A Primer On Trading Halts

For those following my trading recaps on the Warrior Trading blog or on the Youtube channel, you already know I’m likely going to end March in the red, the first red month I’ve had in a while. While there’s still a chance I could end even, but after the March I’ve had, I’m not going to push my luck.

Instead, on the final trading day of March, I’m going to keep my aim fixed on base hits. I’ll be on the lookout for home run setups, but my goal is to end the month on a green day.

However, the fact that the final trading day of 2019’s first quarter is upon us does mean activity will be up in the market. Institutional traders and hedge funds will all be trading with the end of the fiscal quarter, so volatility will most likely be elevated across the board.

With that in mind, I want to talk about events that go hand-in-hand with volatility and big market moves: trading halts.

Halts are enacted by exchanges for a variety of reasons, but a halt's main use is to prevent any buying or selling activity in a stock during a period when it might react violently. I recently made a video that goes over three of the most common halts and the reasons why they happen, but I wanted to spend some time here reviewing how I view these halts as I’m trading.

T1 Halt - News Pending

Whenever a company has news to release during a market session that might substantially affect trading activity, the company alerts the exchange it trades on about the timing of this news and the exchange implements a halt prior to the release. This is one reason why most companies issue news, financial reports or other planned announcements in-between market sessions.

For unplanned news that might affect the stock—or even an announcement that there is no news surrounding an unexplained surge in price action—a T1 halt is issued.

I tend to avoid trading around T1 halts if and when they can be anticipated. Unplanned news is generally not a great catalyst for any of trading setups I look for, and there’s no telling how the market might react to whatever the company is announcing. It can be especially bad if the company issues a T1 halt to announce there is no news motivating price action.

T12 Halt - Information Needed

While a T1 halt is initiated by the company whose stock is in question, a T12 halt occurs when the exchange notices unusual trading activity in a stock and needs information from the company to explain it.

This is another halt that throws up a red flag that the price activity in the stock is about to become messy. But, while T1 halt might precede good could influence share price to the upside, a T12 halt almost always precedes a sell-off. If the exchange notices something suspicious about the price action in a stock, it could mean anything from an unverified rumor to flat-out manipulation.

Even if the halt turns up nothing, that lack of a catalyst alone will give traders in the stock enough reason to exit the position as quickly as possible once trading resumes.

Limit Up/Limit Down Halt - Circuit Breaker Halt

Finally, one of the most common halts, particularly among small-cap traders, is the limit up/limit down halt. Most traders refer to it as a circuit breaker halt because, unlike T1 or T12 halts, LULD halts are automated.

For the most part, a LULD halt occurs whenever a stock’s average price moves by more than 10 percent within a five-minute span. The threshold for a circuit breaker halt can be different for differently priced assets—stocks that trade below a dollar might have to move 20 percent to trigger a halt—but all LULD halts prevent all trading activity while the market digests the recent action and any news or activity that may have prompted it.

Because LULD halts are automated, trading around them can actually be an aspect of my strategy. If I know why a stock is moving and I was already interested in trading it, I can anticipate when a halt might happen and plan to either sell before it reaches that level or hold the shares into the halt. Generally, that decision depends on the technical qualities of the stock. If it looks like the price and volume are rising heading into the halt, the stock will generally come out of the halt higher.

Like with all trading, there’s no guarantee what effect a halt will have on any given stock upon resumption. Traders should study the activity surrounding halts to get a feel for them and how they will play in their overall strategy.

Like it or not, halts are an integral feature of trading. traders who get caught unaware in them will learn that lesson quickly.