What Is a Zero Uptick?

A zero uptick is a security purchase that is executed at the same price as the trade immediately preceding it, but at a price higher than the transaction before that.

For example, if equity shares are traded at $47.00, and the following two trades transact at 47.03, the last of the two trades at $47.03 is considered to be a zero uptick. This distinction can be important for short sellers trying to avoid shorting a stock on an uptick so as to comply with the uptick rule. Also known as a zero-plus tick.

Key Takeaways

  • A zero uptick is a security purchase executed at the same price as the trade immediately preceding it, but at a price higher than the transaction before that.
  • A zero uptick occurs instantly when a trade is made with qualifying characteristics based on the two transactions before it.
  • The qualifications of a zero tick include a trade between buyers and sellers on a security that makes no change to the price of that security.
  • Additionally, the trade before the no-change trade must make the price go higher than it was on the tick before.
  • The Uptick Rule (also known as the "plus tick rule") is a former law established by the Securities and Exchange Commission (SEC) in 1934 that requires every short sale transaction to be entered at a higher price than the previous trade.

How a Zero Uptick Works

A zero uptick occurs instantly as a trade is made that has qualifying characteristics based on the two transactions before it. The qualifications of a zero tick include a trade between buyers and sellers on a security that makes no change to the price of that security.

Additionally, the trade before the no-change trade must make the price go higher than it was on the tick before. The following illustration displays each tick of the stock price of Exxon Mobil (XOM) during a one-minute span. The two ticks that would qualify as zero ticks are noted.

Zero Ticks on XOM
Zero Ticks on XOM.

A zero tick is allowable for initiating a short sell position. The technique of shorting on a zero uptick is not applicable to all investment markets, due to various rules and regulations prohibiting or restricting such transactions. The Forex or foreign exchange market, which has limited restrictions on shorting, is among the markets in which the technique is more popular.

Uptick Rules

The Uptick Rule (also known as the "plus tick rule") is a former law established by the Securities and Exchange Commission (SEC) that requires every short sale transaction to be entered at a higher price than the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1 and implemented in 1938. It prevents short sellers from adding to the downward momentum of an asset already experiencing sharp declines.

The uptick rule was eliminated in 2008 and later reinstated, but is only activated when an individual company's shares have fallen at least 10% on a trading day.

By entering a short sale order with a price above the current bid, a short seller ensures their order is filled on an uptick. The uptick rule is disregarded when trading some types of financial instruments such as futures, single stock futures, currencies, or market ETFs such as the QQQQ or SPDRs. These instruments can be shorted on a downtick because they are highly liquid and have enough buyers willing to enter into a long position, ensuring that the price will rarely be driven to unjustifiably low levels.

The uptick rule was eliminated in 2008 and later reinstated, but is only activated when an individual company's shares have fallen at least 10% on a trading day.

The uptick rule can be frustrating to short sellers (people who are betting that a stock will fall) because they must wait for the stock to stabilize before their order can be filled.

Some investors argue that uptick rules inhibit trading and shrink liquidity. In order to short a stock, an investor must first borrow the shares from someone who owns them. This creates demand for the shares. The reality is that short selling provides liquidity to markets and also prevents stocks from being bid up to ridiculously high levels of hype and over-optimism.