Definition and Examples of Suspended Trading
A trading suspension occurs when the SEC stops trading in a stock to protect investors. That means you can’t buy or sell shares in a company whose stock faces trading suspension.
This happens when the SEC has questions about the company or has not received accurate information from the company. Trading suspensions can last for up to 10 business days.
For example, the SEC ordered suspension of trading in shares of Sports Field Holdings between Sept. 21 and Oct. 4, 2021, because the company had not completed required regulatory filings in over two years and did not respond to questions about its delinquency.
How Does Suspended Trading Work?
The SEC gives three reasons for potential suspension of trading:
- The company is delinquent in its filings with the SEC, making it impossible for investors to find current and accurate information about it.
- There are questions about the accuracy of currently available public information about the company.
- There are questions about how the stock is trading, including potential market manipulation, insider trading, and the ability to settle transactions.
SEC trading suspensions are generally done to protect investors from trading in securities that are not compliant with disclosure rules or in cases where the SEC suspects something amiss. This could be manipulation of the stock price, insider trading or fraudulent filings. The suspension gives the SEC time to investigate and come to some sort of ruling about future trading in the stock.
The SEC does not warn investors beforehand that it will suspend trading in a particular stock.
What Happens After a Trading Suspension?
The SEC may continue to investigate a company even after the 10-day trading suspension period ends. However, whether trading resumes in the shares of stock depends on which market the stock was trading in.
For stocks trading in the OTC markets, SEC rules require brokers to ensure that the stock meets certain requirements before they can solicit trades from investors and resume trading in the stock. For stocks trading on other markets, such as the NYSE or Nasdaq, trading can resume after the 10-day trading suspension has been served.
A company’s stock price may be significantly lower after a trading suspension. Investors may also have trouble selling shares after a trading suspension due to lack of buyers. Either case presents a loss of investment.
Suspended Trading vs. Trading Halts vs. Trading Restrictions
While trading suspensions are enforced by the SEC, there are two other scenarios where an investor may not be able to temporarily place buy or sell orders for a stock: trading halts and trading restrictions.
Stock exchanges can generally halt trading for an hour or day. These types of trading suspensions are referred to as trading halts or trading pauses, and they are not something that the SEC imposes on an individual basis.
There are two common reasons why an exchange would halt trading in a stock. One is the limit up/limit down (LULD) rule, which pauses trading when a stock price goes up or down more than a predetermined amount.
The other reason is for impending breaking news. In this instance, the company itself will contact the exchange and let them know that material news is coming. The exchange will then halt trading, usually for an hour, giving the market time to consider what impact the news should have on the stock’s price. This should make it so that trading in reaction to the news is more reasonable and less driven by emotion.
Restrictions on trading in particular stocks by brokerages are rare, but they do occur. For example, in January 2021, Robinhood and Webull temporarily restricted investors from placing certain trades in meme stocks.
According to Robinhood, clearinghouses that execute trades require a deposit from the broker for all trades that are settled. When there's market volatility, especially frenzied buying, the deposit required increases. On January 28, 2021, at the height of the meme stock craze, the amount of deposit Robinhood was required to make was 10 times the normal amount. Robinhood put restrictions on the trading of the stocks that had the highest required deposit because it couldn’t meet the required numbers.
What It Means for Individual Investors
Pending orders can be canceled during a trading suspension. Keep in mind, the stock price may be drastically different when the stock starts trading again.
If you use a limit order, the trade won’t execute if the price has moved far away from the limit number. If you use a market order, you may end up paying a lot more than intended.
Generally speaking, any type of trading suspension or halt is meant to make traders pause before trading in the stock. It’s a good idea to heed that advice and dig deeper into the cause of the pause, and consider all fundamentals and news surrounding the stock.
- Trading suspensions are a halt in trading ordered by the SEC to protect investors and may last up to 10 days.
- SEC can suspend trading for a number of reasons, including lack of information or to investigate potential fraudulent activity.
- How quickly trading resumes after suspension depends on which market the stock trades in.
- Trading suspension may result in lower stock price or lack of market for the stock after resumption of trading.
- Trading suspension differs from trading halts enforced by stock exchanges and broker-driven restriction of trading in stocks.
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