A stock trading halt, also known as a circuit-breaker, is a temporary period when an exchange pauses stock trading. During this period, buyers can’t buy the stock while sellers cannot sell the stock. Unknown to many, stock halts are extremely popular in the market. Indeed, on any regular trading day, an average of three halts tend to happen. In this article, we will look at how you can identify and trade stock halts.
Why Stock Halts Happen
Stock halts are an essential part of the trading environment. Generally, the goal is to give investors and traders ample time to reflect on a major event and then decide on whether to buy, sell, or hold an asset. Ideally, there are two main types of trading halts: regulatory and nonregulatory.
In a regulatory halt, exchanges like the New York Stock Exchange (NYSE) and the Nasdaq pause a stock when there is material information that can change the stock dynamics. For example, a regulatory halt can happen when a company plans to sell a material part of its business. It can also happen when there is a major transaction that is about to happen.
Some examples of recent regulatory halts were:
- Luckin Coffee – Recently, the New York Stock Exchange (NYSE) halted trading in Luckin Coffee after the company’s auditor found errors in the firm’s accounting.
- Swire Pacific – In Hong Kong, the Hang Seng was temporarily trading in Swire Pacific ahead of a cash injection announcement by the government.
- Livongo Health – Nasdaq halted Livongo Health when its acquisition by Teladoc was completed.
The purpose of these regulatory halts is to ensure that all investors and traders have access to this information. For example, it would have been a disadvantage to investors if they bought Luckin Coffee shares before the accounting scandal.
In addition to such material information, an exchange can halt trading if it believes that the company will not continue meeting the listing requirements. For example, to be eligible for a Nasdaq listing, a company must have stockholder equity of at least $5 million.
A non-regulatory halt, on the other hand, happens when there is a major movement in a stock. This movement usually happens when there is an imbalance between buy and sell orders. For example, when a stock falls by about 20%, the exchange can halt it for a while to give investors a chance to react to the news.
It is worth noting that a regulatory halt can happen for a substantial period. In some cases, some stocks have been halted for several days. A non-regulatory halt, on the other hand, takes a few minutes. It can also be restarted once the imbalance remains.
How To Trade Stock Halts
The first thing you must do when trading halts is identify the halted stock. Most brokers provide a dashboard of all firms that have just been halted. If your broker does not give you this information, you can find it on a website known as Nasdaq Tracker. The screenshot below shows the companies that are being halted at the time of writing this report.
In this screenshot, we can see several sections in the halt history. On the extreme left, we see the halt date, which is when the date was initiated. It is followed by the time the halt was started and then the ticker symbol and the company. We also see the market, which simply refers to the exchange. This is followed by the reason code, pause threshold, resumption date, resumption quote time, and resumption trade time.
On the reason code, we see that the reasons for the halts are presented using a code. Therefore, as a trader, it is important to understand what these codes are. The most important of them are:
- D – This code means that the stock is being delisted.
- LUDP – This is a volatility pause or a nonregulatory pause.
- M – This is also a volatility pause on a stock.
- T1 – This is a popular code that means that a company has news pending.
- T2 – This happens when a company has just released its news.
- T3 – This happens after news when the exchange senses that there is a technology hick-up.
In the previous screenshot, we see that Blackbaud stock was halted for volatility reasons. This happened after the company reported a data breach, leading its stock to fall precipitously, as shown below.
Blackbaud stock halted
Study the Reasons Well
If you have already bought or sold a stock that has just been halted, unfortunately, there is nothing you can do. Instead, you have to wait for the stock to resume trading, and then you act. In this situation, the outcome can be two-fold. First, the stock can move in your direction, meaning that you can make a substantial amount of money.
Second, if you don’t have a stop loss and the trade moves against you, you can lose a substantial amount of money.
Now, if you are not in the trade and you want to take advantage of it when it opens, there are several things you can do. First, you need to study the halt reasons and determine whether there is a basis for the price action. In the Blackbaud example above, we see that the stock dropped sharply after a data breach.
As such, try and find as much information as possible about this bleach. Having a good understanding of the news will help you know whether the stock will bounce back or continue with the previous trend.
Second, use limit orders. A limit order is a type of order that tells a broker to open a buy or sell order once the price of an asset moves to a certain level. For example, in the case of Blackbaud, you can place a buy limit order at the important support of $45.77. In this case, the broker will buy the stock once the price reaches this level or below.
You can also sell limit at $55.96, which will open a short order at this level. As you will experience, opening a market order during this period can lead to significant losses. Also, ensure that you have a stop loss or a trailing stop loss to limit potential losses.
Trading halt example
Trading halts are an essential part of the financial market – essential because they ensure that all traders have the same access to information. However, halts can also be challenging, especially for people who hold the stocks. Therefore, having adequate information about how they work and skills to handle them can help you make informed decisions.