A zero plus tick or zero uptick happens when a trade for a security is executed at the same price as the previous trade but higher than the last trade at a different price. For instance, if a series of trades occur at $10, $10.01, and $10.01 again, the latter trade would be called a zero plus tick or zero uptick because it’s the same price as the earlier trade but higher than the last differing price trade.
The term zero plus tick or zero uptick applies to many securities, including stocks, bonds, and commodities, but it’s most commonly used for listed equity securities. The opposite of a zero plus tick is a zero minus tick.
Key Takeaways
- A zero tick plus occurs when a security transaction happens at the same price as the previous one but is an uptick from the last different price.
- Until 2007, the SEC mandated that stocks could only be shorted on an uptick or zero plus tick to prevent market destabilization.
- As of 2010, a new rule states that if a stock falls by more than 10% in a day, short sales can only be made on an uptick for the remainder of the day and the following day.
Understanding a Zero Plus Tick
An uptick and zero plus tick mean that the stock price moved up and then held momentarily. For over 70 years, there was an uptick rule established by the SEC, which allowed stocks to be shorted only on an uptick or a zero plus tick, not on a downtick.
The rule aimed to stabilize the market by stopping traders from shorting a stock on a downtick, thus preventing price manipulations. Before the rule, traders pooled their capital to short sell securities, triggering panics that caused shareholders to sell at lower prices, thus dropping the security’s value further.
After investigations into short selling during the 1937 market break and suspicions that it led to the 1929 stock market crash, the uptick rule was implemented in 1938. It was repealed in 2007, as the SEC decided that the modern, orderly market no longer needed the restriction and decimalization had also mitigated the issue.
During the 2008 financial crisis, the SEC faced calls to reinstate the rule, leading to the 2010 alternative uptick rule. This rule dictates that if a stock’s price drops more than 10% in a day, short selling would only be permitted on an uptick for the rest of that day and the next day.
Example of a Zero Plus Tick
Imagine Company ABC has a bid price of $273.36 and an offer of $273.37. Trades occur at both these prices in quick succession, holding at that level briefly. A trade at $273.37 marks an uptick. If another trade then occurs at $273.37, it’s called a zero tick plus.
Normally, this doesn’t make much difference. However, if the stock has dropped 10% from its previous close at any point during the day, the uptick rule becomes significant. Traders then can only short the stock if it’s on an uptick, meaning they can execute trades only on the offer side but can’t remove liquidity on the bid side. This rule is part of the 2010 alternative uptick regulations.
Related Terms: Uptick, Downtick, Short Selling, SEC, Financial Crisis.
References
- U.S. Securities and Exchange Commission. “SEC Votes on Regulation SHO Amendments and Proposals; Also Votes to Eliminate ‘Tick’ Test”.
- U.S. Securities and Exchange Commission. “SEC Approves Short Selling Restrictions”.
- Review of Quantitative Finance and Accounting. “One Size Fits All? High Frequency Trading, Tick Size Changes and the Implications for Exchanges: Market Quality and Market Structure Considerations”.
