When Trading Stops: What You Need to Know About Halts, Suspensions and Other Interruptions
Thousands of stocks are quoted and traded every day in U.S. securities markets. Trading in most stocks takes place without interruption throughout the trading day—but some stocks are subject to short-term trading halts and longer-term trading suspensions. In rare instances when the market experiences a very steep decline, trading across the entire market can be stopped. This alert explains how, when and why interruptions in trading occur—and what investors can do in some of these situations.
Trading Halts to Allow the Market to Digest New Company Information
When a company is listed on a U.S. stock exchange, including NYSE, NYSE MKT, NYSE Arca, the NASDAQ Stock Market and the BATS Exchange, it agrees to notify the listing exchange about any corporate developments that could affect trading activity in its stock—before announcing them to the public. These developments can include:
- changes related to the financial health of the company;
- major corporate transactions like restructurings or mergers;
- significant positive or negative information about its products;
- changes in key management individuals; and
- legal or regulatory developments that affect the company’s ability to conduct business.
For their part, the listing U.S. stock exchanges have the authority to halt trading based on their evaluation of a given announcement. Generally, the more likely the announcement is to affect the stock price, whether positively or negatively, the more likely the exchange is to call for a trading halt pending dissemination of news by the issuer. An exchange can also halt trading after news affecting the company has been released. This could happen when the company releases information without notifying the exchange in advance—or when another company announces an unsolicited tender offer for the company whose stock is now subject to the trading halt. In very rare instances, an exchange may choose to halt trading when, regardless of the timing of any announcement, a high-impact event outside the company’s control occurs—such as an unforeseen natural disaster or a significant market disruption—that can affect trading in a stock.
These temporary trading interruptions, also known as regulatory halts, tend to be relatively short and are designed to allow prompt and full dissemination of the news to the marketplace at large.
What Happens During a Trading Halt?
When a trading halt is implemented, the listing exchange notifies the market that trading is not allowed in that stock. Other U.S. markets trading the stock must observe the trading halt as well. While the halt is in effect, brokers are prohibited from publishing quotations or indications of interest and from trading the stock. The listing exchange will end the trading halt by taking the steps required by its rules. In general, the market is made aware that a trading halt is coming to an end, either at the same time the halt ends or a few minutes before.
Trading Delays Can Also Occur at the Market Open
Typically, companies make material news announcements after the market has closed. In these situations, investors have time to evaluate the significance of the news and place orders for the following day at prices they deem appropriate. This can result in an imbalance between the buy and sell orders at the opening of trading the following day. In this situation, an exchange may delay the opening of trading to allow orders to be entered to correct the imbalance. These opening delays, also known as operational or non-regulatory trading halts, are usually short-lived since the exchange is focused on ensuring an orderly and prompt opening for the stock. Non-regulatory trading halts do not require other exchanges that list the security, and that do not have the sort of imbalance described above, to follow suit and halt trading.
SEC Trading Suspensions to Protect Investors
The Securities and Exchange Commission (SEC) is authorized under federal law to suspend trading in any stock for a period of up to 10 business days. The SEC issues a suspension when it believes that the investing public may be at risk. Many factors influence the SEC’s decision. A very important one is a company’s failure to keep up the required filing of periodic reports—such as annual and quarterly reports—that provide the public with information about the company’s business, corporate outlook and financial performance to date. Another factor is the quality of the publicly available information, particularly if it appears to be inaccurate. The SEC will also consider the trading activity in a stock, evaluating who is actively trading and whether market manipulation may be taking place.
Once the SEC decides to suspend trading, it will issue an order of suspension and announce the reasons(s) for its decision and the actual dates. If the reason is a lack of current information, the SEC will state when the company last filed public reports. This information provides an indication of how stale available information is. Current and past trading suspensions are available on the SEC’s website.
What Happens After a Trading Suspension Ends?
Historically, most companies subject to trading suspensions by the SEC have been quoted in the over-the counter (OTC) market on the OTC Bulletin Board or other broker-dealer operated systems prior to the suspension—and most SEC suspensions are based on a lack of current information about the company. The end of a trading suspension does not mean that quoting and trading automatically start again for OTC stocks. Instead, certain requirements in SEC Rule 15c2-11 must be met. A broker must also file a form with FINRA that needs to be approved before quoting can resume. The broker can file the form after it obtains and reviews current information about the company, including:
- the company’s organization, operations and certain control affiliates;
- the title and class of securities outstanding and being traded; and
- the company’s most recent balance sheet and profit and loss and retained earnings statement.
The broker filing the form must have a reasonable basis for believing the information is accurate and that it comes from reliable sources. A broker generally cannot quote the stock or solicit or recommend the stock to any investor until the form is approved. After approval, the broker can begin quoting—and other brokers may also quote the stock relying, or "piggybacking," on the first broker’s quote without filing the form or reviewing the company information on their own. Be aware that the SEC’s ability to continue a trading suspension indefinitely is strictly limited. As a result, the lifting of a trading suspension does not mean that the SEC’s concerns have been addressed and no longer apply.
Investors need to be careful before purchasing a stock after an SEC trading suspension has ended. If you are considering this move, here are several things you can do to help protect yourself:
- Ask the broker quoting the stock what information it has on the company and how recent that information is, bearing in mind that the SEC’s reasons for imposing a trading suspension typically involve a lack of current, reliable information.
- Look for information on your own and evaluate carefully whatever you find.
- Understand that there may be an illiquid market for some of these stocks, particularly if the company does not have to file periodic reports with the SEC.
- Use extreme caution if anyone is recommending you purchase the stock without offering current information about the company.
Controlling Market Volatility
The U.S. securities markets trade enormous volumes of stocks every day. Investors have come to expect prices to be set and transactions to be completed in the most efficient manner possible. Regulators work with market professionals to ensure that prices are set, and clearance and settlement take place, without disruptions. Every once in a while, markets may experience events, referred to as extreme market volatility, during which prices become erratic. The exchanges and FINRA have rules in place to take coordinated action to control market volatility for the benefit of investors. Those rules call for a pause in the trading of a single stock across all markets when the price changes by a certain percentage over the preceding five minutes, and for a market-wide trading halt when the Dow Jones Industrial Average (DJIA) declines by specified percentages. Read on to learn how single-stock trading pauses and market-wide circuit breakers work.
Single-stock trading pauses: a five-minute pause to let the price stabilize
Rapid price movement in a short period of time may signal that the price-setting process for a stock may be distorted. To keep the process from getting out of control, the listing exchange will call for a trading pause if the price moves up or down by specified percentages in a rolling, five-minute period. Here are the price moves that trigger the pause:
- 10 percent price movement, up or down, for securities in the S&P 500, the Russell 1000 Index and some exchange-traded products (ETPs);
- 30 percent price movement for other stocks priced at least $1.00; and
- 50 percent price movement for other stocks priced at less than $1.00.
The trading pause must be observed by all other markets, including stock, options and single-stock future markets that trade the stock. The pause across all markets allows time for buyers and sellers to consider the situation and decide what price makes sense, and to enter orders accordingly. A pause is set to last five minutes, but the listing market can extend it if there is a significant imbalance between buy and sell orders. Other exchanges may resume trading after 10 minutes have passed and then trading can resume in the OTC market. A trading pause may be called from 9:45 a.m. Eastern Standard Time (EST) to 3:35 p.m. (EST). Information about current trading pauses is published daily.
Market-wide circuit breakers: giving markets time to breathe after certain declines in the DJIA
After certain periods of extreme market volatility in the late 1980s, the SEC asked the exchanges to come up with a way to implement market-wide trading halts during such events. These periods are now identified by a decline of a certain number of points in the DJIA. These point declines, known as "circuit breakers,” were activated for the first and only time on October 27, 1997, when the DJIA fell 350 points, initiating a 30-minute, market-wide trading halt. Following that event, the trigger levels for circuit breakers were set at 10 percent, 20 percent and 30 percent declines of the DJIA. The actual point number is calculated at the beginning of each calendar quarter, using the average closing value for the prior month. The length of the market-wide halt depends on the percentage decline and the time of day it occurs. The halt can be as short as 30 minutes or the decline may cause the markets to close for the day. Information on current point levels is updated quarterly.
New Volatility Rules Starting in 2013: The SEC has approved new rules that provide for different measures to control market volatility for both individual stocks and the market at large. These rules will be implemented in phases starting April 2013.
Trading Halts and Delays
- Trading Halts and Delays—U.S. Securities and Exchange Commission (SEC)
- Investor Bulletin: Trading Suspensions—SEC
- Trading in Stock After an SEC Trading Suspension—Be Aware of the Risks—SEC
- Microcap Stock: A Guide for Investors—SEC