Downtick (Financial Markets) - Explained
What is a Downtick in the Market?
Written by Jason Gordon
Updated at April 17th, 2022
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What is a Downtick in the Market?Downtick-Uptick TestAcademic Research on Downtick in Financial MarketWhat is a Downtick in the Market?
When a financial instrument sells at a lower price than the previous transaction, it is called the downtick. It happens when a stocks price decreases from the preceding price. It is the opposite of uptick. It is generally used for stocks price, but it may also be applied to commodities or other forms of securities. For example, a stock of X is traded at $20, and in the following trade, it sells at $18, so the stock is on a downtick. Tick is a measurement of small price movements of the stocks. In the U.S the minimum tick size is 1 cent for the stocks trading for more than $1. A downtick not always indicates a downturn and a natural part of stock market fluctuation. Many reasons may contribute towards downtick including an increase in supply over demand.
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Downtick-Uptick Test
Downtick-uptick test is implemented by the New York Stock Exchange to restrict market volatility. According to it, whenever the Dow Jones Industrial Average moves more than 2% in any direction from the previous trading day the volume of trades must be restricted. The objective is to restrict the high volume of trading during an unstable market situation as that contributes to even more fluctuation and affects the exchange negatively.