Trading halts: what are they and why do they happen?
- What is a trading halt?
- Who can halt trading?
- What is the difference between a trading halt and a up/down limit?
- Why does trading get halted?
- How long do trading halts last?
- Is a trading halt good or bad?
- How to know if trading has been halted?
What is a trading halt?
A trading halt is a temporary pause in trading on a specific stock, index or commodity futures. The aim of a trading halt is to allow time for traders and investors to process and digest any rapid price movements.
Markets that operate with a central limit order book – such as stock exchanges or commodity exchanges – can be susceptible to large price swings that may create execution issues and order imbalances. So, trading venues use various mechanisms to manage this extreme volatility.
Who can halt trading?
Trading halts are instituted by an exchange or across a number of exchanges – they are not controlled by individual brokers. While the halt is in effect, brokerage firms cannot publish quotations or allow clients to trade the asset in question as there is no valid price to trade upon.
This means if a market is halted, you won’t be able to trade it anywhere – including on the FOREX.com platform.
What is the difference between a trading halt and a up/down limit?
Trading halts are temporary pauses caused by an event, whereas up/down limits stop trading if a market moves above or below a certain price.
Trading halts are put in place when a market has moved too far, too fast – they are time dependent. Up/down limits have a much larger tolerance as they’re based upon the price movement of the whole trading session, without short-term considerations.
Why does trading get halted?
Trading is halted when there is an order imbalance, which can be bullish or bearish in nature. They’re usually the result of regulatory concerns, the anticipation of significant news, or an excess of buy or sell orders for a specific asset.
Trading halts are more common for stocks, due to the regulatory requirements put on companies who want to list or unexpected news and events. For commodity exchanges, trading halts are automatic, and are triggered by price limits that are set each day.
How long do trading halts last?
Trading halts in futures-based products (indices and commodities) usually last between a few seconds and a few minutes. This enables market makers and options traders to re-run their models and digest the new price information.
But in equities, if the issue persists, there can be a longer suspension put in place. For example, under US law, the SEC can suspend stocks for up to 10 days if there is reason to believe public investors will be at significant risk should trading continue.
Is a trading halt good or bad?
A trading halt isn’t good or bad, it’s just a necessary restriction in a regulated market environment. Ultimately, they promote equal and fair access to information, and protect market participants’ wealth by minimising the damage that can be caused by a lack of information.
How to know if trading has been halted?
There are different procedures and codes in place for trading halts across different markets.
Short outages on the CME often originate from its ‘Velocity Logic’, which tends to kick in around major data releases from the US.
Longer-term outages are likely to be after more significant price moves cause price limits to be hit. These price limits are set on index and commodity futures contracts each trading session. When a market hits this price limit, different actions can occur depending on the market in question. The main consequences are:
- Trading halts until the price limits expand
- Trading remains in the limit condition
- Trading stops for the day
You can find the daily price limits for each commodity market on the CME Group website.