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What is a Trading Halt

28 Aug 2023

Introduction

A trading or stock halt is a temporary suspension of trading activity on a stock exchange or a market segment due to some extraordinary circumstances. They are usually imposed by the exchange authorities or the market regulators to protect the interests of the investors and maintain the orderly functioning of the market. 

Trading halts can be either pre-planned or unplanned, depending on the nature and timing of the triggering factor.

One of the recent examples of trading halts was on February 24, 2021. Trading was halted on India’s National Stock Exchange (NSE) for nearly four hours due to technical glitches that affected its connectivity with its two telecom service providers. Let’s understand their types, benefits, and drawbacks.

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How are Trading Halts Implemented?

Trading halts can be classified into two broad categories: regulatory and non-regulatory.

  1. Regulatory Trading Halts

The regulators impose regulatory trading halts or exchanges when there is doubt that the security meets the listing standards or when material information needs to be disseminated to the market. For example, a regulatory trading halt may occur when:

  • A company will announce a significant merger, acquisition, restructuring, dividend, earnings, product launch, legal action, management change, or any other important event that may affect its business or valuation.
  • A regulator or an authority is about to announce a policy change, a regulatory action, a market intervention, a legal decision, or any other important news that may affect the industry or the economy.
  • Security is suspected of fraud, manipulation, insider trading, accounting irregularities, or any other illegal or unethical activity that may harm investors or the public.

The primary exchange, where the stock is listed, initiates this halt, and other exchanges honor it. It is announced before it takes effect and lifted once the relevant information is publicized. The duration of a regulatory trading halt differs depending on the situation's complexity and sensitivity.

2. Non-Regulatory Trading Halts

They are imposed by the exchanges when there is an imbalance between buy and sell orders for a security or extreme volatility or rapid price movement in a security or an index. For example, a non-regulatory trading halt may occur when:

  • A large influx of buy or sell orders for security exceeds its available supply or demand, creating a gap between the bid and ask prices.
  • There is a sudden surge or drop in a security or index price that exceeds a certain percentage or threshold within a short period.
  • A technical problem or malfunction affects the trading system or platform, such as a power outage, a network failure, a software bug, or a cyberattack.

It is usually triggered automatically by the exchange’s rules and algorithms and is lifted once the order imbalance is resolved or the price movement stabilises. The duration of a non-regulatory trading halt may vary depending on the exchange’s policies and procedures.

Why are Trading Halts Important?

Trading halts serve various purposes, such as

  • Providing time for disseminating and assimilating information that can affect the investors' valuation or trading decisions.
  • Prevent panic selling or buying that can cause irrational price fluctuations or distortions in the market.
  • Protect the interests of the investors from potential losses or damages due to technical errors, frauds, scams, or other malpractices.

Trading halts can also have some drawbacks, such as

  • Disrupting the regular trading activity and liquidity of the market.
  • Create uncertainty and confusion among the investors and traders.
  • It affects the performance and reputation of the exchange or the market segment.

What is Circuit Breaker in Trading Halt?

The circuit breaker system is based on the movement of two benchmark indices: the BSE Sensex and the NSE Nifty. The circuit breaker limits are set at 10%, 15%, and 20% of these indices' previous day's closing value. Suppose either of these indices crosses any of these limits (either upside or downside). In that case, the trading will halt for a specific duration across all equity and equity-based derivative markets nationwide. The circuit breaker system was introduced in India in 2001 and revised in 2013 to align it with global practices and make it more effective.

Conclusion

Trading halt is a common phenomenon in stock markets around the world. It serves as a mechanism to maintain market stability and integrity and safeguard the interests of investors and traders. However, a trading halt also has some drawbacks, such as disrupting normal market operations, creating uncertainty and confusion among market participants, and affecting the liquidity and efficiency of the market. Therefore, a trading halt should be used judiciously and sparingly, only when necessary.

 

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