What Is a Bid Tick?
A bid tick is an indication of whether the latest bid price is higher, lower, or the same as the previous bid. Bid ticks track movements of bid prices in an open market for all placed bid offers, giving real-time information to traders and market participants about the direction of bid prices over any given time period.
In contrast, the ask tick would track ask (offer) prices over the same time period.
- A bid tick tracks the movements in the bid price of a security over time.
- Bid ticks are watched by sellers of securities as an indication of near-term price action and for judging when to sell.
- Bid ticks can be aggregated into a tick index that measures the ratio of up and down steps over time.
Understanding Bid Ticks
The direction of the bid tick is important to institutional traders, who move large amounts of stock within a small period of time. Day traders also rely heavily on the direction of the bid tick when making their trade decisions. By monitoring bid ticks, traders can look for indications of how the market is expecting prices to move and the general spread between the bid and ask quotes.
Those selling a security are most interested in the bid tick since they must match up with someone bidding to buy the security.
The Bid Tick Index
The bid tick index is a popular indicator used by day traders to view the overall market sentiment at any point in time. Seeing the ratio of "up" stocks to "down" helps traders make decisions that are dependent on market movement. Typically, readings of +1,000 and -1,000 are considered extremes; traders are generally mindful of overbought and oversold conditions at these levels.
A tick index is a short-term indicator, relevant for only a few minutes. For traders looking to enter into bullish sentiment, a positive tick index is a good indicator of overall market optimism, as more stocks are trading up rather than down. However, traders should remember that the tick index is a very broad and speculative identifier of market sentiment at a specific point in time. Traders with longer-term strategies generally consider it an unreliable or insignificant indicator.
More About Ticks
A tick is a measure of the minimum upward or downward movement allowed in the price of a security. Since 2001, with the advent of decimalization, the minimum tick size for stocks trading above $1 is 1 cent in most markets. For example, if a stock is trading at $12.10, the next tick could be either $12.09 or else $12.11.
An uptick indicates a trade where the transaction has occurred at a price higher than the previous transaction and a downtick indicates a transaction that has occurred at a lower price.
In this context, the uptick rule used to refer to a trading restriction that prohibits short selling except on an uptick, presumably to alleviate downward pressure on a stock when it is already declining. The uptick rule was eliminated by the SEC in 2007, but the financial crisis that started that same year had lawmakers second-guessing that decision. Instead of reviving the old rule, the SEC created an alternative uptick rule which imposes short selling restrictions on a stock that has fallen more than 10% in a day.