Trading Halts: What They Mean And How To Profit From Them

A trading halt will scare a lot of first time investors. You will be unable to buy or sell your shares because the SEC has ‘halted’ trading on the stock ticker. Don’t be afraid however, there are plenty of ways to actually make money off a trading halt.

A trading halt is when a regulator for a market (SEC for the U.S) halts trading on a stock due to an order imbalance either to the buy or sell side. This order imbalance will cause the stock to shoot either up or down above 10% rapidly which will auto trigger a trading halt on the stock. (Source)

In this article I am going to show you some tricks of the trade to predict trading halts and actually make money off them. The reason we can make money off trading halts is simple. After a trading halt a stock will swing rapidly both up or down. This rapid increase in volatility is what we will make money off of.

Here at Chronohistoria I teach people how to generate above normal market returns in the markets. I routinely publish stock research articles, investing methodologies, and tricks/tips of the trade to help others generate above normal market returns (alpha). Feel free to sign up for the free newsletter to remain up to date.

Let’s jump right into the article: Trading Halts: What They Mean and How To Profit From Them.

What Is A Trading Halt?

The simple explanation for a trading halt is this: A trading halt is when a government’s regulatory body decides to halt trading on a security at risk of experiencing extremely rapid price movement. These trading halts are used when an order imbalance is present on a stocks ticker.

For example, if there are 1,000,000 buyers and only 2 sellers for shares on a stock then a halt will occur. This is because there is a massive order imbalance towards the bid side of the stock.

As we can see from the above chart not limiting trading will result in catastrophic effects for the shorts on a stock. Around 1:00 pm in the above chart the SEC should have issued a trading halt on a security due to the order imbalance being towards the buy side by nearly 80%.

This might seem like a good thing for those who are bullish on a stock but in reality it’s dangerous to everyone involved in the stock. This is because markets in high volatility states experience rubber banding where everyone ends up losing except for professional traders.

Simply put, a trading halt is just when a regulatory body halts all trading activity on a stock to allow normal people to catch up with the price action and order imbalance.

Why Trading Halts Exist

Trading halts themselves are a good thing. The reason why is that they limit volatility from growing out of control. When a stock’s volatility explodes then all risk management you could implement is thrown out of the window and now instead of investing everyone is gambling. (Source)

As we can see volatility is what kills the stock’s price here for both buyers and sellers. As we can see eventually the order imbalance on the stock switches around 12:30 pm in the above theoretical scenario. This results in a rapid price drop in the stock which if you’re not fast enough will destroy your investment.

Now let’s look at a theoretical stock where a trading halt was placed.

In the above scenario a trading halt was placed on a stock at noon and ran until 12:30 pm. Once trading started back up again everyone had time to evaluate their position and place their orders again. This drastically reduced volatility in the stock and resulted in the gradual decline of a stock’s price. (Source)

Overall a trading halt in theory will create a more stable market. This benefits all investors over time and results in increased economic growth and growing confidence in the markets.

Recently however with the rise of retail investors we are starting to see trading halts as a way to generate additional revenue off volatility crunches and price swings. Let me show you how to make money off this phenomenon.

Theory Behind How To Profit Off Trading Halts

From 1990 until 2008 the markets were largely dominated by institutional investors. However with the advent of online brokers and algorithmic trading we have started to see the rise of retail investors. (Source)

This rise of retail traders has increased the volatility in the markets drastically. Further since 2020 pandemic traditional valuation metrics have been thrown out of the window due to the power of organized retail trader activity. (Source)

What this means is that when a trading halt occurs normally you would expect volatility to decrease as the order imbalance begins to normalize. Recently in the past two years however this has flipped. Now we are starting to see order imbalance increase after a trading halt to the buy side. (Source)

This results in a multitude of trading halts hitting a stock one after another. With each trading halt resulting in more and more retail traders pouring into the stock and issuing market orders to buy shares. This causes a cascading effect where a stock will increase in price perpetually until retail investors begin to leave the stock for another one.

What this means is that we can make money by betting that a stock will increase after a trading halt so long as retail investors are actively trading and discussing a stock on social media.

To make sure that retail investors are talking about a stock on social media we need to use the investment methodology of sentiment analysis. I wrote up an entire article that goes over this methodology. (You can read it by clicking here)

Steps To Profit From Trading Halts

There are three steps to profiting from trading halts. First, we are going to find out what stocks retail investors are interested in. Second, we need to figure out if the stock will be able to rise fast enough to engage a trading halt. Third, we need to place our trade to profit from the increasing volatility.

Step 1: Figure Out What Stocks Retail Traders Are Targeting

This is the hardest part about this trade. We need to figure out what stocks retail traders are targeting. You can either do this one of two ways.

• Develop a python program that will web scrape data from social media sites where retail traders hang out.
• Use a free online web scraping tool such as:
  1. ApeWisdom.com
  2. HypeEquity.com

If you don’t know how to program just use one of the free web tools listed to accomplish this task. You should get a list of stocks that are being talked about on social media.

Once you have your list of stocks let’s move on to the next step.

Step 2: Can The Stock Rise Fast Enough To Trigger A Trading Halt

With that list of stocks we need to figure out which ones have the best likelihood of having an order imbalance to the bid side. To do this you need to look at the average 10 day intraday volume for the stock along with the public float.

One of the most common ways of doing this is by looking up the stock in yahoo.fincance.com and clicking on the statistics tab. Once there you scroll down to find the average 10 day volume along with the stocks float.

The above image is of the share statistics for SmileDirectClub, a known retail trader target. What we are looking for is a float that is around 10x the average 10 day volume.

The float is the amount of shares publicly available to trade. This means that if the average volume is high and the float is low any amount of retail traders who pour into the stock could trigger a trading halt.

Once we find our targets for the trading halt we need to move on to the next step. Placing a trade that will profit off a volatility explosion.

Step 3: Placing A Trade That Will Profit Off Volatility Explosion

Their best type of trade that will cause you to profit off volatility explosion is the iron condor. With an Iron Condor it does not matter which way the stock moves so long as it moves fast (volatility).

For a full rundown on this trade check out this article that goes over everything you need to know about Iron Condors. (Click here)

In the above scenario we placed an iron condor trade on a stock that is expected to explode in volatility. In this case the stock exploded upwards off a trading halt past our upwards wing of $130. Because of this we can expect to profit at around a 25% ROI.

The best part of this trade is that so long as volatility increases we will make money. It does not matter which way the stock’s price will move. That’s the power of an iron condor trade.

However every position comes with risk. For the iron condor trade your risk is that the stock’s volatility does not increase and that retail investors do not pour into the stock. This is why doing your homework ahead of time is so important, we need to know that a stock is about to explode before placing this trade.

Conclusion

There you have it, an article that goes over trading halts, what they are, and how to profit from them. At the end of the day trading halts are just a way for the SEC to lower volatility in a stock. However recently volatility after trading halts has been increasing at an alarming pace.

This is because of the ever increasing population of retail traders in the market. Good news is that if you arm yourself with the right knowledge, such as in this article, you will be ready to make some extra cash.

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Further, you can check out some of the other articles below.