Options during Trading Halt
A temporary suspension of trading for specific security at a single exchange or multiple exchanges is called a trading halt.
There can be several reasons for a trading halt, such as
- technical glitch,
- regulatory concerns,
- the anticipation of the news announcement, and
- correction of order imbalance.
How Does Trading Halt Work?
The biggest reason for the trading halt can be the anticipation of a news announcement that will greatly affect stock prices. Another reason is a circuit breaker due to a large change in prices.
It doesn’t matter the news is positive or negative; it will halt trading.
On public exchanges like the New York Stock Exchange (NYSE), there are almost thousands of stocks traded daily, and companies agree to pass the material information to exchanges before announcing it to the general public.
In order to promote fair trading and the equal dissemination of information, exchanges decide to halt trading before that particular news or information is released.
Trading Halts at the Market Open
To release sensitive information to the public, companies wait for market closure. This strategy will give investors some time to evaluate the information and find out whether it is significant or not? However, doing this can lead to a large imbalance between buy and sell orders. In such cases, exchanges decide whether to open a delay or to halt trading at the market opening immediately. These delays are not lengthy and exist for a couple of minutes. When the balance between the buy and sell orders is restored delays are no longer in effect.
For instance, if the halt occurs before the trading is opened officially it is known as held at open. When the stock is held at the opening, there can be three reasons for that.
- The release of new information from the company can have a significant effect on the stock price.
- There is an imbalance between the buy and sell orders.
- A stock is unable to meet the regulatory listing requirements.
Trading delays are actually the trading halts that mostly occur at the start of the trading day. For the ease of investors, all the information related to trading delay and halt is given on the exchange’s website.
The Ins and Outs of Trading Halt
As an options trader or a stock trader, you must keep this dangerous market phenomenon in mind. For a stock’s price action, trading halt can be good, neutral, or bad. However, during a trading halt, traders are helpless to exit a position, and it nearly becomes impossible for them to anticipate.
There can be lots of reasons for a trading halt. What can you do if the trading halt occurs? If the trading halts can result in the delisting of stock from a major exchange, then what will you do? What would be the condition of options during the trading halt?
Reasons for Trading Halts
There can be lots of reasons for a trading halt. Let’s have a look at some of the major and common reasons for a trading halt.
- The most common reason for a trading halt can be to allow the market to digest meaningful information about the company. This information can be about a new deal, a development on the financial health of the company, drug approval, or any other major headlines. In such cases, the major exchanges of the US have the authority to check the news and determine whether trading should be halted or not. It has been seen that news related trading halt happens when exchanges feel that this news can significantly impact the volatility in the stock.
- Along with exchanges, the exchange commission can also halt trading in a stock. Companies can also request for a trading halt. Typically, this trading halt only lasts for five minutes. In some circumstances, it can be extended for longer periods. For example, a suspension caused by SEC can last up to 10 business days.
- The final reason can be the volatility “circuit breakers.” These can halt trading or individual stocks or overall trading. These circuit breakers are intended to prevent the massive swings in share prices over a short time period, such as flash crashes.
What Happens Once A Stock Is Halted?
Every time in case of a trading halt, it’s the responsibility of the exchanges to tell the reason to investors in the form of a trading halt code. A code T1 indicates pending news. H5 indicates the violation of the listing requirement. You can easily find these trading halt codes on websites like NasdaqTrader.com. There is bad news for the trader because he can do anything with his position in a halted stock until the trade is resumed.
So, if one of your stocks is halted, first of all, try to identify the reason. If the trade is halted due to pending news, then the company will have to share the news before resuming stock trading. Once the news is publically released, it’s time for the trader to be vigilant because there will be a great swing in share prices for a short time.
What Could Be The Worst-Case Scenario?
When the criminal investigations are in the process, there is a possibility that trading might not resume on major exchanges once it has been halted. In such cases, trading might be resumed on the OTC market with a different ticker. SEC warns investors that stocks have been suspended due to safety concerns, so typically, the trading resumes at a steep discount. Those investors who are willing to buy stocks of a company can buy stocks at significantly lower prices.
Options during trading halt might lose value if the halt is extended for a longer period. In such cases, options traders can’t do anything, and they are not able to buy and sell their position. Typically trading halt only lasts for five minutes, but sometimes it can be extended for 10 days. In these circumstances, the options will lose their value. The trading halt is not in control of traders, so they can’t do anything with it.
Sky Hoon. Read Full Bio
Website Owner, Twitter-er
He has been trading since 2008. He started this blog to share the journey about option trading. He dabbled in stocks, bitcoin, ethereum (in Celsius Network), ETF (lazy Dollar Cost Averaging) and also built websites for fun. He used this as a platform to share my experiences and mistakes in trading, especially options which I just picked up.