How and Why Trading Halted on Avis and This New SPAC

By TradeSmith Editorial Staff

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On Tuesday, SilverBox Engaged Merger Corp I (SBEA) shares popped more than 58% before 9:35 a.m.

The special purpose acquisition vehicle (SPAC) announced it was working on a potential merger with Black Rifle Coffee, a Salt Lake City-based company owned by former members of the U.S. military.

The proposed $1.7 billion deal emerged in premarket hours. Traders actively piled into the stock before the market opened, driving shares up like the hill of a rollercoaster. Then, share prices shot up quickly in the first two minutes of trading, popping as high as $15.75.

Seconds later, at 9:32:03 a.m., the Nasdaq halted shares.

And two hours later, shares fell to as little as $11.01.

When investors are increasing trading volumes around crypto stocks, SPACs, and other speculative vehicles, you need to know what halting is and why it matters.

Defining a Stock Halt

In a stock halt, the exchange simply kills execution between buyers and sellers to curb dramatic price swings that could impact market participants.

Exchanges like the Nasdaq can halt the trading of stocks for many reasons, including regulation, technical glitches (fat fingers), asset-specific news, or a dramatic surge or imbalance of buy and sell orders on that security. When halts occur, exchanges classify them as either “regulatory” or “non-regulatory” actions.

In addition, each halt will have a code to signify the event and the related circumstances.

Examples include:

  • T1: A halt that signals pending news that can affect the stock
  • T2: A halt that signals the news has been released
  • H4: A halt related to a company’s failure to comply with listing requirements
  • H10: A halt where the Securities and Exchange Commission has suspended trading
Stock halting tapers speculation and enables equal speeds of information around a specific stock. A halt allows market participants to catch up on the news around the security, eliminates arbitrage or illegal transactions, and enables other exchanges to take similar action around the same security.

In the case of SilverBox Engaged Merger Corp I, the Nasdaq triggered what is known as a “Limit Up Limit Down” (LULD) rule, which halts trading over what is known as a “circuit breaker.”

In this situation, the circuit break ensures that a stock’s fundamental price is based on supply and demand (buying and selling) and doesn’t move outside of specific parameters due to order errors, excessive speculation, or straight-up manipulation.

The LULD establishes upper and lower limit bands based on a stock’s average price during the previous five minutes of trading.

In the case of SBEA, it blew through those limits to the upside quickly and immediately triggered a halt. Following that event, the stock quickly started to fall as speculators moved to take profits and other investors who bought at the top started to sell off their positions.

The circuit breaker in this case did fuel a balance quickly between the supply and demand of the stock, and the stock retreated.

When Multiple Triggers Occur

On Tuesday, another company experienced multiple trading halts.

After a blowout quarter on earnings, shares of Avis Budget Group (CAR) surged more than 200% in the first two hours of trading. But along the way, the stock triggered an LULD trading halt at 9:53. Then, after a five-minute delay, shares continued to rip higher.

What was the driving force?

The company reported much stronger earnings than expected in the third quarter. The car rental giant — nearly driven into bankruptcy at the onset of the COVID-19 crisis — reported earnings per share of $10.74. That figure and its ensuing revenue numbers were well above expectations.

As a result, hedge funds that had been shorting the stock quickly started covering their positions. Shares popped 100%, then 200%, and then started to reverse. Before earnings, about 20.5% of the stock was sold short, according to FactSet. When short sellers must cover their positions by buying stock, this triggers a short squeeze. Similar stock squeezes triggered massive share price moves in stocks like AMC Entertainment (AMC) and GameStop (GME) earlier this year.

Over the next two hours, Avis experienced LULD pauses 10 more times. In some cases, the stock returned from a trading halt and quickly halted again in as little as 30 seconds.

When a stock returns from its temporary pauses, the result is a frenzy and a wild number of price swings. Naturally, investors who are trying to sell and take profits can quickly find themselves unable to act.

What to Do If You Are Caught in a Trading Halt

If you find yourself stuck in a trading halt, keep in mind that you should not panic. The point of a trading halt is to prevent such panic.

Typically, it remains in your best interest to use trailing stops and follow the same rules that you do with TradeSmith Finance. The key thing to remember is that the markets will restore order in a short time. There are challenges in every market, but it’s important to recognize that the purpose of these orders is to protect investors, not hinder them.