What Is the Downtick-Uptick Rule on the New York Stock Exchange (NYSE)?

To ensure orderly markets, the New York Stock Exchange (NYSE) has a set of restrictions that it can implement when the exchange is experiencing significant daily moves—either upward or downward.

While many of these restrictions are specifically executed when the market is experiencing a significant downturn, formerly, there was one restriction that the NYSE used to implement during a market upturn or a market downturn.

This restriction was known as the downtick-uptick test, or Rule 80A, under the NYSE. In addition to the downtick-uptick test, Rule 80A was also referred to as the "collar rule" or the "index arbitrage tick test."

History of the Downtick-Uptick Test

The downtick-uptick test was a type of index arbitrage test that was intended to reduce the volume of trades. This restriction existed because large-volume trades magnify fluctuations and can be potentially harmful to the exchange.

Regardless of whether the market was up or down, the restriction was used to restrict the volume of trades on S&P 500 stocks whenever the NYSE Composite Index (previously the Dow Jones Industrial Average) gained or lost more than 2% from the previous trading day. 

(The initial tick rule specified a movement of 50 points or greater—either up or down. Then, in 1999, Rule 80A was amended to reflect a change of "two percent.")

Purpose of the Downtick-Uptick Test

The main purpose behind this specific restriction—Rule 80A—was to reduce the number of program trades occurring during a trading session. Program trading involves the use of computer-generated algorithms to trade a basket of stocks in large volumes (and usually with great frequency).

This rule required that all sell trades for stocks within the S&P 500 during a market upturn be marked "sell-plus"; it also required all buy trades during a market downturn be marked "buy-minus."

By having all trades that may affect the market specially flagged before execution, this rule halted the use of program trades because program trades are typically of a large volume.

Elimination of the Downtick-Uptick Test in 2007

In November 2007, Rule 80A (the downtick-uptick rule) was eliminated by the Securities and Exchange Commission (SEC) as part of Rule Filing SR-NYSE-2007-96.

Some experts in the financial world have discussed the value of reinstating Rule 80A (or a similar rule) because, since the rule was removed, there has been an increase in the likelihood of large market movements. This has created increased instability in the markets compared to when the rule was in place.

Downtick-Uptick Rule vs. Uptick Rule

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.

According to the stipulations of this SEC rule, short selling a stock was not allowed on a downtick. (A downtick is any transaction that involves a financial instrument that occurs at a lower price than the previous transaction. As it relates to the stock market, a downtick occurs anytime a stock's price decreases in relation to its last trade.)

The uptick rule was eliminated by the Securities and Exchange Commission in July of 2007.

Then, in 2010, the SEC instituted an alternative uptick rule to restrict short selling on a stock price that drops more than 10% in one day.