Have you ever thought about a very pertinent question “why do stocks get halted?” If not, then you should think about a rare scenario where trading of stocks of a particular company is prohibited. Yes, it happens and also may happen to you. Therefore, it is important to know all about a stock halt to avoid confusion and frustration in the future.
Given the importance of the stock halt scenario, we decided to help you. In this article, we are going to explain this concept. We are also going to answer “why do stocks get halted?” So, stay tuned as you are going to learn a lot.
Stock halt – what is it?
Let’s consider a few scenarios first;
- Some type of imposition of regulatory actions
- Traders are anticipating significant news about a company
- An excessive trading phase of a particular stock leads to rectification
- Merger or acquisition is on the cards
These are a few rare scenarios that may put the stocks of a company to a halt. But what is a stock halt? A stock halt, also known as a trading halt, is basically a scenario that involves the prohibition of stocks of a company for a particular time period. A stock exchange imposes a stock halt. As a result, traders or brokers are not permitted to buy or sell stocks of that company.
There are also some exceptional events that may cause an entire exchange to halt trading. For example, a stock exchange may halt trading when there is a substantial imbalance between the supply and demand of a stock. The basic purpose of the stock halt is to reinstate the balance between buyers and sellers of a particular stock. Such action is necessary for the smooth execution of trading.
How does it work?
As we have mentioned earlier, a stock halt is a rare scenario. Some major news events often lead to it. However, it is the responsibility of the stock exchanges to keep trading smooth and organized. AND such a major news event may cause disruption in that order. Therefore, stock exchanges halt the trading of a particular stock after a significant news event. It prevents investors from panic selling of stocks and incurring significant losses. The primary purpose of stock exchanges is to avoid getting blamed by investors.
Furthermore, stock exchanges issue announcements to all brokers and the market about trading halt. The halt applies to all exchanges if the halted stock is traded on more than one exchange. As a result of the halt, brokers cannot trade stocks prohibited for trading. Similarly, exchanges again issue announcements when the stock is allowed for trading.
Another important point to remember is that stock exchanges mark halted stocks by a code. This code is a unique identification number that refers to a stock halt because of a particular reason. The codes are;
- H10 – The Securities Exchange Commission (SEC) prohibits the trading of a stock
- T1 – Stocks get halted because of a pending news event
- T2 – Stocks get halted because of the release of a major news event
- T5 – A 10% change in the price of stock occurs that leads to a stock halt
Why do stocks get halted?
There are some specific triggers that answer the question “why do stocks get halted?”
- Primarily, major news events and price volatility cause stock halt. For example, if stock prices change by 10% within five minutes, stock exchanges put those stocks to a halt. Similarly, frequent changes in volatility causing prices to suddenly fluctuate above or below also leads to a stock halt. Additionally, the SEC may also suspend the trading of penny stocks if it suspects any fraudulent activity.
- Another trigger for a stock halt is when stocks of a company are excessively traded despite having huge potential for the long-term. In such cases, stock exchanges apply a T12 halt which is a bad type of halt. As a result of the T12 halt, stock prices suddenly crash after the halt is lifted.
- Mergers and acquisitions are also causes of trade halts. For example, if two companies are about to merge, the stock trading of those companies is suspended. Similarly, stocks are suspended from trading up to the completion of the acquisition.
Examples of stock halt
1. Northview Apartment Real Estate Investment Trust: TSE
Northview Apartment Real Estate Investment Trust, listed on TSE, acquired six apartment properties in 2018. As it was a huge news event, the stock exchange halted the share trading of the company.
2. DryShips Inc. : NASDAQ
DryShips Inc., listed on NASDAQ, shares were trading in the low single digits in 2016. However, a surge of 1500% within ten days moved the stock price from $5.10 to $120 per share. The NASDAQ applied T12 to halt and suspended the trading of DryShips Inc. shares and demanded additional information from the company.
3. Sundance Resource Limited: Australian Stock Exchange
The CEO and the Chairperson of Sundance Resource Limited, listed on the Australian Stock Exchange, tragically lost their lives in a plane crash. The stock exchange immediately put stocks of the company to halt to prepare investors to prepare for the tragic news.
What happens after the stock halt?
It is important to note that quoting or trading doesn’t resume automatically after a trading halt. 15c2-11 is an SEC rule that must be met. Additionally, FINRA also requires brokers to file a form that must be approved to resume trading of halted stocks. However, a broker needs to have the following information about the company to file the form.
- Operations, organizations, and some particular control affiliates of the company
- The title and class of the outstanding stocks and stocks that are being traded
- The most recent balance sheet, profit and loss, and retained earnings statements
Moreover, FINRA also requires brokers to present a reasonable basis for considering the information accurately. Finally, the broker can resume quoting and trading halted stocks after approval of the form. Other brokers can also resume trading after the approval of the first broker’s form. They don’t need to file separate forms for one company.
Consider the following points before investing in stocks after a halt
- Ask the broker for all the information it has about the company and the authenticity of the source. Moreover, it is also important to check whether the information is recent or not. It is necessary because a lack of current and reliable information also leads to a stock halt.
- Additionally, look for as much information as possible about the company and carefully analyze it.
- Analyze the liquidity of the stocks as they may be illiquid, especially if the company doesn’t have to submit periodic reports to the SEC.
- Be highly cautious if someone suggests stocks of a company but doesn’t have recent and reliable information.
It is crucial for stock traders to know the answer to a very pertinent question “why do stocks get halted?” Stocks get halted because of a few specific reasons such as mergers and acquisitions. Stock halt refers to a scenario when stock exchanges prohibit the trading of a company’s stock. Undoubtedly, a trading halt is a situation that causes distress and anxiousness among traders. However, the SEC and stock exchanges do this to protect investors. It actually avoids panic selling of stocks by traders not aware of the latest news events. Thus, a trading halt creates a balance between informed and uninformed traders. Moreover, it also helps in preventing illegal or fraudulent activities. Simply put, a trading halt isn’t a bad scenario and traders don’t need to feel overwhelmed. However, it is important to be extremely cautious when trading resumes after a stock halt.