What are Tick Test Rules?
Also called short sale rules, tick test rules are restrictions on when traders can short a stock.
How Do Tick Test Rules Work?
Also known as a minus tick, a downtick occurs when a security sells at a price less than the preceding sale. A downtick is the opposite of an uptick.
For example, if there is a trade for XYZ Company at $15 per share, and the next trade is at $12 per share, the XYZ shares are said to be 'on a downtick.' In the United States, when a stock is on a downtick, tick test rules generally prohibit traders from shorting the stock.
Although the term usually refers to stocks, it can also apply to bonds, commodities and other traded securities.
Why Do Tick Test Rules Matter?
Downticks are important because not only do they indicate the price trend of a stock, they also trigger restrictions on short sales. Tick test rules exist to prevent traders from jumping on the bandwagon to destabilize a stock's price (note that exchange-traded funds can be shorted on a downtick, however).