To ensure orderly markets, the New York Stock Exchange (NYSE) has a set of restrictions that it can implement when experiencing significant daily moves, either up or down. Many of these restrictions are executed when the market experiences a significant downturn, although there is one that is used in an upturn.

Commonly referred to as the downtick-uptick test, the index arbitrage test is a restriction used to reduce the volume of trades, given that large-volume trades magnify fluctuations and are potentially harmful to the exchange. Regardless of whether the market is up or down, this restriction is applied whenever there is a daily move of 170 points or more in the Dow Jones Industrial Average.

The main purpose behind this rule (Rule 80A under the NYSE) was to reduce the number of program trades occurring during a trading session. This rule required that all sell trades for stocks within the S&P 500 during an up market be marked "sell-plus"; it also required all buy trades during a down market to be marked "buy-minus". By having all trades that may affect the market specially marked before execution, this rule halted the use of program trades, which are typically of a large volume. Rule 80A is also referred to as the "collar rule" or the "index arbitrage tick test" in addition to the uptick/downtick rule.

Starting in November of 2007, the NYSE eliminated Rule 80A, or the downtick-uptick rule, as part of Rule Filing SR-NYSE-2007-96.

The downtick-uptick rule is not to be confused with the uptick rule, which was a rule that required every short sale to be entered at a price higher than the previous tick. The uptick rule was eliminated by the Securities and Exchange Commission in July of 2007, but as of March 2009, legislation had been made in an attempt to have it reinstated.

Keep reading about trading rules in our Active Trading Tutorial.

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