Upticks happen during a surge in the rate of a commodity concerning its earlier exchange or last tick. A financial instrument is considered to be on an uptick if the current rate is higher by a minimum of 1 cent than the preceding rate. The increase in the value of 1 cent is termed as tick size.
A stock is said to be on an uptick only if a sufficient number of investors are amenable to purchase it. For instance, let us consider that a stock’s trading value is $8/8.01. In the case of a bearish stock, market participants will be ready to bid for $8 instead of waiting for the rate to increase.
Similarly, prospective buyers wait patiently for the price to reduce given its bearish nature. This can reduce the bid to $7.95. If the number of sellers is more than the buyers, they can grab the lower quote offer. Thus, the stock can be sold at a low rate of $7.80 without any uptick.
However, at this level, the selling pressure will have reduced and made the residual sellers wait. Buyers who consider the rate to be cheaper can raise their bid to $7.81. And, if this rate is accepted and the transaction is done, the condition is termed as an uptick as the preceding rate was $7.80.
Understanding the Uptick Rule
According to this regulation, a position can be sold short only after there is an uptick in the value of the security that is traded. The uptick can refer to an upward price movement of a currency or a commodity.
Conversely, a downtick is when the new quote on the price is lower than its preceding quote. Zero plus tick is another terminology used in association with an uptick. This situation occurs when the last trade occurs similar to the preceding and only when an uptick occurred with the preceding trade.
The uptick regulation was first introduced in 1938 to limit the downward movement of a stock by short-sellers when the price of the stock is declining. However, in 2007, it was eliminated by the SEC but later reinstated in 2010 with a new set of rules.
Accordingly, the short-selling of stock should stop based on the 10% circuit breaker regulation when the price has come down from its closing rate the preceding day by 10%. And, the process may resume only when the market sees an uptick or the zero-plus tick.
Significance of Uptick in Forex
In contrast to equity trading, forex does not attract any major uptick limitations as you are not dealing with one particular instrument here. Since forex involves currency pairs where you buy one and sell the other simultaneously every time, the restriction on short selling is not feasible.
For instance, if there is speculation about an increase of EUR against USD, a trader can buy EUR (go long) and sell USD (go short). The converse may happen if there is speculation about USD strengthening against the EURO.
Moreover, since the forex market trades at around USD 3.2 trillion in a day, you get to trade in a market with huge liquidity spanning over 24 hours. And, there is profit potential regardless of the market movement, making forex a considerably lucrative one when compared to the equity market.
Without an uptick and its accompanying regulation, short-sellers are capable of decreasing the price of a stock drastically as they do not need to slow down for an uptick to occur. This can appeal more to bearish traders and buyers will be wary, leading to improper balance and a steep decline in the value of the stock. Thus, the regulation helps promote stability and boost the confidence of traders when volatility is high.