When a stock exchange calls a halt to trading of a stock, your broker will be unable to buy or sell any position in the shares. There are limited circumstances under which an exchange will call a halt, and a set of rules about when trading can resume. In rare instances, an entire stock exchange will halt trading.
The basic job of a stock exchange is to match buyers and sellers of securities, and to ensure the smooth execution of trading orders. The New York Stock Exchange and the Nasdaq have a vested interest in keeping the flow orderly. Whenever major news is reported or trading orders go out of balance, investors can suffer unexpected financial losses and hold the exchange itself responsible. Therefore, under certain circumstances, the exchange has the option of halting trades.
Trading Halt Procedures
When an exchange imposes a trading halt, it issues an announcement that puts brokers and market makers on notice that trading in a particular stock has been suspended. If a stock trades on more than one exchange, the trading halt applies to all of them. Brokers may not quote the stock price or trade the stock for their own accounts. When the exchange is prepared to lift the halt, it will notify brokers a few minutes beforehand.
SEC Trading Halts
In addition to the individual exchanges, the Securities and Exchange Commission may also suspend trading of any U.S. security for up to 10 days. This often occurs when companies fail to follow statutory reporting requirements or fail to issue their annual and quarterly statements on time. The SEC can also halt trading if it suspects the company has issued false information, or there has been manipulation of the stock or fraud on the part of brokers or company management.
Material News and Circuit Breakers
A stock exchange can suspend trading before or after the announcement of news expected to have a material effect, such as a pending merger or a change in key management. (Listed companies have an obligation to notify an exchange of important news before it is released.) In addition, each exchange has guidelines on unusual price movements; a rise or fall of a minimum percentage can bring a "trading pause" of a few minutes or a longer halt. A market-wide trading halt, also known as a "circuit breaker," may occur if the Dow Jones industrial average rises or falls a certain percentage too quickly. While a short circuit breaker caused by a change of 10 percent in the average may last just five minutes, a steep decline or rise of 30 percent or more can bring a day-long trading halt.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.