What is a stock-trading halt and why do exchanges order them?

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Shares of SVB Financial Group SIVB, parent of Silicon Valley Bank,
The market was closed soon after it opened on Friday and never reopened. Back in January, a disturbance caused shares of nearly 200 securities to be halted on the New York Stock Exchange.

Readers may be wondering: what are trading stops, and why do exchanges order them?

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Trading halts were first implemented decades ago to help protect against sudden and destabilizing declines in the markets, according to current and former floor traders. And although the rules have been updated and standardized over time, the basic objective remains the same: to prevent stocks from spiraling out of control and unnecessarily destroying billions, or even trillions, of dollars in wealth.

“The halvings give traders, investors and the community time to pause, take a deep breath, regroup, and trade stocks,” said Jonathan Corpina, senior managing partner at Meridian Equity Partners and longtime floor trader at the NYSE.

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The rules governing trading halts were standardized by the Securities and Exchange Commission in 2012 following the flash crash of May 6, 2010, when the S&P 500 SPX,
Nasdaq Composite Comp,
and the Dow Jones Industrial Average DJIA,
It suddenly plunged more than 5% in a span of minutes, temporarily wiping out nearly $1 trillion in market capitalization.

As a result, the SEC established new uniform rules for the so-called “limit up, limit down” imposed on individual stocks, as well as revised the rules governing market-wide circuit-breakers.

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The limit up, limit down rule requires exchanges to stop trading in shares of a single security if they suddenly move up or down in a sharp manner. The magnitude of the move required to order such a stop depends on a variety of factors such as the size of the company, and they are typically triggered when the price of a given security suddenly deviates from the rolling average.

If a major piece of corporate news is about to be announced, the exchanges may halt trading in a single stock, as companies are required to inform the exchanges ahead of time. These are called “pending news” halts, and they can last from a few minutes to several days in some rare cases.

The rules for a market-wide “circuit-breaker” halt are more concrete and are divided into different levels: A Level 1 halt is triggered when the S&P 500 falls 7% from the previous session’s close. A Level 2 Halt occurs when the S&P 500 falls 13%. In both cases trading is suspended for at least 15 minutes.

Level 3 stops if the S&P 500 declines by 20%. If this occurs, the NYSE and other major US exchanges cease trading early.

Such market-wide trading halts are very rare, and the most recent examples occurred during March 2020, when volatility induced by the arrival of the COVID-19 pandemic repeatedly disrupted trading in stock markets around the world.

The longest market-wide halt in recent memory occurred after the September 11 terrorist attacks, when US equity trading was halted for four days, the longest shutdown since the 1930s.

Credit: www.marketwatch.com /

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