A zero uptick is a unique type of trade where a security purchase is executed at the same price as the trade immediately preceding it, but at a higher price than the transaction before that. Consider this scenario: if shares trade at $47.00 each, and the next two trades occur at $47.03, the last of those trades at $47.03 is considered to be a zero uptick. This is crucial for short-sellers seeking to conform to any prevailing uptick rules.
Key Takeaways
- Definition: A zero uptick is a trade executed at the same price as the immediate preceding one but higher than the previous transaction.
- Instant Execution: These trades occur instantly, following specific conditions based on two prior transactions.
- Trade Characteristics: Zero tick trades do not change the selling price but occur after a price increase.
- Short-Selling Compliance: Zero upticks were often critical for short-sellers to meet uptick rule requirements.
- Regulatory History: The uptick rule was a regulation put in place for short-selling market stability, revoked in 2007 but modified in 2010.
How Does a Zero Uptick Work?
A zero uptick happens instantly through trade exhibiting particular characteristics based on the last two transactions. For a zero tick to occur, a no-change trade must follow a price-up movement from the previous tick.
The following image illustrates various zero ticks within the span of a minute, exemplified through snapshots of Exxon Mobil (XOM) stock prices:
Zero Ticks on XOM.
Using zero upticks to initiate short sell positions depends on the stock market’s rules and regulations. In foreign exchange markets, for instance, shorting on zero upticks can be more common due to fewer restrictions.
Special Considerations
Formerly, markets operated under the uptick rule, a regulation from the Securities and Exchange Commission (SEC) demanding short sale transactions to be executed at a price higher than the prior trade. Initially established by the Securities Exchange Act of 1934 as Rule 10a-1 and activated in 1938, it limited downward price pressures due to short sellers. Although this rule was eliminated in 2007, the SEC introduced an alternative under Rule 201 of Regulation SHO in 2010. This alternative is triggered when a security’s price drops 10% or more from the previous closing price and remains until the close of the next day.
The uptick rule can be challenging for short-sellers as they must await market stabilization before proceeding with their orders. Critics argue that these rules restrict trade activities and decrease market liquidity. They further assert that short selling creates market liquidity and helps prevent stock prices from being overly elevated by excessive optimism.
Related Terms: Uptick Rule, Short Selling, Trading Regulations, Market Fluctuations.
References
- U.S. Government Printing Office. “Securities Exchange Act of 1934”, Page 90.
- U.S. Securities and Exchange Commission. “SEC Approves Short Selling Restrictions”.
- U.S. Securities and Exchange Commission. “Final Rule: Regulation SHO and Rule 10a-1”, Page 1.
