Zero Plus Tick

Definition

A Zero Plus Tick, also known as an uptick trade or a zero uptick, is a financial term that refers to a trade executed at the same price as the previous trade but higher than the trade prior to that. This typically occurs in stock trading when short selling rules are enforced. Zero Plus Tick ensures that the current transaction does not exacerbate a security’s declining price and prevents market manipulation through short selling.

Phonetic

The phonetic pronunciation of “Zero Plus Tick” would be: Z – Zulue – Echor – Romeoo – OscarP – Papal – Limau – Uniforms – SierraT – Tangoi – Indiac – Charliek – Kilo

Key Takeaways

1. Zero plus tick is a securities trading term that involves a transaction occurring at the same price as the previous trade but with an upward trend. This generally reflects a more positive market sentiment.
2. Zero plus ticks are closely related to the uptick rule that prevents short-sellers from initiating a short sale on a downtick, thus promoting market stability by restricting drastic price movements.
3. Successive zero plus ticks demonstrate buying pressure, which can impact a security’s price trend. Monitoring zero plus ticks can provide valuable information regarding market trends and investors’ sentiment for making trading decisions.

Importance

The Zero Plus Tick is an important business/finance term because it refers to a securities transaction executed at the same price as the preceding trade, but at a higher price than the last trade of a different price. This concept holds significance primarily in the context of short selling, as it helps mitigate downward pressure on a stock’s price and minimize potential market manipulation. In some countries, regulators, like the SEC in the United States, enforce the uptick rule that prevents investors from short selling a security unless the last trade was a zero plus tick or on an uptick. By mandating this rule, regulators aim to maintain market stability, reduce volatility, and prevent potential “bear raids” wherein short-sellers aggressively sell stocks to drive down prices for personal gains.

Explanation

Zero Plus Tick is an essential concept in finance and business, particularly regarding securities trading. It serves the important purpose of regulating the buying and selling of short-sold securities, which are instruments that traders use to bet against a stock’s value. The primary objective of a Zero Plus Tick is to prevent short sellers from excessively contributing to a stock’s price decline, exacerbating the fall, and potentially causing a domino effect on investor confidence. By mandating that short sales can only take place on a Zero Plus Tick, regulators ensure that the downward price pressure exerted by short sellers is somewhat controlled, thereby promoting market stability and maintaining a level playing field for all investors. In practice, a Zero Plus Tick occurs when the previous trade occurs at a higher price compared to the preceding trade. In essence, the rule implies that a short sale should only be executed if the previous trade was conducted at a higher price or if the price remained unchanged compared to the previous transaction. As a result, the Zero Plus Tick rule establishes a positive or neutral requirement for short selling activities. This mechanism acts as a counterbalance, protecting the market from predatory short selling practices that could otherwise unnecessarily drive down prices and create artificial market volatility. Consequently, the Zero Plus Tick plays a crucial role in preserving the financial system’s integrity and enhancing investor confidence, ensuring market participants can operate in a transparent and efficient environment.

Examples

A zero plus tick, also known as an uptick trade, occurs when a financial security’s trade price is the same as the preceding trade but higher than the one prior to that. It is typically used in short selling of stocks and helps to prevent downward manipulation of a stock’s price. Here are three real-world examples of the zero plus tick in action: Example 1:Stock ABC’s recent trades were executed at the following prices: $50, $50.20, $50.20. In this scenario, the third trade at $50.20 is a zero plus tick because it matches the preceding trade price and is higher than the trade before it ($50). If there were any short sellers targeting this stock, they would only be allowed to sell short on this uptick or at higher prices, thereby protecting the stock from undue downward price manipulation. Example 2:Company XYZ has a trading price sequence of $25, $25, $25.10, and $25.10. The fourth trade is an example of a zero plus tick since it is equal to the trade before it and higher than the trade two steps back ($25). This trade restriction helps maintain market stability and limits the occurrence of price manipulation through short selling. Example 3:Suppose the stock of Company DEF is trading with a sequence of $30.50, $30.75, $30.75, $30.70, and $30.70. The third trade ($30.75) acts as a zero plus tick as it matches its previous trade price and is higher than the one prior to that. This zero plus tick would protect Company DEF’s stock from potentially being short sold and artificially pushed downward.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Uptick Rule
• Short Sale
• Bid-Ask Spread
• Financial Markets
• Order Execution

Sources for More Information

• Investopedia
• Investing Answers
• AllBusiness.com
• Shmoop