Zero Plus Tick
Candlefocus EditorThe rationale behind this rule was to combat any potential sudden drops in stock prices that could occur due to large fundstrades, or when large traders sell off multiple stocks in a row without giving the market time to react. The zero plus tick rule was created to help restore reasonable pricing in the market by preventing large traders from selling off all of their stock while taking advantage of the downward momentum they created.
The zero plus tick rule was in effect until 2007, when it was replaced with the alternate uptick rule. This rule states that a stock must have declined more than 10% that day before traders are allowed to short it freely. This rule was put in place to protect stocks that were prices were declining due to market trends, rather than individual traders.
It is important to note that the zero plus tick rule is still in effect for some transactions, particularly for stocks traded on the New York Stock Exchange. These transactions are known as “Hot Issue Transactions” and include stocks with significant daily trade volume. Hot Issue Transactions are subject to the original tick rule, meaning that the SEC discouraged short-selling even when there was strong evidence of a bearish trend.
Overall, understanding Zero Plus Tick is important for traders looking to short sell. Familiarity with the rule allows traders to capitalize on shorting opportunities while still following the SEC’s rules of trading. It also helps protect the market from large-scale manipulation and sudden drops in stock prices.