Tuesday, July 17, 2007

Implications of the Change to the Uptick Rule

As noted by the Daily Options Report, Jason Goepfert of SentimenTrader attributes the recent shift in the distribution of the NYSE TICK (fewer readings of +1000 and greater) to the impact of the elimination of the uptick rule for shorting. As a result, we have traders shorting by hitting bids, not waiting for upticks. That potentially skews the TICK in a more negative direction. As Rennie Yang of MarketTells recently observed, this has created a mean in the TICK closer to zero (whereas it had been +200 and higher in the recent past). Using that zero point as a reference (to see if the distribution of TICK values was dominantly above or below that point) worked well in this morning's trade.

If the uptick rule is indeed responsible for the shift in the NYSE TICK, then we should see a similar shift in the Dow TICK ($TIKI). It does appear that this is the case. Going back to March 1st and looking at one-minute data, the average one-minute high value for $TIKI has been 11. Over the past week, the average has been 9. Interestingly, however, the recent average low for $TIKI (-10) is similar to the average low since March (-11). It's the strong uptick readings--for both $TICK and $TIKI--that appear to be truncated.

Meanwhile, here's another implication of the elimination of the uptick rule. That makes it easier to short stocks by hitting bids and should give us better sentiment readings in Market Delta. (Above I've illustrated this morning's chart in AAPL). In other words, the balance of volume at bid vs. offer should tell us more about what institutional traders are doing in each stock now that they don't have to short on upticks.


Tracking the Adjusted TICK

Trading With the Adjusted TICK