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Stock Price Movement Associated with Temporary Trading Suspensions: Bear Market versus Bull Market

Published online by Cambridge University Press:  19 October 2009

Michael H. Hopewell  and
Arthur L. Schwartz Jr.
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Extract

A temporary trading suspension in a listed security represents a temporal discontinuity in a continuous auction market. Although the SEC occasionally suspends trading in specific securities, the NYSE itself administratively halts trading in individual NYSE issues. The latter occur quite frequently (almost three per day on average), and typically last about two hours. NYSE-initiated suspensions are the focus of the present paper.

Type
VIII. Securities Markets
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 4 , November 1976 , pp. 577 - 590
Copyright
Copyright © School of Business Administration, University of Washington 1976

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References

1 The sequence of events resulting in a news suspension normally begins with the corporation contacting the Department of Stock List to indicate a forthcoming news announcement. The Exchange listing agreement specifies this procedure. However, news suspension requests can also be initiated by other parties including the specialist.

2 Marketability services refer to those broker and dealer services supplied in executing market orders which are demands by investors for immediate executions. Imbalances resulting in suspensions could arise from investor demands for marketability services but could also be caused by investor response to previously disseminated new information.

3 Hopewell, Michael H. and Schwartz, Arthur L. Jr., “Temporary Trading Suspensions in Individual NYSE Securities,” unpublished working paper (May 1976).Google Scholar

4 The suspension day encompasses the suspension period. It represents the time from the close of trading on the day prior to the beginning of the suspension to the close on the day trading is resumed. For most securities experiencing suspension, the beginning of the suspension and the resumption of trading occur on the same day. As noted and discussed below, this is not true for all suspensions.

5 In each market period, trading in some individual securities was suspended more than once. Each security-suspension observation is included in the sample.

6 For an extensive discussion of the price effects of investor demands for marketability services, see Niederhoffer, Victor and Osborne, M. F. M., “Market Making and Reversal,” Journal of the American Statistical Association (December 1966), pp. 897–916CrossRefGoogle Scholar; Smidt, Seymour, “A New Look at the Random Walk Hypothesis,” Journal of Financial and Quantitative Analysis (September 1968), pp. 235–262CrossRefGoogle Scholar; Kraus, Alan and Stoll, Hans, “Price Impacts of Block Trading on the New York Stock Exchange, Journal of Finance (June 1972), pp. 569–588CrossRefGoogle Scholar; and Grier, Paul C. and Albin, Peter S., “Non-Random Price changes in Association with Trading in Large Blocks,” Journal of Business (July 1973), pp. 425–433.CrossRefGoogle Scholar

7 The eleven pre- and postsuspension returns each cover a single trading day. Day 0 represents a single day for approximately 85 percent of the security-suspension observations and more than one day for the remaining observations.

8 The S&P 500 was used as a surrogate for the market portfolio. Estimated market model parameters were supplied by Performance Measurement Service, Corporate Services Department, Merrill, Lynch, Pierce, Fenner and Smith. Parameters estimated on the most recent data, but not overlapping the period for which abnormal returns were to be estimated, were used for each security-suspension observation.

9 Kraus and Stoll use this technique in their study of block trades. As we use price change rather than abnormal return to classify suspensions, classification may not be perfect.

10 The value of the index APId represents the abnormal return relative for equal dollar investment in N securities, each security purchased at the close of day -6 and held to the close of day D, and is defined as

where Ui,t is the estimated abnormal return for security i for day t.

11 t tests on each daily mean abnormal return indicate that a few scattered days are significantly different from zero at the .05 level (ignoring transactions costs). However, day 0 mean abnormal return is not significant in any group. Each t statistic is obtained by dividing the mean by its standard error, and the latter is equal to standard deviation across securities divided by the square root of the number of securities.

12 We will tend to speak of the suspension period and day 0 interchangeably since analysis of intra-day 0 returns indicates that day 0 return is dominated by the return over the suspension period.

13 The separate tests on all the groups and subgroups are obviously not independent.

14 Results of analyzing the relatively small number of zero tick suspensions are not presented. We will note that in both market periods, day 0 mean abnormal return for zero tick suspension is approximately -2 percent and cumulative postsuspension abnormal returns show a recovery of approximately 1 percent.

15 It should be noted that we cannot reject the null hypothesis that the suspension tick sign is independent of market period. The chi-square statistic is 1.50 with 2 df.