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What are Circuit Breaker Halts? Snappy Illustration

Ross_Circuit_Breakers

Hey, everyone. Ross here from Warrior Trading. So, today we’re going to talk about stock halts. Now, a stock halt can be a pretty scary thing, because when a stock is halted, you cannot buy or sell shares. So, if you’re in the stock while it’s halted, you are literally stuck until it resumes trading. And when stocks are halted. Between the time that they halt and the time they resume trading, they can open at a very different price. I’ve seen stocks get halted at $10 and resume at $30 a share, but I’ve also seen stocks get halted at $30 a share and resume at $2 a share. So, what happens during the halt that allows the price to change so much? All right. When stocks get halted, there will be a halt code associated with the stock. The first one that we’ll talk about today is called T.1 halt.

A T.1 halt is when a stock is halted pending news. So, a company can choose to release news, and typically when they release big news, they release the news pre-market or after hours. They’ll be based on s predetermined schedule. They’ll let everyone know, “Okay. Next Friday at 5:00 PM we’re releasing our quarterly earnings,” so everyone’s anticipating it. But sometimes in the middle of the day the company will feel they need to release news. This could be for any number of reasons. One could be, for instance, and I’ve seen this a few times, earnings have been leaked, and now they feel like they need to pause trading in the middle of the day, halt the stock, and go ahead and formally release the earnings that were leaked to news agencies or whatever. Other instances could be something suddenly has happened that’s a very critical, a CEO is stepping down, something, maybe a lawsuit has been filed. Those would typically be negative things, but there could be any number of different things that could cause a halt to take place in the middle of the day.

When a company wants to release news in the middle of the day, they’ll contact the exchange. The exchange will halt the stock. It will say halted on a T.1 code pending news. And once the company has released the news, then the exchange will schedule the stock to resume trading. That’s typically within an hour at most of when the news was released. So, it’ll start trading again. In the case of most T.1 a news release halts, you can expect that the stock will resume at a different price than when it was halted. If the news is good, it will resume higher. If the news is bad, it will resume lower. The reason that happens is because before the stock presumes, traders are already putting in their orders to either buy or sell. So, by the time the market opens, they match the current supply and demand, and that is what creates the change in price.

A T.1 halt can be concerning. The time that it’s probably the most concerning, and I’ve seen this a lot as a trader who often trades a lower priced stocks, is when a stock will be up maybe a hundred or 200% on no news whatsoever. Sometimes the company will feel they need to respond to the price action. They’ll ask the exchange to halt the stock. They’ll release the headline, which is that there is no fundamental news to account for the move, and typically the stock will resume lower, as you have confirmation that there is no news. Sometimes these stocks will move higher, because people think maybe somebody knows something. Maybe there is news coming out, but then when the company formerly says there’s no news, they go down. A T.1 halt is the one that we see fairly often.

T.12 halt is halted requiring additional information by the exchange. This is not a good halt to see if you’re holding a stock to the long side. This has been called the equivalent of a company being brought into the principal’s office. Basically what it means is the exchange has decided on their own to halt trading in the company, and this could be because they suspect that there’s something not appropriate going on within the current trading activity. Typically where we see T.12 halts is when you have a company that is going up 100, 200, 300, 400, 500% on no news at all. Right?

That’s when the exchange says, “Well, if the company’s not going to request that we halt it, so they can release news, we’re going to go ahead and halt the stock. It’s a T.12 halt, and now the company has to come to us and say, “What’s going on?” What a lot of times happens is the company will say, “There is no news to account for this move,” and when the trading does resume, it will resume a lot lower, because all of the fear, and greed, and emotion that was tied into the squeeze up, now kind of the bubble gets burst, and the stock comes back down. So, T.1 halt and T.12 halts are both fairly common, T.1 being more common.

Then the third type of halt that we see pretty often is called a circuit breaker halt, and the the code is LULD, limit up-limit down. This is a very interesting type of halt. We see this probably the most frequently out of all of the halt types, and there’s a couple of others, but I won’t get into those now. The LULD halt, the way this works is after the flash crash, regulators wanted to create a mechanism of preventing stocks from dropping 50% and bouncing right back up, because that was a problem. Investors who had stop orders on their accounts, the market dropped, their stop orders got fired, and then the market went right back up. So, they just got stopped out for millions of dollars of losses, only to see the market get right back to where it was. What happened was a couple stop orders trigger, more settled orders trigger, then more stop orders trigger, then more sellers trigger and create this flash crash.

Circuit breaker halts were created to stop that from happening, give moments of pause in the market. The way these rules are written is they’re based on thresholds. Stocks fall into different categories of what their thresholds will be, but typically from 9:45 until I believe 3:45 in the afternoon, if a stock moves up more than 10% within five minutes, it will be halted for a five minute long circuit breaker halt. This is a volatility trading pause. It gives investors and traders a moment to sort of take a breath, digest the news, if there is any. Then the stock will resume. Sometimes these halts will be extended for 10 minutes. So, we’ll see either a five minute long halt or a 10 minute long halt.

There are some instances where lower priced stocks, the threshold is higher, it needs to go up 20%, or in the lowest price stocks, it needs to go up 40%. That’s to accommodate the larger amount of volatility that we typically see in lower priced stocks. I believe for exchange traded funds they may have an even lower threshold of 5% or something like that. There’s a whole graph on all of the different thresholds, and sometimes they don’t even totally make sense, because you’ll be looking at a stack, and it’ll be up 10% in the last five minutes, but it’s not halted. One of the things that you have to realize is that the way the volatility circuit breaker bands work is they’re looking at the average price of the last five minutes. If you’re looking at the price from five minutes ago to right now, well the average price is in the middle, so it needs to be up 10% from the middle. So, being up 10% in five minutes doesn’t necessarily cut it. It might need to be more like up 10% in two and a half minutes.

These are some of the nuances here that can make anticipating circuit breaker halts a little bit more difficult, but you can expect that if you’re actively trading a stock moving anywhere in the range of 10% or more every five minutes, that there is a risk of a circuit breaker halt. Occasionally circuit breaker halts will turn in to a T.12 halt or a T.1 halt, as either the exchange or the company wants to get a better sense of what’s going on with the stock. All right? I hope this has helped you understand circuit breaker halts. There’s, like I said, some nuance here, but it’s something that is good to know. As usual, if you have any questions, don’t hesitate to reach out. If you’re still watching, you must’ve really enjoyed that video. So, why not subscribe and get email alerts anytime I upload new content? Remember, when you subscribe, you become a member of the Warrior Trading family.