Question

16. In each of the following cases determine if the halting of the trade by the exchange in response to price movement of traded securities was advisable. Explain your reasons and use appropriate terminology

i) In response to an attack on the subway system in New York, the stock prices plummeted by 10% within a few seconds. The exchange halted trading for 10 minutes.

ii) The only drug made by a company EKKG was deemed unsafe by FDA. The stock price plummeted by 50% in a few seconds. The exchange halted trading for 10 minutes. When trading resumed, the price further plummeted by 40%, the exchange halted trading for the day.

iii) Due to friction with western nations China and Russia pulled out of WTO (world trade organization) and announced that foreign companies were no longer welcome in their countries. They also reneged on all trade treaties. Stock markets in Japan, Hong Kong, and India closed down 20% that day. When the US markets opened, the S&P was down 11% within a few seconds. In response the exchange halted trading for an hour. When the market resumed the index plummeted 5% further. The exchange closed trading for the day.

iv) In response to a twitter feed that appeared to originate from the White House that claimed that for national security reasons, the constitution has been temporarily suspended and the country was under Marshal law until further notice the markets plummeted. The exchange halted trading for 10 minutes. White house denied having sent such a tweet. When trading resumed, the markets recovered most of their losses and actually closed slightly up for the day.

Answer 1

A trading halt is a temporary suspension of trading for a particular security or securities at one exchange or across numerous exchanges. Trading halts are typically enacted in anticipation of a news announcement, to correct an order imbalance, as a result of a technical glitch or due to regulatory concerns. When a trading halt is in effect, open orders may be canceled and options still may be exercised.

A trading halt is most often instituted in anticipation of an announcement of news that will affect a stock’s price greatly, whether it be positive news or negative news. There are thousands of stocks traded each day on public exchanges such as the New York Stock Exchange (NYSE) or the NASDAQ, and each of these companies agrees to pass on material information to the exchanges prior to announcing it to the general public.

In order to promote the equal dissemination of information, and fair trading based on that information, these exchanges may decide to halt trading temporarily, before such information is released.            

Basis above discussion, below are our opinions on halting by exchange :

1. Attack on the subway system in New York seems to be a news that may bring imbalance in the trade and thus it’s right decision on the part of exchange to halt the trading for some time, till it becomes a widespread news.
2. Since company has only one drug and deemed unsafe y FDA means it would negatively effect the sentiments of general investors. Thus in the light of above it’s righteous on the part of exchange to halt the trading which is further evident from the further decline of price on resume of trading.
3. Liberalization and Globalization is something which is driving the current world economy. Nations like China and Russia pulling out of WTO is definitely a major setback for the economy and further their NO Welcome policy to foreign countries.Evident from the downfall in Indian and Hong Kong economy, it’s righteous on the part of exchange to halt the trading.
4. It’s very important for the exchange to verify to information before making a decision. The information should come from a reliable source and be correct. Social media is not a reliable source to base the decision on. Thus halting in this case is not advisable.