SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
One view of price restrictions is that they help prevent “bear raids,” or that they make it
more difficult for would-be manipulators to drive prices down below their true values. On the
other hand, price restrictions might also make it more difficult for short sellers to move prices
back toward their true value in response to upward manipulations. Because price restrictions are
inherently short-term constraints, any substantive impact on the susceptibility of securities to
manipulation is most likely to be manifest at short horizons. For this reason, we focus our
investigation on price patterns that might indicate manipulative behavior at a daily or intraday
frequency. To explore these issues, we proceed along three avenues of investigation.
First, to the extent that price restrictions create an environment less conducive to price
patterns that might indicate downward manipulation and more conducive to price patterns that
might indicate upward manipulations, we might expect to observe more extreme negative
returns, and fewer extreme positive returns, for pilot stocks than for control stocks. To
investigate this, we use our control-sample methodology to test whether the skewness of the
returns distribution of short-horizon returns differs across pilot and control stocks. 16 Our results
indicate no statistically significant impact of the pilot program on return skewness, measured at
five-minute, thirty-minute, or one-day return intervals.
Second, we identify positive and negative price “spikes,” or instances when extreme price
moves are reversed shortly afterwards, and examine whether the frequency of positive and
negative spikes differs across pilot and control stocks. We find that at a short (five-minute)
horizon, pilot stocks tend to experience more price reversals than control stocks, but that this
result is the same for negative and positive price reversals. At a thirty-minute horizon, we find
no evidence that there are more price reversals for pilot stocks than control stocks.
16 Bris, Goetzmann, and Zhu (2004), in a study of the effects of short sale regulations around the world, find
evidence suggesting that short selling constraints can affect the skewness of the returns distribution.
Prepared by the Office of Economic Analysis 9
DRAFT