A trading halt is a short pause in trading that can occur on a single security, multiple securities, or the entire market. It can happen when there is an imbalance in orders, to make a major news announcement, or to correct a large and unexpected change in the share price of the security. Trading halts are put in place to protect investors from drastic fluctuations, or even losses, that can occur from a sudden share price or sudden news announcement.

Two of the most common types of trading halts are regulatory halts and self-regulatory halts. Regulatory halts are requested by an exchange, central bank, or other governmental authority due to a special event that affects the markets. Examples of regulatory halts are when a company files for bankruptcy or when a company releases a news announcement that affects the markets.

Self-regulatory halts are implemented when markets experience pre-defined large price movements or incorrect order imbalances that require the halting of trading to assist in protecting traders. When a trading halt is triggered, the networks of the exchange can cease the matching and processing of orders, halt the communication with investors, and temporarily block all trading activities.

Trading halts are also sometimes referred to as “circuit breakers.” These are triggered when the Standard & Poor’s 500 index experiences a 7% decline, 13% decline, or 20% decline intraday. These are intended to give the markets an opportunity to cool off and to reduce the further risk from panicking investors.

Overall, trading halts help protect investors from losses stemming from incorrect trades or drastic changes in share price. It also gives investors a chance to take a step back and to analyze the current market. When a trading halt is in effect, investors are able to make sound decisions without the clouds of panic making it difficult to think clearly.