Trading halts are generally imposed before the release of critical market news, for regulatory reasons, or as a 'circuit breaker' when there is an imbalance of buy and sell orders. A company may also request a trading halt when price-sensitive information is near release to prevent confidential information from leaking into the market.
In this article, we dive deeper into the trading halt mechanism on the ASX share market to better understand what it is and how it works.
Understanding the trading halt
A trading halt is a temporary suspension of trading in a company's shares or trading on a particular share exchange. Trades will not be executed during a trading halt. Investors can place, amend, or cancel orders, but orders will not be actioned until the trading halt ends.
The halt could impact a specific share or, less commonly, an entire exchange. Companies often request trading halts to manage their continuous disclosure requirements. These requirements mean listed companies must continuously disclose information that may impact their market price or value.
The need for a trading halt may arise when a listed company becomes aware of information a reasonable person would expect to impact the share price but is unable to announce this information to the market promptly.
How long is a typical trading halt?
The ASX believes trading interruptions should be kept to a minimum. This means it does not automatically grant trading halts. The ASX will only agree to a trading halt for the period it considers reasonably necessary.
Trading halts can be short, occurring for as little as a day or part of a day. The longest a trading halt can last is two full trading days. The ASX will generally only agree to a trading halt where:
- Trading in the relevant share could occur while the market is not reasonably informed
- There could be a false or disorderly market in the relevant share or
- It is otherwise reasonably required to manage continuous disclosure requirements.
Although the imposition of a trading halt may make investors anxious, it is actually intended to protect them. It levels the playing field between those in the know and those who are not.
Temporary trading halts allow all share market participants to be informed of price-sensitive information and remove arbitrage opportunities. Where a share is traded on multiple exchanges, the imposition of a trading halt on one exchange allows other exchanges the opportunity to also halt trading in the relevant security.
How does a trading halt work?
The ASX grants a trading halt at the company's request. The company must tell the ASX the reason for the halt, how long it wants it to last, and what event will end the halt. Trading halts are generally lifted after the release of the relevant announcement and cannot last longer than two trading days.
During a trading halt, investors cannot trade in the halted securities but can make, amend, and cancel buy and sell orders. Existing orders are not purged from the system but remain in place and are available for execution after the halt has been lifted.
Before agreeing to a trading halt, the ASX must be satisfied that the circumstances justify the interruption to trading. The company seeking the suspension must disclose to the ASX the general nature of the pending announcement so the ASX can assess whether a halt is warranted.
It will not agree to a trading halt where the request is made solely for administrative or marketing purposes.
An exchange may initiate trading halts when a company no longer meets the requirements to be listed on the platform. This could occur if a company has failed to make the required public filings.
Why do companies enter trading halts?
Companies enter trading halts to manage their continuous disclosure obligations. These obligations mean that companies listed on the ASX must continuously disclose information that may affect their market price or value.
If a company receives this type of information but is not in a position to announce it straight away, it may request a trading halt. A company may also request a trading halt when the ASX has asked it to make an announcement to correct or prevent a false statement. If trading in the company's shares could occur before it is able to make this announcement, a trading halt should be requested.
A trading halt provides time to disseminate the relevant information to the market. This means all market participants can access accurate information when making trading decisions.
Trading halts are commonly requested when a company is about to release important news. This could be news about a merger or acquisition, regulatory development, or any unusual information that may positively or negatively impact the share price.
News and rumours about such events ahead of an announcement can result in an imbalance in buy and sell orders. The share market is most sensitive to new information during trading hours. Suppose a company becomes aware of market-sensitive information that needs to be disclosed during trading hours and cannot immediately disclose it. In that case, it will need to consider applying for a trading halt.
This is equally the case when the information is received outside market hours, but the company does not believe it will be in a position to disclose it before the resumption of trading.
Examples on the ASX
Appen Ltd (ASX: APX) entered a trading halt in May 2022, shortly after informing the market it had received a takeover offer. The announcement about the proposal was made in response to circulating rumours and resulted in a jump in the price of Appen shares. Shares were then placed in a trading halt before it was revealed the offer had been withdrawn.
Pushpay Holdings Ltd (ASX: PPH) also entered a trading halt in May 2022. This followed its announcement in April that it had received expressions of interest regarding the company's acquisition. The trading halt was imposed to allow Pushpay time to announce that two major existing shareholders had entered a cooperation agreement concerning potential company transactions.
Different types of trading halts
Trading halts most commonly occur for a single share on the stock exchange, but market-wide trading halts can also occur. In a market-wide trading halt, trading in all shares on an exchange is suspended. This can act as a circuit breaker to calm financial markets.
An imbalance can occur between the supply and demand for shares when there is a high trading volume. If there are too many sellers compared to buyers, share prices can fall. A market-wide trading halt shuts down trading, which can prevent severe financial losses caused by panic selling.
In the United States, market-wide trading halts are instituted when price declines may impact market liquidity. If the S&P 500 Index (SP: .INX) declines by 20% from the previous day's close, trading is halted on the share market for the remainder of the day.
Stock exchanges have an interest in keeping trading smooth and orderly. Trading halts, impacting one or all securities on an exchange, can prevent panicked reactions which may result in considerable losses for investors.
US exchanges implemented 'circuit breaker' trading halts in response to price declines at the onset of the coronavirus pandemic. However, the ASX does not utilise circuit breakers. The justification for this is that exchanges play an essential role in allowing investors to manage risks through trading, particularly in times of high volatility. Continuity of markets supports price discovery and risk transfer, which are considered critical during volatile periods.
Outside of periods of market volatility, exchange-wide trading halts can occur when there is an issue with a particular exchange. For example, in late 2020, the ASX closed for a day due to IT issues following a systems upgrade.
