What Is an Uptick?
Uptick describes an increase in the price of a financial instrument since the preceding transaction. An uptick occurs when a security’s price rises in relation to the last tick or trade. An uptick is sometimes also referred to as a plus tick.
- An uptick is a transaction for a financial instrument executed at a higher price than the previous trade.
- Since 2001, the minimum tick size for stocks trading above $1 is 1 cent.
- The uptick rule, originally in place from 1938 to 2007, dictated that a short sale could only be made on an uptick.
- In 2010, a new alternative rule was introduced, ordering short-sellers to execute trades only on an uptick if the security has already fallen 10% in a day.
How Uptick Works
Since 2001, the minimum tick size for stocks trading above $1 is 1 cent. That 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 experience 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 likely 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.
Types of Uptick
There are several terms that contain the word uptick. They include zero uptick, which refers to a transaction executed at the same price as the trade immediately preceding it, but at a price higher than the transaction before that; uptick volume, meaning the number of shares traded while a stock price is rising; and the uptick rule.
The significance of an uptick in financial markets is largely related to the uptick rule. This directive, originally in place from 1938 to 2007, dictated that a short sale could only be made on an uptick. It was introduced to prevent short sellers piling too much pressure on a falling stock price.
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 may attract more bears and scare buyers away, creating an imbalance that could lead to a precipitous decline in a faltering stock.
The 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 the unprecedented bear market of 2008-09.
Alternative Uptick Rule
In February 2010, the Securities and Exchange Commission (SEC) introduced an “alternative uptick rule," designed to promote market stability and preserve investor confidence during periods of volatility.
The new rule states that short selling a stock that has already declined by at least 10% in one day would only be permitted on an uptick. It is hoped that this will give investors enough time to exit long positions before bearish sentiment potentially spirals out of control, leading them to lose a fortune.
Most securities are covered by the rule. In the event it is activated, the alternative uptick rule would apply to short sale orders for the remainder of the day, as well as the following day.