What Is a Zero Plus Tick?
A zero plus tick or zero uptick is a security trade that is executed at the same price as the preceding trade but at a higher price than the last trade of a different price. For example, if a succession of trades occur at $10, $10.01, and $10.01 again, the latter trade would be considered a zero plus tick, or zero uptick trade, because it is the same price as the previous trade, but a higher price than the last trade at a different price.
The term zero plus tick or zero uptick can be applied to stocks, bonds, commodities, and other traded securities, but most often is used for listed equity securities. The opposite of a zero plus tick is a zero minus tick.
- A zero tick plus is when a security has a transaction above the national best bid (uptick), and then another transaction occurs at that same price.
- Up until 2007, the Securities and Exchange Commission (SEC) had a rule stating that a stock could only be shorted on an uptick or a zero plus tick in order to prevent the destabilization of a stock.
- As of 2010, an alternate uptick rule states that if a stock has declined more than 10% that day traders may only short on an uptick. They may short freely if the stock hasn't declined by more than 10%.
Understanding a Zero Plus Tick
An uptick, and zero plus tick, means the price of a stock moved higher and then stayed there, albeit briefly. It was for this reason that, for more than 70 years, there was an uptick rule as established by the U.S. Securities and Exchange Commission (SEC), which stated that stocks could only be shorted on an uptick or a zero plus tick, not on a downtick.
The uptick rule was intended to stabilize the market by preventing traders from destabilizing a stock’s price by shorting it on a downtick. Prior to the implementation of the uptick rule, it was common for groups of traders to pool capital and sell short in order to drive down the price of a specific security. The goal of this was to cause a panic among shareholders, who would then sell their shares at the lower price. This manipulation of the market caused securities to decline even further in value.
It was thought that short selling on downticks may have led to the stock market crash of 1929, following inquiries into short selling that occurred during the 1937 market break. The uptick rule was implemented in 1938 and lifted in 2007 after the SEC concluded that markets were advanced and orderly enough to not need the restriction. It is also believed that the advent of decimalization on the major stock exchanges helped to make the rule unnecessary.
During the 2008 financial crisis, widespread calls for the reinstatement of the uptick rule led the SEC to implement an alternative uptick rule in 2010. This rule stated that if a stock dropped more than 10% in a day, short selling would only be allowed on an uptick. Once the 10% drop has been triggered the alternate uptick rule remains in effect for the rest of the day and the following day.
Example of a Zero Plus Tick
Assume that Company ABC has a bid price of $273.36 and an offer of $273.37. Transactions have occurred at both of these prices in the last second as the price holds there. A transaction occurring at $273.37 is an uptick. If another transaction occurs at $273.37, that is a zero tick plus.
In most circumstances, this doesn't matter. But say the stock has fallen by 10% from the prior close price at one point in the day. Then the upticks matter because a trader could only short if the price is on an uptick. Essentially this means they can only get filled on the offer side. They can't cross the market to remove liquidity off the bid. This is per the alternative uptick rule established in 2010.