Hi there - I'd say that whether or not your niece should use the halter in the show ring varies depending upon what part of the country you're in. In smaller shows in the Northeast almost all kids use a halter whereas in some really big shows with more experienced kids you'll find fewer of those kids use a halter in the show ring so that it doesn't detract from the animal's appearance.
My advice since your niece is just starting out and since she's young is that she use the halter and that you wrap it up neatly so there's just enough available for her to use without there being a long lead that can fall or trail along behind her. It's always better to err on the side of caution for her first show - it's better to have a halter and not need it than to not have one and have her sheep get away from her in the ring to sour her first experience. You could also invest in a leather dressy halter or a poly halter that coordinates with her hair tie or outfit as a way to make the halter enhance her lamb's experience in the show ring as well.
If she does use a halter in the show ring she should make sure that it's on properly and that the sheep is used to being handled. There are a few useful videos that can help you prepare your daughter for her first show here:
http://www.raisingsheep.net/raising-sheep-for-show.html and you can find some tips for halter training your lamb and getting it used to being handled prior to taking it into the ring under the "Getting Started" navigation tab on the same site.
I hope this information has helped you!