Zero Plus Tick: What It Is, How It Works, and Example

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 occurs 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 assets, but it is most often used for listed equity securities. The opposite of a zero plus tick is a zero minus tick.

Understanding a Zero Plus Tick

A zero uptick, or 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 panic among shareholders, who would then sell their shares at a 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

Suppose stock ABC has been rising from $45 to $50 throughout the day. After a series of upticks (when each trade occurs at a higher price than the previous one), the stock repeats at $50 again.

Example of a Zero Plus Tick

Assume that Company XYZ 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 plus tick.

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.

Zero Downtick

A zero downtick is the opposite of a zero uptick, occurring when a transaction is executed at the same price as the trade immediately preceding it but at a price lower than the transaction before that. This subtle price movement pattern provides traders and analysts with valuable information about the market's short-term direction and momentum. Understanding zero downticks can be particularly useful for those engaged in short selling or attempting to gauge potential support levels for a stock.

The concept of zero downticks gained prominence in the context of short selling regulations, particularly after the removal of the uptick rule in 2007. While a zero downtick doesn't necessarily indicate a strong bearish trend, it can suggest a temporary pause in upward momentum or a potential shift in market sentiment.

The Uptick Rule

The uptick rule is a former regulation established by the SEC that required 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 prevented short sellers from adding to the downward momentum of an asset already experiencing sudden declines.

Uptick rules 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 shrinks liquidity.

Shorting means an investor must first borrow the shares from someone who owns them. This creates demand for the shares. They argue that short selling provides liquidity to markets and also prevents stocks from being bid up to ridiculously high levels of hype and overoptimism.

Why Zero Uptick Matters

Understanding zero upticks is important for traders because these subtle price movements can affect trading strategies. First, zero upticks serve as indicators of short-term price momentum. When a stock experiences a zero uptick, buyers are willing to purchase shares at the same price as the previous trade, despite the overall upward movement. This could signal a potential continuation of the upward trend, as it demonstrates sustained buying interest even at higher prices.

A trader considering shorting the stock may look at zero uptick moments carefully. Under certain "uptick rules" (like the now-repealed SEC Rule 10a-1), an investor could only start a short sale if the last price change was an uptick. If there’s a zero uptick, the trader can't short the stock at that moment unless the stock price ticks up.

Zero upticks also play a role in technical analysis. Traders who use candlestick charts or other technical indicators may incorporate zero upticks into their analysis to better understand price action. These small price movements can sometimes indicate potential support or resistance levels, helping traders make more informed decisions about entry and exit points.

Lastly, the frequency and pattern of zero upticks can provide insights into overall market liquidity and trading behavior. A high frequency of zero upticks suggests active trading with tight bid-ask spreads, while infrequent zero upticks could indicate lower liquidity or wider spreads.

The zero-uptick rule specifically applies to short sellers. It restricts short selling to prevent excessive downward pressure on a stock’s price by only allowing short sales when the last sale price is higher than or equal to the previous trade (i.e., a zero or positive uptick).

The Bottom Line

A zero uptick occurs when an asset is traded at the same price as the preceding trade, but at a higher price than the trade before that. These price patterns can offer hints about short-term momentum, market liquidity, and trading behavior. For investors and traders, recognizing zero upticks can enhance technical analysis, inform short-selling strategies, and provide a more nuanced view of price action.