What is a Trading Halt?

In the stock market, control is key – control over when to enter and exit a position, and control over your response to new information. An absence of control puts investor capital at risk. Therefore, trading halts are a market occurrence that is important to understand. Whilst they can be good, bad, or neutral for your holdings, they can leave you helpless to exit a position and are impossible to accurately predict.

What is a trading halt?

A trading halt is a temporary suspension of a company’s trading activity on the stock exchange. This can occur at the request of the company itself, or when the ASX receives an announcement from an external entity that can be interpreted as price sensitive for the company. In this trading halt period for a stock, investors cannot actively buy or sell the shares of the company on the stock exchange. Instead, the shares are placed into a “Trading Halt Session State” where market participants can place orders, but there is no execution of these orders. Only limit orders can be placed during a trading halt. Conversely, market orders can be cancelled, but no new market orders can be placed. Read our blog on the different types of orders here: https://maqro.com.au/stocks/market-order-vs-limit-order/

What are reasons for a trading halt?

The dominant purpose of a trading halt is to allow the market to interpret and respond to new price sensitive information about a specific company. Part of becoming a publicly traded company on the ASX is agreeing to notify the listing exchange of any corporate developments that could affect its stock’s trading activity, prior to announcing this to the public. These developments include:

1. Major corporate transactions: Is the company looking at, or have they completed an acquisition of another company. Does this transaction alter the company’s value proposition, market share or corporate structure?
2. Significant information about products: Has the company launched a new good or service, or have there been developments in an existing offering that will alter the business?
3. Regulatory developments: Have there been changes to the legislative framework that the business is subject to, that will impact its future operations?
4. Significant changes to company financial health: Are there notable changes on the company’s financial statements that may impact investor perceptions?

A general rule of thumb is that news related trading halts will occur when the exchange expects that release of this news will cause significant stock volatility.

In the US, trading halts can also be imposed in response to price movements, as a market “circuit breaker”. This action is triggered when there a significant price fluctuation on the major US indices such as the S&P500 index. Organised in 3 levels, Level 1 circuit breakers occur when there’s a 7% decline in the index value during a single day and involves a 15-minute trading halt.

Level 2 and 3 circuit breakers occur at 13% and 20% decline levels respectively and can occur only once a day.

The ASX does not use circuit breakers as a trading halt strategy. Instead, ASIC apply a common set of market integrity rules (MIRs) for all securities and futures markets to adhere to.

What are trading halt advantages?

The dominant reason as to why trading halts exist proves to be the same reason why they are advantageous in the market – they protect investors and level the playing field between those who are informed and reactive, like institutional investors, and those who are not instantaneously updated on news. Accordingly, all market participants can make informed financial decisions, which helps prevent panic selling and automatically triggered trades from creating a selling “snowball” effect. This was evident during the 2008 GFC, where initial news of corporate defaults catalysed a mass market sell off that materialised into a stock market crash, as automatic sales were triggered from initial market downturns, amplifying initial causes.

Trading halts are also positive in preventing arbitrage opportunities (riskless return investing) and the potential for illegal transactions, such as insider trading, which occurs when stock transactions occur via the realise of non-public news. 

What to do if your holding is in a trading halt?

Because of their impossibility to predict, if a stock is in a trading halt, it is best to respond by heading to the ASX website and reading through the issued material. Usually, there will be guidance from either the exchange or the company itself on the reason for the halt. From here, the strategic approach is to interpret the information and form a response on a likely market reaction. Limit orders can be placed through trading platforms to be executed upon the resumption of trading. The order, whether it be a “buy” or “sell” is dependent on your outlook for the company, post announcement. Alternatively, you can also take no action, through a “hold” strategy (if you already own the stock).

At Maqro, our team of advisors and analysts remain constantly informed on market conditions and company announcements in real time, helping you to make the best stock market decisions