An Analysis of Stock Market Halts: Regulatory and Market Implications of Stock Markets

Halts are mechanisms used by exchanges to halt trading in a specific asset or the entire market in response to sharp price movements or significant market disruptions. These halts are typically implemented to prevent panic selling, provide time for information to be disseminated, and restore order to the market. From a regulatory perspective, trading halts are designed to protect investors and maintain market stability. Regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States or the Securities Exchange Organization (SEO) in Iran set rules regarding when and how trading halts occur. These rules are usually based on predetermined price thresholds or market events. For example, US stock exchanges have implemented mechanisms such as "circuit breakers" that temporarily halt trading if an index such as the S&P 500 falls by a certain percentage (such as 7%, 13%, or 20%). The effectiveness of trading halts has been debated. Proponents of these halts argue that they provide valuable time for market participants to process information and prevent irrational market reactions, especially during times of high volatility. For example, in the 1987 stock market crash, trading halts helped prevent further panic. But critics argue that trading halts may exacerbate volatility because they may delay inevitable price adjustments and cause uncertainty among market participants. In the context of the Tehran Stock Exchange (TSE), trading halts are also used to deal with extreme volatility or the release of important information. The Tehran Stock Exchange has set guidelines to halt trading during sharp price movements, typically for stocks that experience significant volatility in a short period of time. However, there are concerns that these halts may sometimes be overly aggressive, leading to market distortions and limiting price discovery.