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What is a Tick Test?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 December 2016
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    Conjecture Corporation
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Tick tests were a method once employed to determine when circumstances were right for the execution of a short sale. To a great degree, this type of testing method was focused mainly on use within markets based in the United States. The tick test approach was first developed and employed during the decade of the 1930’s, but is now considered obsolete.

The concept of a test to help monitor and manage short sales came about after the Stock Market Crash of 1929. It was obvious there needed to be some means of protecting interests in a market situation that was, at that point, not as closely regulated as it is today. Thus, the tick test became the standard means of deciding what type of conditions had to exist before a short sale could take place. Known as Rule 10a-1, the tick test became the regulation to govern this type of trading action.

Essentially, the tick test provides for a short sale under two conditions. First, the sale could take place in an uptick situation. That is, when the current price of a given stock was higher than the last trading prices for the same stock, a short sale would be allowed.

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Second, the tick test allowed for what is known as a zero-plus tick or a zero uptick. In this scenario, there was no change in the latest trade price. However, if that current trade price was higher than the trade price that had immediately preceded it, a short sale was possible.

The main function of the tick test was to monitor the trading curb and make sure transactions were above board. At the same time, the test made it more difficult for a group of investors to manufacture what is known as a bear attack on a given stock, and thus throw the market out of sync before anyone knew what was happening. Since the 1930’s, methods for monitoring trading activity have become increasingly comprehensive, and this type of activity can be easily detected early in the process. As a result, the necessity for the tick test eventually became obsolete. Recognizing this, the Securities and Exchange Commission chose to rescind Rule 10a-1 on 6 July 2007.

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