In this article, we will explore the concept of suspended trading and how it is implemented. We will also look at the differences between suspended trading, trading halts, and trading restrictions. Finally, we will discuss the impact of suspended trading on the individual investor.
Definition and Examples of Suspended Trading
Suspended trading refers to the suspension of trading in a specific security by the Securities and Exchange Commission (SEC) for a specified period. Trading can be suspended by the SEC for up to 10 business days.
How Does Suspended Trading Work?
The Securities and Exchange Commission provides three potential reasons for suspending trading: if the company is late in submitting its filings to the SEC, making it impossible for investors to find up-to-date and accurate information about it; if there are doubts about the accuracy of the publicly available information about the company; and if there are doubts about how the stock is being traded, including potential manipulation of the stock price, insider trading, and settlement capabilities of transactions.
Suspended Trading vs. Trading Halts vs. Trading Restrictions
Although suspended trading is imposed by the SEC, there are two other cases in which investors may be temporarily unable to place buy or sell orders for stocks: trading halts and trading restrictions. Stock exchanges can halt trading for an hour or a day. This type of trading suspension refers to trading being halted or paused temporarily, rather than something imposed individually by the SEC. There are two common reasons for halting trading in stocks. The first reason is the Limit Up-Limit Down (LULD) rule, which halts trading when the stock price rises or falls beyond a specified threshold. The other reason is the presence of important news coming out. In this case, the company itself will contact the exchange and inform it of the upcoming important news. The exchange will typically halt trading for an hour, giving the market time to consider the impact of the news on the stock price. This aims to make trading in response to news more rational and less emotionally driven. Trading restrictions are rare but do occur at times. For example, in January 2021, Robinhood and Webull temporarily restricted investors from placing certain trades in “meme” stocks. Securities settlement requires that they deposit collateral from the broker for every trade settled. When there is market volatility, especially when there is reckless buying, the required collateral increases. On January 28, 2021, at the peak of the meme stock phenomenon, the collateral required by Robinhood was ten times higher than usual. Robinhood imposed restrictions on trading stocks that required the highest amount of collateral because it could not meet the required figures.
What Does This Mean for Individual Investors?
Pending orders can be canceled during a trading suspension. You must remember that the stock price may be significantly different when trading resumes. If you used a limit order, the trade will not execute if the price moves away from the specified limit. If you used a market order, you may have to pay much more than you had planned.
In general, any type of trading suspension or halt is meant to make traders pause before trading in the stock. It is wise to take this advice into consideration and explore the reasons and consider the fundamentals and news related to the stock before making any trades.
Source: https://www.thebalancemoney.com/what-is-suspended-trading-5272151
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