Zero Uptick

What Is a Zero Uptick?

A zero uptick is a security purchase that is executed at the same price as the trade immediately preceding it, but at a price higher than the transaction before that. For example, if shares trade at $47 a share, and the following two trades transact at $47.03, the last of the two trades at $47.03 is considered to be a zero uptick. This was important for short-sellers trying to avoid shorting a stock on an uptick to comply with the uptick rule (although that rule is no longer in place).

How a Zero Uptick Works

A zero uptick occurs instantly as a trade is made that has qualifying characteristics based on the two transactions before it. The qualifications of a zero tick include trades between buyers and sellers of a stock that makes no change to the price of that security.

Additionally, the trade before the no-change trade must make the price go higher than it was on the tick before. The following illustration displays each tick of the stock price of Exxon Mobil (XOM) during a one-minute span. The two ticks that would qualify as zero ticks are noted.

Zero Ticks on XOM.

A zero tick is allowable for initiating a short sell position. The technique of shorting on a zero uptick does not apply to all investment markets, due to various rules and regulations prohibiting or restricting such transactions. The Forex or foreign exchange market, which has limited restrictions on shorting, is among the markets in which the technique is more popular.

Special Considerations

The uptick rule is a former law established by the Securities and Exchange Commission (SEC) that required every short sale transaction to be entered at a higher price than the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1 and implemented in 1938. It prevented short sellers from adding to the downward momentum of an asset already experiencing sharp declines.

The uptick rule was eliminated in 2007. In 2010, the SEC put in place an alternative uptick rule (Rule 201 of Regulation SHO) that is only triggered when a security's price falls by 10% or more from the previous closing price. It then remains in effect until the close of the next day.

Uptick rules can be frustrating to short-sellers (people who are betting that a stock will fall) because they must wait for the stock to stabilize before their order can be filled. Some investors argue that uptick rules inhibit trading and shrink liquidity.

Shorting means an investor must first borrow the shares from someone who owns them. This creates demand for the shares. They argue that short selling provides liquidity to markets and also prevents stocks from being bid up to ridiculously high levels of hype and over-optimism.