Trading Halt
This is a case study trade that was intended to illustrate a single trading strategy, but which turned out to be a much more valuable case study than expected.
The temporary suspension from trading alters the dynamics of any trade and turned the case study speculative trade into a two day trade instead of a three or four day trade. We show how this trade was found, our planned management method, and the way these plans were altered by events. In addition to the impact on our planned case study trade, we also show the impact on other trading strategies built around this high volume fast moving momentum trade.
Volume is the fuel that drives the market. Most times we only consider volume in terms of how far we want to travel with a stock. When we trade more liquid stocks like CBA, volume is not an issue. Volume normally rides in the background, proving an assumed service for our trading. There are times when we need to check the fuel gauge before taking a trade. When we trade a speculative issue, volume is important because it determines if we can trade at the size we want to. If we want to spend $10,000 it is difficult to do this if the stock only turns over an average of $2,000 a day.
There are also times when we wonder just what type of jet fuel is powering a stock. These are the stocks where they rise a massive spike in volume. This is well beyond the normal range of trading activity. On an end-of-day chart, these volume spikes stand out clearly. Typically prices have also lifted significantly. Stocks with these characteristics go on the watch list for the next day as a potential short-term trading opportunity.
Volume is fuel, but the fuel is created by trading activity. A single volume spike that consists on just one or two trades is not particularly interesting as a trading opportunity. More traders are needed to sustain the activity. If the spike is created by just a handful of trades – potentially by just a handful of traders – then we may have nobody to trade with the next day. Without others to trade with, the spike is unlikely to continue.
This is quite the opposite from a volume spike that triggers a dramatic price dip. This type of dumping is a warning signal and we try to get out as quickly as possible.
Every day we run a real-time search about 30 minutes after the market opens. We are interested in the most actively traded stocks. We simply ignore stocks like NCP and TLS which appear regularly at the top of the list. We look for those slightly lower down where there is a rush of trading activity of more than 40 or 50 trades in the first half hour of trading. Once identified, we look for the percentage change in price and the raw volume figures.
Why not search just on volume? These figures can be misleading. It is quite easy to turnover a million shares in a stock trading at $0.002. It only takes a single $20,000 trade. This volume turnover is ranked alongside a million shares traded in TLS for a total cost of $4,700,000. This is unlikely to be a single buyer.
This real-time search throws up interesting opportunities every now and then. On Tuesday it identified YTL with very heavy trading. This stock was on jet fuel – volume and trading activity. Traders can join this stock after takeoff at around $0.092. The objective is to ride the rise while the volume of trading remains high and while buyers are more eager than sellers.
On an end-of-day basis, traders did not get to identify this stock until Tuesday evening. They had no choice but to scramble for the open on Wednesday morning. The order lines clearly shows that this stock was going to gap up, with an estimated open $0.012 above the previous days close. Sellers were hard to find and the buy order line was deep. This is a bullish characteristic so we joined the trade as a potential overnight gap trade.
The order screen immediately prior to the open showed the estimated match price at $0.11. By placing a buy order above the estimated match price we are guaranteed an entry at the match price. Orders with a buy price below the match price miss out.
Later in the day this trade went off the rails as the stock was suspended from trading. This is a potential death knell for this type of trade. The trade momentum is unusually driven by rumour. Subsequent articles in the Financial Review confirm this was behind the buying. When we identified the trade opportunity we were not aware of these rumours. The fast moving activity suggested rumours were responsible but like the rest of the market, we had no way of deciding their veracity.
What happens when a stock is suspended from trading pending an announcement? The most important impact is that the rumour which drove the initial price rise is now able to be compared to reality. It is not too often that reality matches the rumour. Even when it does, the reality removes the emotional component of the unknown from the price. People get excited by rumours. The price and volume spike confirms the high level of emotional trading activity. Take emotion from the equation and most times the price falls. Leave emotion in the equation, and the price is likely to continue climbing.
The impact on the planned overnight gap trading strategy is devastating. The suspension from trading came later in the day and without warning. The order lines were still excited, with buyers pushing up prices and sellers moving the offer price further away. This was momentum still in full flush. The overnight gap trading strategy calls for the trader to close the trade near the end of the day, or on the first signs of momentum weakness. When trading is unexpectedly halted none of these strategies is possible. We are trapped. Potentially the gap trade could have made an exit above $0.13, perhaps as high as $0.14. As it is, he cannot even get out at the last traded price of $0.13 because the market has stopped trading unexpectedly.
The impact on our end-of-day momentum based case study trade is also devastating. Our intention was to continue the ride, using the price leverage to boost returns over the next 1 to 3 days. The trade had the potential to become a gap trade. A gap opening on Thursday would have been tempting as an overnight gap trade solution. A subdued opening on Thursday with steady momentum buying would confirm the dynamics of the planned momentum trade. The halt in trading made these plans redundant.
The case study, and the overnight gap trade strategies are short-term strategies. How price behaves once trading resumes is important. To manage this trade effectively we need to be on the ball and alert from when trading resumes. Fortunately the resumption of trading is not as abrupt as the suspension of trading. The exchange announces when trading will recommence, and also sets a pre-open period. This is vital to the management of the exit in this situation.
The pre-open allows traders to reposition their buy and sell orders. The screen carries the estimated match price information as in the normal pre-open of trading. How the order line is constructed in this period tells us what we should be doing. The YTL pre-open was not encouraging. The estimated match price was $0.125. This decline was not unexpected, but it provided little hope that the upward momentum would resume. Unlike the previous day before the trading halt, many sellers were clustered around $0.13 and $0.135. This suggested that the momentum had gone from this stock. The best strategy was to get out on the open.
This was achieved by placing a sell order that was below the estimated match price. All orders lower than this would be filled on the open. The estimated match price changes in response to every new buy or sell order placed right up until the moment the first trade is executed. It is important to ensure that the estimated match price is above your sell price in the seconds prior to the open.
Using this approach our exit in the case study trade is at $0.125. This returned 13.64% for the trade, or $2,730. These returns fall far short of the anticipated returns from this style of trading. The reduction is due to the unexpected suspension of trading that removed the emotional component that was driving price.
The intraday trader who used an overnight gap strategy based on an entry at $0.092 also performed worse than anticipated. An exit at $0.125 delivered at 35.87% return compared to a 52% potential return based on an exit at $0.14.
When a trading halt is imposed traders need to carefully examine the pre-open order lines to determine how much momentum has been eroded. Often a quick exit is required to protect open profits.
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Volume is fuel, but the fuel is created by trading activity. A single volume spike that consists on just one or two trades is not particularly interesting as a trading opportunity. More traders are needed to sustain the activity. If the spike is created by just a handful of trades – potentially by just a handful of traders – then we may have nobody to trade with the next day. Without others to trade with, the spike is unlikely to continue.
This is quite the opposite from a volume spike that triggers a dramatic price dip. This type of dumping is a warning signal and we try to get out as quickly as possible.
Every day we run a real-time search about 30 minutes after the market opens. We are interested in the most actively traded stocks. We simply ignore stocks like NCP and TLS which appear regularly at the top of the list. We look for those slightly lower down where there is a rush of trading activity of more than 40 or 50 trades in the first half hour of trading. Once identified, we look for the percentage change in price and the raw volume figures.
Why not search just on volume? These figures can be misleading. It is quite easy to turnover a million shares in a stock trading at $0.002. It only takes a single $20,000 trade. This volume turnover is ranked alongside a million shares traded in TLS for a total cost of $4,700,000. This is unlikely to be a single buyer.
This real-time search throws up interesting opportunities every now and then. On Tuesday it identified YTL with very heavy trading. This stock was on jet fuel – volume and trading activity. Traders can join this stock after takeoff at around $0.092. The objective is to ride the rise while the volume of trading remains high and while buyers are more eager than sellers.
On an end-of-day basis, traders did not get to identify this stock until Tuesday evening. They had no choice but to scramble for the open on Wednesday morning. The order lines clearly shows that this stock was going to gap up, with an estimated open $0.012 above the previous days close. Sellers were hard to find and the buy order line was deep. This is a bullish characteristic so we joined the trade as a potential overnight gap trade.
The order screen immediately prior to the open showed the estimated match price at $0.11. By placing a buy order above the estimated match price we are guaranteed an entry at the match price. Orders with a buy price below the match price miss out.
Later in the day this trade went off the rails as the stock was suspended from trading. This is a potential death knell for this type of trade. The trade momentum is unusually driven by rumour. Subsequent articles in the Financial Review confirm this was behind the buying. When we identified the trade opportunity we were not aware of these rumours. The fast moving activity suggested rumours were responsible but like the rest of the market, we had no way of deciding their veracity.
What happens when a stock is suspended from trading pending an announcement? The most important impact is that the rumour which drove the initial price rise is now able to be compared to reality. It is not too often that reality matches the rumour. Even when it does, the reality removes the emotional component of the unknown from the price. People get excited by rumours. The price and volume spike confirms the high level of emotional trading activity. Take emotion from the equation and most times the price falls. Leave emotion in the equation, and the price is likely to continue climbing.
The impact on the planned overnight gap trading strategy is devastating. The suspension from trading came later in the day and without warning. The order lines were still excited, with buyers pushing up prices and sellers moving the offer price further away. This was momentum still in full flush. The overnight gap trading strategy calls for the trader to close the trade near the end of the day, or on the first signs of momentum weakness. When trading is unexpectedly halted none of these strategies is possible. We are trapped. Potentially the gap trade could have made an exit above $0.13, perhaps as high as $0.14. As it is, he cannot even get out at the last traded price of $0.13 because the market has stopped trading unexpectedly.
The impact on our end-of-day momentum based case study trade is also devastating. Our intention was to continue the ride, using the price leverage to boost returns over the next 1 to 3 days. The trade had the potential to become a gap trade. A gap opening on Thursday would have been tempting as an overnight gap trade solution. A subdued opening on Thursday with steady momentum buying would confirm the dynamics of the planned momentum trade. The halt in trading made these plans redundant.
The case study, and the overnight gap trade strategies are short-term strategies. How price behaves once trading resumes is important. To manage this trade effectively we need to be on the ball and alert from when trading resumes. Fortunately the resumption of trading is not as abrupt as the suspension of trading. The exchange announces when trading will recommence, and also sets a pre-open period. This is vital to the management of the exit in this situation.
The pre-open allows traders to reposition their buy and sell orders. The screen carries the estimated match price information as in the normal pre-open of trading. How the order line is constructed in this period tells us what we should be doing. The YTL pre-open was not encouraging. The estimated match price was $0.125. This decline was not unexpected, but it provided little hope that the upward momentum would resume. Unlike the previous day before the trading halt, many sellers were clustered around $0.13 and $0.135. This suggested that the momentum had gone from this stock. The best strategy was to get out on the open.
This was achieved by placing a sell order that was below the estimated match price. All orders lower than this would be filled on the open. The estimated match price changes in response to every new buy or sell order placed right up until the moment the first trade is executed. It is important to ensure that the estimated match price is above your sell price in the seconds prior to the open.
Using this approach our exit in the case study trade is at $0.125. This returned 13.64% for the trade, or $2,730. These returns fall far short of the anticipated returns from this style of trading. The reduction is due to the unexpected suspension of trading that removed the emotional component that was driving price.
The intraday trader who used an overnight gap strategy based on an entry at $0.092 also performed worse than anticipated. An exit at $0.125 delivered at 35.87% return compared to a 52% potential return based on an exit at $0.14.
When a trading halt is imposed traders need to carefully examine the pre-open order lines to determine how much momentum has been eroded. Often a quick exit is required to protect open profits.
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SUBJECT SUMMARY - TRADING HALT A trading halt is imposed either at the request of a company, or by the ASX. A company may request a trading halt when it is finalising an important new contract. This self imposed trading halt has become more frequent under the new continuous disclosure rules. The ASX may impose a trading halt if the price of shares has increased dramatically without any clear explanation. This is an unusual event. When exceptional price rises, or falls, occur, the ASX will query the company and ask for an explanation. The standard response is that the company is unaware of any factor which may be causing the price activity. There have been some classic instances with major blue chip companies where this response has clearly not been accurate. A company may also hint that the rumours driving the price may be true, and in this situation they often request a temporary suspension of trading pending an announcement to the exchange. Even when there has been no exceptional trading activity, there is an increasing number of requests for trading halts pending announcements. In rumour driven momentum trades, these sudden trading halts usually destroy the momentum of trading. |