Any type of investment can be volatile, but during volatile moments, what regulations are implemented to control it? At some point, if you have tried to complete a trade during market hours but couldn't, it's likely that you experienced a trading halt.
Market authorities and companies can both evoke a trading halt. During a trading halt, can trades be completed? How long do halts last, and what triggers them? Here's a breakdown of trading halts.
What are trading halts?
Trading halts are a temporary postponement of trading for a particular security or several securities on numerous exchanges. Usually, when a trading halt occurs, it lasts for a few hours. A halt is enacted due to reasons like pertinent news announcements that might impact the stock price, correct errors in the listing, or when there's a lack of balance between buyers and sellers (non-regulatory halt).
Companies and exchange markets both have the ability to implement a trading halt. If the security is halted due to non-compliance with the exchange’s regulation requirements, the time period that it's suspended can be longer than usual. During a halt, options can still be exercised but other non-option securities won't be available for purchase or to sell until trading resumes.
Trading halts are used as a way to ensure that trading markets remain fair for both buyers and sellers. Regulatory authorities like the FINRA (Financial Industry Regulatory Authority) and the SEC and trading exchanges use halts to manage extreme volatility and make corrections when there are order imbalances.
Trading halts are common.
Trading halts are quite common. A study posted by the Wharton School of the University of Pennsylvania analyzed the frequency of trading halts. It showed that between 2012 and 2015, there was at least 1 halt on 98 percent of the trading days. Also, there were at least five halts on 72 percent of trading days. On December 17, 2021, the stock market in Turkey triggered a market-wide circuit breaker twice in one hour. All of the listed stocks were halted after the Borsa Istanbul 100 index fell by 7 percent.
Market-wide circuit breakers are when a halt is enacted on an entire market. This happens when the S&P 500 index decreases by a specific amount. There are three levels for S&P 500 index decline—level one is a decline by 7 percent in a single trading day, levels 2 and 3 consist of a 13 percent and 20 percent decline, respectively. Usually, the market will be halted for 15 minutes during level 1 or 2 breakers, while level 3 breakers last for the entire trading day.
When a decline triggers level 1 or 2 before 3:25 p.m. ET, a halt occurs for 15 minutes—but not at or after 3:25 pm. Circuit breakers also occur on individual securities. The limit-up-limit-down (LULD) mechanism controls single breakers. When a trader seeks to buy a security at the L.D. price, the security is in a limit state for 15 seconds. If the trade is completed (or canceled) within the 15-second timeframe, trading resumes. If the trade isn't acted upon in 15 seconds, a 5-minute halt is placed on that single security.