At one time, trading was done only by stock brokerage professionals who worked at major financial institutions—today it is widely available to anyone with a bank account, internet connection, and some money to risk. While retail traders now enjoy many of the same liberties as institutional traders such as international markets, publicly-traded assets, and even technical indicators, all participants are subject to many of the same market effects as well.
Two of those market effects—trading halts and trading restrictions—sound similar, but in fact are very different.
What is the Difference Between a Trading Halt and a Trading Restriction?
A trading halt is a market event in which the trading of a particular asset or an entire stock exchange is temporarily suspended, whereas a trading restriction is a trading limitation enforced by the Securities Exchange Commission (SEC) and/or investing brokerages that prevent investors from participating in frequent and short-term trading activities at larger scales. In other words, trading halts are reactionary and trading restrictions are preventative.
To better understand, we’ll take a closer look at both trading halts and trading restrictions.
What Is a Trading Halt?
A trading halt can be stock-specific or market-wide, affecting traders of all sizes, backgrounds, and geographic locations. The duration of a trading halt can vary, freezing securities or entire markets for minutes or even hours at a time.
Trading halts are artificial, meaning they are not a natural part of markets—however, they have been in existence for some time. Stock market halts date back to 1987, when the SEC mandated the creation of market-wide circuit-breakers (MWCBs) to prevent a repeat of the Oct. 19, 1987 market crash, also known as “Black Monday,” when the Dow plunged 22.6% .
Reasons for Trading Halts
Trading halts are a method of pausing market action to prevent volatility from snowballing in response to unexpected stimuli.
Trading halts are designed only to be triggered when a certain market event occurs that is extreme, unprecedented, or otherwise affects market trading. Halts may be triggered by severe price rises or drops, commonly referred to as “circuit breakers” or “curbs.” Halts are implemented for a variety of reasons, including the following.
Anticipation of a Major News Announcement: Code T1: Pending News
A trading halt might be called during the day to allow a company to make an announcement. If the announcement is pre-market, it might result in a trading delay rather than a halt. A trading halt or delay allows investors time to assess the news’ impact.
Severe Price Drop: Code LUDP: Volatility Trading Pause
The NYSE also imposes trading halts based on the severity of price moves, applying to both upside and downside swings in short amounts of time. Whereas news-induced trading halts are usually one hour in duration, stocks can get halted for five to 10 minutes for increasing or decreasing rapidly in price over a short period, typically exceeding 10% in a five minute period.
Market-Wide Circuit Breakers
There are also three tiers of market-wide circuit breakers that pause trading across all US markets when the benchmark indices (https://www.sofi.com/learn/content/what-is-the-sp-500/, Dow Jones 30, https://www.sofi.com/learn/content/nasdaq-listing-requirements/), exceed pre-set percentages in terms of price from the prior day’s closing price:
Level 1: 15-minute halt when the S&P 500 falls 7% below the previous day’s closing price between 9:30am EST and 3:24pm EST.
Level 2: 15-minute halt when the S&P 500 falls 13% below the previous day’s close between 9:30am EST to 3:24pm EST. Level 1 and 2 circuit breakers do not halt trading between 3:25pm EST and 4:00pm EST.
Level 3: Trading is closed for the remainder of the day until 4pm EST when the S&P 500 falls 20% below the previous day’s close.
Correct an Order Imbalance
Non-regulatory halts or delays occur on exchanges such as the NYSE when a security has a disproportionate imbalance in the pending buy and sell orders. When this occurs, trading is halted, market participants are alerted to the situation, and exchange specialists communicate to investors a reasonable price range where the security may begin trading again on the exchange. However, a non-regulatory trading halt or delay on exchange does not mean other markets must follow suit with this particular security.
Technical Glitch: Code T6: Extraordinary Market Activity
Trading is halted when it’s determined that unusual market activity such as the misuse or malfunction of an electronic quotation, communication, reporting, or execution system is likely to impact a security’s market.
A trading halt may be placed on a security when there is uncertainty over whether the security meets the market’s listing standards. When this halt is placed by a security’s primary markets, other markets that offer trading of that security must also respect this halt. These include:
• Code H10: SEC Trading Suspension: A five minute trading halt for a stock priced above $3.00 that moves more than 10% in a five minute period. H10s are commonly imposed by the SEC onto penny stocks and other over-the-counter stocks suspected of stock promotion or fraud.
• Code T12: Additional Information Requested: A trading halt that occurs when a stock has rallied significantly without any clear impetus. This can be common among orchestrated pump-and-dumps or short squeezes, and in many cases when the halt is lifted, the stock reverts back down because there is no underlying fundamentals supporting the drastic rise in price.
How Long Do Trading Halts Last?
Trading halts are typically no longer than an hour, the remainder of the trading day, or on rare occasions up to 10 days. However, if the SEC deems appropriate, the regulatory body may revoke a security’s registration altogether. Trading halts imposed on stocks on the New York Stock Exchange (NYSE) and the NASDAQ are publicly available and updated in real-time there, as well as on the OTC Bulletin Board .
Example of Trading Halts
Amid the late-January 2021 Gamestop vs Wall Street spectacle, Gamestop’s stock saw huge capital inflows over the course of a couple weeks, leading the NYSE in terms of daily volume. The stock’s intraday volume was so high that it triggered the volatility circuit breaker dozens of times over the last week of January and again on February 2, 2021, when it dropped 42%.
On February 1, 2021, Adamas Pharmaceuticals’ trading was halted for news pending linked to the day being the FDA action date for the company’s marketing application for Gocovri (amantadine) to treat OFF episodes in Parkinson’s disease patients receiving levodopa-based therapy.
In June 2020, bankrupt car rental company Hertz’s stock trading was halted pending news around a planned controversial stock sale. The stock was trading down about half a percent to under $2.00 when the SEC told Hertz that the regulator had issues with the company’s stock sale plan.
Market-wide circuit breakers
MWCBs were triggered four times in March 2020 in response to the global COVID-19 pandemic lockdowns that caused two of the six largest single-day drops in market history. This was the first occurrence of market-wide circuit breakers since 1997.
What is a Trading Restriction?
Trading restrictions are trading limitations imposed by the SEC to restrict day trading of US stocks and stock markets. Trading restrictions attempt to prevent “pattern day traders” from operating in the markets unless they maintain a minimum equity balance of $25,000 in their trading account.
Trading restrictions ensure a minimum standard is met by all market participants to trade assets to the fullest extent to which they have access. Margin requirements, pattern day trading, and occasionally limited market hours narrows the potential pool of traders to those with the designated criteria deemed necessary to effectively play by market rules at a certain scale.
Pattern Day Trading
The SEC defines a day trade as “the purchasing and selling or the selling and purchasing of the same security on the same day in a margin account.” Accordingly, the SEC defines a pattern day trader as anyone who executes four or more trades within five trading days. In other words, opening and closing one trade per day is enough to classify a trader as a pattern day trader, applying the $25,000 minimum equity capital restrictions.
In addition to the SEC, some stockbrokers may impose even more stringent definitions of a pattern day trader, classifying pattern day trading as making two or three day trades in a five-day period, thus imposing the $25,000 minimum equity balance on anyone who meets this criteria.
Day traders in the US are permitted to trade on up to 4:1 leverage, meaning day traders can open positions up to four times the amount of cash in their trading account. For example, if a trader has $25,000 in their account, they can open up positions up to $100,000 for the day. However, traders that hold positions overnight are limited to 2:1 leverage, or up to double the amount of cash in their trading account.
Since day traders’ positions are intraday and each trade is less likely to experience larger price swings compared to positions held longer, day traders are allowed to have more leverage. If a trader exceeds their allowed margin, then the day trader’s broker will issue them a margin call, a demand for additional funds to maintain a certain account ‘margin’ requirement. Margin calls are usually brought on by a position decreasing sharply in value or an overleveraged position decreasing enough to fall below the margin requirement.
Examples of Trading Restrictions
PDT Suspended Trading
If Trader Smith has $20,000 in their trading account—$5,000 less than the minimum equity requirement for pattern day, they may only open and close three total trades in a week. If Smith opens and closes five total trades in one week with their same $20,000 account, they will be flagged as a pattern day trader. Because their account’s equity doesn’t meet the minimum PDT margin requirement, their account may be suspended from trading until they add additional funds to their account to meet the $25,000 minimum equity requirement—or wait five or so days for the suspension to end. All margin and leverage is suspended during a PDT trading suspension, however some brokers may allow for cash account transactions while in PDT suspension.
A late February 2021 25%+ selloff in the crypto markets was believed to have been started by margin calls that were liquidated, thereby creating a snowball of market sell orders that cascaded lower to then trigger lower liquidation levels and stop-loss orders, creating a feedback loop of selling. The initial margin calls were triggered when a trader’s leveraged long trade came under pressure during a pullback, at which point the position was liquidated, force-sold after not meeting the margin requirements.
Trading halts and trading restrictions can affect any trader at one time or another. From an individual perspective, there are minimum capital requirements to sign up for trading, especially for those intent on day trading. If a trader doesn’t maintain a certain level of margin, their trading account can be suspended or be limited to trading only with cash available.
Even if traders follow all the rules and maintain their margin requirements, there are certain trading days when trading of particular stocks pauses due to reasons outside of any one person’s control—whether it’s pending news, volatility, suspected fraud, or even a technical error. On rare occasions, the entire market may be halted or shut down for the day due to severe drops.
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