How trading halts work and how to use them in the market
Some times ago, we covered circuit breakers, which are common tools used in the financial market. In the report, we said that a circuit breaker happens when the price of an index declines by a certain amount.
The goal of doing this is to let market participants to take a breather. The breakers also help to reduce panic among market participants.
In this report, we will look at trading halts, which are essential aspects of the financial market.
What is a trading halt?
A trading halt is when a financial asset is paused by the exchange for several minutes or hours. During this period, no market participants can buy or sell the asset. The halt can happen for stocks, indices, and commodities in some cases.
For example, at the beginning of Juve 2020, shares of Swire Pacific were halted in Hong Kong. Swire is the parent company of Cathay Pacific, the leading airline in Hong Kong.
During the halt, it was revealed that the Hong Kong government was intending to invest more than $5 billion into the firm.
The goal of this investment was to save the company because of the ongoing challenges in the airline industries.
Benefits of trading halts
Trading halts happen with the goal of creating an equal playing field in the financial market. They also happen to ensure that market participants internalise and digest the information before buying or selling.
A circuit breaker, which is a form of a trading halt is essential because it prevents retail and unsophisticated traders from overreacting.
Top reasons for halts
There are several reasons why halts happen. The Nasdaq has created a comprehensive list of the items that lead to these halts. These include:
News pending – A good example of this is what happened in Hong Kong. Other news could be an investigation into a company and mergers and acquisitions.
Volatility – This is a halt that happens when the price of an asset falls by more than 10%.
Extraordinary activity – This happens when there is an extraordinary activity in a company.
Non-compliance – This halt happens when a company does not comply to listing requirements.
Non-current – This happens when a company misses to submit the required regulatory information.
Other reasons why halts happen are: Corporate actions, regulatory concerns and when there is a technology issue.
How to trade during a halt
In most times, trading halts happen before the market opens. This means that it is not possible to buy and sell stocks.
Check the Stock
When you find that a stock is not trading, a good thing to do is to check whether the stock has indeed been halted.
For companies listed in Nasdaq, you can check this page to see the reason for the halt.
If a halt happens in a stock that you have already bought or sold short, it means that you are in a difficult situation.
This is because the stock will likely see some volatility when the stock starts to trade again.
The second thing you need to do is to know the reason for the halt. In the case of Swire Pacific, the stock jumped after the bailout as you can see below. Still, the stock then dropped in the following days.
Therefore, understanding the reason of the halt can help you make informed decision.
Finally, you should not panic or overreact when there is a trading halt. Doing the two could make you make uninformed decisions.
For example, in the case of Swire, while the stock jumped after the news, it then dropped.
Trading halts are essential components of the financial market. They help make the markets work by creating a level playing field.
As a trader, the knowledge that halts exist should make you always have a stop loss on all your trades.
They should also incentivise you to avoid leaving your trades open overnight.