or selling.

Conclusion

Trade halts are expected in stock markets. It is a crucial tool to maintain market stability and safeguard the interests of traders and investors. A trading halt is implemented for a specific duration. Trading resumes when the conditions improve. If the market falls significantly, the entire stock exchange is put under a trading halt. It helps in reducing price volatility and enhances investors’ confidence. However, they can also disrupt regular market operations and confuse. They can also reduce the efficiency and liquidity in a market. Therefore, they should be used only when it is necessary.