What Triggers a Volatility Halt

What Triggers a Volatility Halt in Trading?

Who hasn’t seen one of the stocks in their portfolio get halted? Immediately, we ask ourselves important questions that could make us rich. Did the company get acquired? Did they discover some new technology that will change everything? What triggers a volatility halt? On a few rare occasions, the news is life-changing. Most of the time, absolutely nothing changes. Why and when do stocks and markets halt? Below, we will look at a few reasons and past instances of halts and how they affected the market. 

Volatility Halts Example

Centerpoint Securities Website

What triggers a volatility halt? Why and when do individual stocks get halted? Market regulators around the world can halt a stock for many reasons.

It is done to protect market participants and to give everyone a fair chance at the juicy news.

Traders who make a living out of the stock market will benefit from the news much faster than someone investing as a side project.

The same security across all markets in the world will halt in order to give everyone the same opportunity to adjust.

Volatility Halt: Markets Are Closed

What triggers a volatility halt? Oftentimes, trading will be halted when the markets are closed. This is the result of a pending positive or negative news release from the company.

Companies usually release sensitive information before or after a trading session.

Such news can be mergers and acquisitions, market offerings to raise funds, significant changes within the company, a technological breakthrough, or financial reasons.

The halt can last for a few hours to a few days. A halt can last longer when it is due to non-compliance with listing standards or fraud.

Volatility Halt: Markets Are Open

What triggers a volatility halt? On a few occasions, market regulators will impose a halt in the middle of a trading session. This is usually due to unusual price and volume movements. The halt will likely last a few minutes to give everyone a chance to reset. It can happen as many times as needed during a single trading session. 

If a stock that is in the S&P 500, Russell 1000, or the QQQ ETF changes by more than 10% within a 5-minute time frame, it is halted. The same rule applies to a 30% change for stocks worth $1 or more and a 50% change for stocks worth less than $1.

What triggers a volatility halt? For those who didn’t know, futures can also be halted. This applies specifically during after-hours for the S&P 500, NASDAQ 100, and DJIA futures when they fall below or rise above 5%. Stocks and ETFs continue trading regularly. 

Now that we know when individual stocks or futures halt, let’s take a look at market-wide halts. 

What Triggers a Volatility Halt?

What triggers a volatility halt? When an entire market halts, it is called a circuit breaker. They are approved by the Securities and Exchange Commission (SEC) to prevent panic trading due to the increased volatility.

Circuit breakers were first introduced during the 1987 Black Monday crash. They are based on the S&P index. There are 3 levels.

Level 1: When the S&P declines by 7%, trading is suspended for 15 minutes. 

Level 2When the S&P declines by 13%, trading is once again suspended for 15 minutes. Trading is not suspended if this happens after 3:25 PM ET.

Level 3: When the S&P declines by 20%, trading is suspended for the rest of the day. 

The percentage above represents trillions of dollars of market cap wiped out in a few moments. Regardless of a single stock halt or a market halt, the important thing is not to panic.

This can cause rash decisions that may be regretted in the future. The NASDAQ website offers details for individual stocks that are halted

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Historical Volatility Halts

For a market halt, the reason for the sudden drop may impact the events after the resumption. In the following sections, we will take a look at historical halts, why they happened, and how the market reacted after its resumption.

1. 1873-1879

What triggers a volatility halt? In 1873, the NYSE halted for 10 straight days. This was caused by a Philadelphia bank, Jay Cooke & Company. Due to a financial crisis in Europe, investors started selling their railroad stock. Why railroads?

They were a relatively new invention and they needed a lot of capital to expand and meet transportation demand. Jay Cooke & Company had a lot of money invested in railroads. Hence, when their stocks went down, the bank went bankrupt.

Americans saw how one big bank failed and got scared. They ran to banks across the country to withdraw their money.

The depression lasted until 1879 across the globe. In the US, it caused even more disparity between races and between the North and the South.

2. Word War 1

The concept of a world war was a never before seen concept in our times. Accordingly, investors decided to withdraw their investments in order to raise money for the war effort.

By August 1, 1914, stock exchanges around the world halted until December 12, 1914. The day it reopened, the DJIA dropped by almost 25%.

The remaining war saw turbulent times for the market. However, there is a positive from all this. This was a turning point for the US stock markets as they overtook the London exchange and became the most important markets worldwide.

3. Black Monday 1987

As I mentioned earlier, this was the first time circuit breakers were introduced. On October 19, 1987, all 3 levels were triggered. Before the crash, the economy saw a massive bull run. Many things led to the crash.

Geopolitical tensions were at their peak with the Cold War as well as the decline of oil prices. What really helped the crash was the emergence of electronic trading.

More people gained access to the markets and new trading strategies such as short selling were introduced. All these events contributed to a recession that lasted less than previous crashes. It took almost 2 years for stocks to recover.

4. September 11th, 2001

What triggers a volatility halt? I don’t need to remind anyone about the events of that day.

The US exchanges never opened following the attacks and remained closed until September 17th.

When markets reopened a short-term sell-off occurred. However, gold, gas and oil prices surged.

Major losers were airline stocks. Markets quickly recovered and resumed.

5. May 6th 2010

Many of you may have never heard about the following story. It was caused by a young British trader, Navinder Singh Sarao, who had no idea of any wrongdoings. He was a very successful investor.

The DJIA dropped by $1T in less than 10 minutes before recuperating almost immediately. This was called the flash crash. This YouTube video explains the story very well. 

6. 2020 COVID Crash

The following crash feels like it happened a decade ago. How long have we been, under this COVID nonsense? Well, it was only 2 years ago, in March 2020 that the stock market went for a rollercoaster ride. I don’t need to make you relive the story. The point I want to make here, is that most stocks recovered within a few weeks. A massive bull run began. Investors who succumbed to the panic and sold everything were the real losers. Those who bought at the bottom profited.

Now that we know when individual stocks or futures halt, let’s take a look at market-wide halts. 

7. 2021 Meme Stocks

Finally, I have to mention meme stocksGameStop (NYSE: GME)BlackBerry (NYSE: BB)AMC Entertainment (NYSE: AMC), and other stocks halted many times at the beginning of 2021. They were also at the center of many controversies involving major stockbrokers and RobinHood (NASDAQ: HOOD). Kudos to everyone who held throughout all the halts and maximized profits.

Now that we know when individual stocks or futures halt, let’s take a look at market-wide halts. 

Final Thoughts: Volatility Halts

I hope you enjoyed this theory and history class on volatility halts. The main thing I want to get across is to be prepared for any eventuality. Hedge your investments and DO NOT PANIC. Follow your strategy and don’t get distracted from the game plan. Halts happen for a reason and are there to protect investors. If it doesn’t apply to a stock you own, do some research and try to take advantage of the situation. 

If you want to learn more about how you can profit from the stock market, head on over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.

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