Tick testing was a method used to determine when to execute a short sale in the US market. It was developed in the 1930s and became obsolete with the increased regulation of the market. The tick test was rescinded in 2007.
Tick testing was a method once employed to determine when circumstances were right for the execution of a short sale. To a large extent, this type of test method was primarily focused on use in markets based in the United States. The tick testing approach was first developed and employed during the 1930s, but is now considered obsolete.
The concept of a test to help monitor and manage short selling arose after the stock market crash of 1929. It was obvious that there had to be some means of protecting interests in a market situation that, at the time, was not it was as tightly regulated as it is today. Thus, the tick test became the standard means of deciding what kind of conditions had to exist before a short sale could take place. Known as the 10a-1 Rule, 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, selling could take place in a rally 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.
Second, the tick test allowed for what is known as a zero plus tick or zero rally. In this scenario, there was no change in the last 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 trade limit and make sure that the trades were above the board. At the same time, the test made it more difficult for a group of investors to fabricate what’s known as a bearish attack on a given stock and thus throw the market off balance before anyone knew what was happening. Since the 1930s, methods for monitoring business activity have become increasingly comprehensive, and this type of activity can easily be detected early in the process. As a result, the need for tick testing has finally become obsolete. Recognizing this, the Securities and Exchange Commission decided to rescind Rule 10a-1 on July 6, 2007.
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