Uptick

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DEFINITION of 'Uptick'

A transaction for a financial instrument that occurs at a higher price than the previous transaction. An uptick has occurred if a stock's price has increased in relation to the last “tick” or trade. The significance of an uptick in financial markets is largely related to the “uptick rule,” which previously dictated that a short sale could only be made on an uptick. Repeal of the U.S. uptick rule in July 2007 has been highlighted by many market experts as a contributing factor in the surge in volatility and unprecedented bear market of 2008-09.

BREAKING DOWN 'Uptick'

Since 2001, the minimum tick size for stocks trading above $1 is 1 cent, which means that a stock that goes from $9 to at least $9.01 would be considered to be on an uptick. Conversely, if it goes from $9 to $8.99, it would be on a downtick.

A stock can only have an uptick if enough investors are willing to step in and buy it. Consider a stock that is trading at $9/$9.01. If the prevailing sentiment for the stock is bearish, sellers will have little hesitation in “hitting the bid” at $9, rather than holding out for a higher price. Likewise, potential buyers will be content to wait for a lower price, given the bearish sentiment, and may lower their bid for the stock to, say, $8.95. If the stock's sellers significantly outnumber buyers, this lower bid will also be snapped up by them.

In this manner, the stock may trade down to $8.80, for example, without an uptick. At this point, however, the selling pressure may have eased up because the remaining sellers are willing to wait, while buyers who think the stock is cheap may increase their bid to $8.81. If a transaction occurs at $8.81, it would be considered an uptick, since the previous transaction was at $8.80.

In the absence of an uptick rule, short sellers can hammer the stock down relentlessly, since they are not required to wait for an uptick to sell it short. Such concerted selling in turn may attract more bears and scare buyers away, and this imbalance may lead to a precipitous decline in a faltering stock.

The uptick rule was introduced in the U.S. in 1934 and implemented in 1938 to forestall the possibility of another market crash like in 1929. Coincidentally or otherwise, its repeal in 2007 may have contributed to the biggest U.S. market collapse and financial crisis since the Great Depression of the 1930s.

In February 2010, the SEC introduced an “alternative uptick rule” that it said was intended to promote market stability and preserve investor confidence. According to the new rule, short selling in a stock that has declined by at least 10% in one day would only be permitted on an uptick.

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