Trading halts: what are they and why do they happen?
Occasionally, certain markets on the City Index platform may be unavailable due to trading halts that are put in place by an exchange. Discover what trading halts are and why they happen.
- What is a trading halt?
- Who can halt trading?
- What is the difference between a trading halt and a up/down limit?
- Why does trading get halted?
- How long do trading halts last?
- Is a trading halt good or bad?
- How to know if trading has been halted?
- Suspensions and circuit breakers
What is a trading halt?
A trading halt is a temporary pause in trading on a specific stock, index or commodity futures. The aim of a trading halt is to allow time for traders and investors to process and digest any rapid price movements.
Markets that operate with a central limit order book – such as stock exchanges or commodity exchanges – can be susceptible to large price swings that may create execution issues and order imbalances. So, trading venues use various mechanisms to manage this extreme volatility. As well as halts, other such mechanisms include suspensions and circuit breakers.
Who can halt trading?
Trading halts are instituted by an exchange or across a number of exchanges – they are not controlled by individual brokers. While the halt is in effect, brokerage firms cannot publish quotations or allow clients to trade the asset in question as there is no valid price to trade upon.
This means if a stock or commodity market is halted, you won’t be able to trade it on the City Index platform.
What is the difference between a trading halt and a up/down limit?
Trading halts are temporary pauses caused by an event, whereas up/down limits stop trading if a market moves above or below a certain price.
Trading halts are put in place when a market has moved too far, too fast – they are time dependent. Up/down limits have a much larger tolerance as they’re based upon the price movement of the whole trading session, without short-term considerations.
Why does trading get halted?
Trading is halted when there is an order imbalance, which can be bullish or bearish in nature. They’re usually the result of regulatory concerns, the anticipation of significant news, or an excess of buy or sell orders for a specific asset.
Trading halts are more common for stocks, due to the regulatory requirements put on companies who want to list. For example, a public company is responsible for notifying its exchange about any news and developments that might affect trading in its stock. It has to do so before announcing the news to the public. This gives the exchange time to evaluate the announcement and call for a trading halt to allow the news to disseminate appropriately.
So, trading halts offer investors protection against insider trading, as they make sure that no one who has obtained information illegally can profit before the information is announced to the public.
An exchange can also halt trading after news has been released, or if there’s a high-impact event out of a company’s control – such as a natural disaster.
For commodity exchanges, trading halts are also a result of news and unexpected events but they’re automatic, triggered by price limits that are set each day.
How long do trading halts last?
Trading halts usually last less than an hour, while the balance of orders is restored.
Trading halts in futures-based products (indices and commodities) usually last between a few seconds and a few minutes. This enables market makers and options traders to re-run their models and digest the new price information.
But in equities, if the issue persists, there can be a longer suspension put in place. For example, under US law, the SEC can suspend stocks for up to 10 days if there is reason to believe public investors will be at significant risk should trading continue.
Is a trading halt good or bad?
A trading halt isn’t good or bad, it’s just a necessary restriction in a regulated market environment. Ultimately, they promote equal and fair access to information, and protect market participants’ wealth by minimising the damage that can be caused by a lack of information.
How to know if trading has been halted?
There are different procedures and codes in place for trading halts across different markets. Let’s take a look at some of the most popular global exchanges and their trading halt processes.
Nasdaq trading halts
When trading halts occur on the Nasdaq, several halt codes are used to tell traders why the action was taken. Here are some of the most common:
- T1 – trading is halted pending the release of significant (or material) news
- T2 – trading is halted to allow for investors to assimilate news released
- T5 – there is a single stock pause due to a 10% or more price change in a security within a five-minute period
The SEC also has a Limit Up-Limit Down (LULD) rule, which halts activity if a stock is trading outside of its specified price bands. These are established at a percentage level above and below the average price of a security over the immediately preceding 5-minute period.
NYSE trading halts
The New York Stock Exchange has similar codes to inform traders as to the reason for the halt. These are:
- News pending
- News dissemination
- Regulatory concern
- Limit Up-Limit Down (LULD)
See the current NYSE trading halts.
ASX trading halts
On the Australian Securities Exchange (ASX) trading halts can be put in place by the exchange or requested by a company. Securities are placed into a 'Trading Halt Session State' and will have the code ‘TH’.
The ASX lifts the trading halt after the release of the announcement, so normally the stock isn’t available until the close of business on the following day. A trading halt on the ASX cannot last longer than two trading days.
LSE trading halts
The London Stock Exchange uses trading halts far more sparingly than other exchanges, preferring to use circuit breakers instead. But it does reserve the right to impose a temporary trading suspension or trading halt for a particular market, segment or tradable instrument as market situations dictate.
For example, in early 2022, the LSE halted trading on Russian securities, including Gazprom, EN+ and Sberbank, as part of sanctions in connection with the invasion of Ukraine.
CME trading halts
Short outages on the CME often originate from its ‘Velocity Logic’, which tends to kick in around major data releases from the US.
Longer-term outages are likely to be after more significant price moves cause price limits to be hit. These price limits are set on index and commodity futures contracts each trading session. When a market hits this price limit, different actions can occur depending on the market in question. The main consequences are:
- Trading halts until the price limits expand
- Trading remains in the limit condition
- Trading stops for the day
You can find the daily price limits for each commodity market on the CME Group website.
What is a trading suspension?
Suspensions are longer pauses in trading that are put in place by a regulatory body – such as the Securities & Exchange Commission. Suspensions usually last a lot longer than trading halts, as they’re the result of non-compliance from a company.
For example, in January 2021, the SEC halted trading on GameStop and other ‘meme stocks’ when they experienced a short squeeze and liquidity was brought into question.
How is a circuit breaker different from a trading halt?
Circuit breakers are trading suspensions that occur on indices at pre-established levels to prevent flash crashes across an entire market. Whereas trading halts are localised to a specific stock or asset.
There are currently three levels of circuit breakers on US indices:
- Level 1 – a 7% decline from the previous closing price
- Level 2 – a 13% decline from the previous closing price
- Level 3 – a 20% decline from the previous closing price
Levels 1 and 2 result in an immediate 15-minute suspension of trading activity – unless the level is breached after 3:25 pm (US time), at which point trading can continue. If level 3 is met, the circuit breaker is triggered, and trading will stop for the rest of the day.