Lesson 22 of 25 · 8 min
A call that arrives during a halt or a gap
When one holding cannot be priced or sold, the entire cure is extracted from the holdings that can.
Every mechanism so far assumed prices exist continuously and any holding can be sold. Two ordinary events break that assumption, and they break it in the direction that enlarges the cure.
A trading halt suspends dealing in one security. It does not suspend the loan, the accrual or the test. The common response is to treat the halted position as unsellable and reduce its advance rate, often to zero, because a lender cannot rely on collateral it has no route out of. That single change can create a shortfall by itself, with no price having moved.
Suppose 12,400 shares halted at $41.60 are worth $515,840 at a 55 percent advance rate, alongside an index fund worth $604,000 at 74 percent. Lending value is $283,712 + $446,960 = $730,672, and at an 80 percent threshold the permitted balance is $584,537.60 against a balance of $512,000 — comfortable. Set the halted position's advance rate to zero and lending value falls to $446,960, permitting $357,568 and producing a shortfall of $154,432.
The cure must come entirely from the index fund, and its arithmetic differs from the familiar multiple because the sold asset is haircut. Each dollar sold cuts the balance by a dollar and the permitted balance by 0.80 × 0.74 = 59.2 cents, closing 40.8 cents. So the sale is $154,432 ÷ 0.408 = $378,509.80 — 62.7 percent of the entire fund, to cure a shortfall in a position that never traded.
S = (B − t × L) ÷ (1 − t × a)
- S
- Market value of the sellable holding that must be sold.
- B
- The balance, including accrued interest.
- L
- Lending value of the collateral after the halted position is written down.
- t
- The maintenance threshold as a decimal.
- a
- The advance rate of the holding being sold. Where it is 1, this reduces to the familiar multiple.
A gap is the second case and is simpler to state. A holding closing at $58.20 and opening at $44.05 has fallen 24.3 percent with no price in between, so there was no moment at which a smaller cure was available. A cure window assumes a sequence of prices to act within, and an overnight gap is precisely the absence of one.
Key terms
- Trading halt
- A suspension of dealing in one security. The loan and the test continue; only the ability to sell stops.
- Write-down to zero
- Reducing a halted or unsellable holding's advance rate to nothing, so it supports no borrowing while the halt lasts.
- Overnight gap
- A move from one session's close to the next session's open with no trading in between, and so no chance to act.
Worked example
A halt in one holding, a sale of another
Halted stock 12,400 at $41.60 (advance rate 55 percent), index fund $604,000 (74 percent), threshold 80 percent of lending value, balance $512,000.
- Lending value before the halt
- $730,672
- Permitted balance before
- $584,537.60
- Lending value with the halt written down
- $446,960
- Shortfall
- $154,432
- Gap closed per dollar of fund sold
- $0.408
- Fund sale required
- $378,509.80
$283,712 + $446,960.
Passes by $72,537.60.
$512,000 − ($446,960 × 0.80).
1 − (0.80 × 0.74).
62.7 percent of the fund.
No price moved. An advance rate went to zero, and two thirds of the only sellable holding was liquidated to answer it.
Check yourself
A halted holding's advance rate is set to zero, creating a $154,432 shortfall at an 80 percent threshold. The only sellable holding carries a 74 percent advance rate. Why is the sale $378,509.80 rather than $772,160?
Saved in this browser only. No account, nothing sent anywhere.
Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.