Definition: A Trading Halt is the temporary suspension of trading of a security for a specific period of time. Trading Halts typically last for an hour, but can extend into days.
Why does it happen?
Trading Halts are generally made by the exchanges.
A stock are halted from trading if
• The respective company is in the process of announcing important news or information that will significantly impact the stock price.
o It prohibits any trader with inside information from benefitting by trading that security before that news is publicly available.
• There is a significant order imbalance between the buyers and sellers of the securities.
o The halt gives the market specialist (market-maker) enough time to clear out the problems caused by this imbalance.
The NASDAQ and other exchanges currently use 11 codes to specify in more detail why trading has been halted for a security.
The “Over The Counter Bulletin Board” (OTCBB) currently uses 5 codes.
In June 2010, 6 executives of Sundance Resources Ltd, a mining company in Australia, went missing on a flight in West Africa. Included in the missing were the CEO and the Chairman. This news was sure to cause a sharp decline in stock price as well as create an unfair arbitrage opportunity for people within the organization with access to the news. Hence, the company immediately requested the Australian Stock Exchange for a trading halt on the company’s stock prior to the open of trade on that morning, until they were sure that the news had been properly distributed to the public.
Advantages of Trading Halts:
• Each market participant gets the equal time to be informed about any news announcement
• Any illegal function caused by any traders are removed and brought to the attention of other investors
• Trading Halts do not cause a change in the stock price of firms
• Regulatory trading halts allow other markets (example: BP trades on the LSE and the NYSE) the opportunity to get the necessary information to halt trading of that stock on their own exchanges
Trading Halts are necessary tools that exchanges utilize in order to restrict individuals with access to insider information from unfairly gaining profits, as well as fixing any abnormal and technical trading issues.