Uptick

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.

Key Takeaways

  • 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.
  • A downtick is when the price of a security moves down by at least 1 cent from its previous trade.

How an 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 bearishsellers 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.

On the CME exchanges, tick sizes are set by the exchange and vary by contract instrument.

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 Upticks

There are several terms that contain the word uptick. They include zero upticks, 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.

Special Considerations

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 from piling too much pressure on a falling stock price.

Important

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.

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.

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.

Example of an Uptick

Stock ABC is currently priced at $15.50. Sentiment on the stock is positive, as the company has come out with a new product that is supposed to outperform all competitors. Investors are bullish on the stock and start purchasing it. The stock goes from $15.50 to $15.60 in one transaction, which is an uptick.

What Is Uptick Volume?

Uptick volume refers to the number of shares that are traded when a stock is on an uptick. Uptick volume is used by technical traders, who use it to determine a stock's net volume; the difference between its uptick volume and downtick volume. Investors and traders look for uptick volume, which is a shift in volume upwards, to determine a new trend of a stock moving up.

What Is the Difference Between Uptick and Downtick?

The difference between uptick and downtick is that an uptick is an increase in a stock's price from its previous transaction. The increase has to be by at least 1 cent. A downtick is a decrease in a stock's price from its previous transaction. The decrease has to be at least by 1 cent.

What Is the Downtick-Uptick Rule?

The downtick-uptick rule, also known as Rule 80A, was a rule that the New York Stock Exchange (NYSE) had established to maintain orderly markets in a market downturn. The rule was abolished in 2007. The rule stated that whenever the NYSE Composite Index gained or lost more than 2% from the previous day that all sell trades on S&P 500 stocks during an upturn in the market be labeled as "sell-plus" and that all buy trades during a downturn in the market be labeled as "buy-plus." These trades were flagged before execution in order to slow trading on S&P 500 companies because it halted the use of program trades that usually trade in large volumes.

What Does an Uptick in Bond Yields Mean?

An uptick in bond yields means the returns that an investor will receive from investing in the bond will be higher. When the yield of a bond goes up, its price goes down.

The Bottom Line

An uptick is an increase in a stock's price by at least 1 cent from its previous trade. Traders and investors look to upticks and downticks to determine what price a stock may be moving and what might be the best time to buy or sell a security.

Article Sources

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