When should trading be suspended?

In the EU, both MAR and MIFID II empower the national financial authorities to order the venue operators to suspend the trading of securities. Indeed:

• MAR (Article 23) states that "in order to fulfill their duties under MAR, competent authorities shall have, in accordance with national law," the power to "to suspend trading of the financial instrument concerned".
• MIFID II (Article 69) states that "competent authorities shall be given all supervisory powers, including investigatory powers and powers to impose remedies, necessary to fulfill their duties under MIFID II and MIFIR", including the power to "require the suspension of trading in a financial instrument".

This seems to give very discretionary powers to EU financial authorities in what regards trading suspensions. However, most of such tend to be decided based upon insufficient published information on the securities or its issuers.

The FCA (UK), in its Disclosure Guidance and Transparency Rules, states some examples of when it may require the suspension of trading of a security:

• "If an issuer fails to make an announcement as required by the MAR within the applicable time-limits which the FCA considers could affect the interests of investors or affect the smooth operation of the market";
• "If there is or there may be a leak of inside information and the issuer is unwilling or unable to issue an appropriate announcement required by MAR Article 17 [public disclosure of public information] within a reasonable period of time."

The CNMV (Spain) states in its website that it "can suspend trading in a given security where there is insufficient information available to the markets."

Note as well that MIFID II (Article 32) empowers the trading venue operators to suspend the trading of securities when such no longer comply with the rules of the trading venue.


In the US, the Securities Exchange Act of 1934 (section 12, k,1) empowers the SEC to suspend:

• "Trading in any security (other than an exempted security) for a period not exceeding 10 business days";
• "All trading on any national securities exchange or otherwise, in securities other than exempted securities, for a period not exceeding 90 calendar days".

And, according to the SEC's investor.gov website, the circumstances that might lead it to suspend trading include:

• "A lack of current, accurate, or adequate information about the company, for example, when a company is not current in its filings of periodic reports;
• Questions about the accuracy of publicly available information, including in company press releases and reports, about the company’s current operational status, financial condition, or business transactions;
• Questions about trading in the stock, including trading by insiders, potential market manipulation, and the ability to clear and settle transactions in the stock."

The SEC's investor.gov website also states that "because a suspension often causes a dramatic decline in the price of the security, the SEC suspends trading only when it believes that the public may be making investment decisions based on a lack of information, or false or misleading information. A suspension may prevent potential investors from being victimized by a fraud."

On its hand, FINRA (US) states that stock exchange operators have the authority to suspend trading when:

• The issuer is preparing to release information that may significantly affect the stock price (positively or negatively);
• The issuer releases information without notifying the exchange in advance;
• News affecting the issuer has been released;
• Another company announces an unsolicited tender offer for the issuer;
• A high-impact event outside the issuer’s control occurs—such as an unforeseen natural disaster or a significant market disruption—that can affect trading in a stock.

FINRA also states that these temporary trading interruptions tend to be relatively short and are designed to allow prompt and full dissemination of the news to the marketplace at large.


Example

On 11/dec/2018, in the Spanish stock market, the shares of the supermarket chain company DIA lost 19% of their value and registered unusually high levels of volatility, in the midst of high media speculation regarding the possibility of the company defaulting on its obligations and having to restructure its debt.

After the market close (at precisely 18:27), in an effort to counter such informative uncertainty, DIA stated that it:

• "Has not proposed its banking entities at any time any release of its debt or any alternative other than the full recognition and discharge of amounts owed to them and to any other financial creditors";
• "Is in advanced conversations with its reference banking entities with a view to reach an agreement to refinance the bank debt of the DIA Group";
• "Enjoys the full support of its suppliers and other commercial partners".

In spite of such statement, on 12/dec/2019 at 09:00 (market open time), the CNMV suspended the trading of all DIA listed financial instruments (shares, bonds and equity derivatives), "while relevant information is being disclosed on the issuer mentioned".

On the same day at 11:37, DIA announced that it:

• "In the context of its bank debt refinancing process, which is taking place and is expected to be closed shortly, the possibility of strengthening the capital structure of the Group by means of a future capital increase with pre-emptive subscription rights is being considered";
• "In the event of such a decision, on which the Board has not yet taken any resolution, and which would need to be submitted to the General Shareholders’ Meeting, DIA has entered into a standby underwriting commitment with Morgan Stanley & Co. International plc, for an amount of EUR 600 million, under which, subject to certain conditions, the latter would undertake to place and, failing that, to subscribe 100% of such amount";
• "The negotiations aimed at the refinancing of the DIA Group are considering a divestment plan that the Company has been assessing as part of its strategic plan, with which it would enhance its key business areas; the divestment plan would affect, in particular, the cash and carry business (Max Descuento) and would imply different strategic options for Clarel, including its sale".

Ten minutes later, the CNMV lifted the trading suspension on all DIA listed financial instruments, "as a result of having been made available to the public (...) sufficient information on the circumstances that led to the adoption of the suspension agreement".

It can be questioned why the CNMV suspended trading at the moment it did, and why did it not suspend during the previous session when the informative uncertainty was causing DIA share price to register high levels of volatility. In light of CNVM statements, it seems to me that the Spanish financial authority may have suspected that it may have occurred a leakage of information regarding the fact that DIA was evaluating a possible capital increase, and thus decided to suspend trading until the issuer publicly clarified its financing plans.

It is also worth noticing that the intraday volatility, measured in the above table by the range (difference between the daily maximum variation and the daily minimum variation), remained significantly high in the sessions after the trading suspension and the respective DIA announcement. I guess this means that, even though CNVM may have acted correctly in suspending trading until DIA clarified its financing plans, the uncertainty in the market regarding DIA's value remained high.