SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
Third, we use a time-series regression methodology to measure the extent to which
positive and negative price changes are likely to be subsequently reversed. If price rules play an
important role in preventing short sellers from temporarily driving prices down below their fair
value, we would expect to see a larger portion of negative returns subsequently reversed for the
pilot stocks than the control stocks. For Listed Stocks, we find that a larger portion of both
negative and positive returns are subsequently reversed for pilot stocks than control stocks at a
short (five-minute) horizon. The symmetry of these results is consistent with the increase in
volatility discussed above rather than any marked increase in the potential for downward price
pressure. On the other hand, a marked increase in the potential for downward price pressure
relative to upward price pressure should lead to an asymmetry in positive and negative return
reversal results. We do not find this asymmetry. At a thirty-minute horizon, we find no
statistically significant difference in the magnitude of return reversals for Listed pilot and control
stocks. For Nasdaq NM Stocks, we find no statistically significant difference in the magnitude
of return reversals for pilot and control stocks for either five-minute or thirty-minute intervals.
One important element of the Pilot is the ability to examine whether the tick test affects
stocks of varying sizes and volume differently. For example, does the tick test affect larger
stocks in the same manner as smaller stocks and would the tick test be more effective for large or
small stocks? To examine these questions, we divide the stocks into size, measured as market
capitalization, and volume, measured as trading volume divided by shares outstanding
(turnover), groups and run each of our tests again for each group. For most of our tests, we find
that the tick and bid tests affect stocks the same no matter how large or small or how active are
the stocks. In particular, we find that the tick and bid tests result in a lower percentage of short
sale volume for most size and activity levels. We also find that the tick and bid tests result in
Prepared by the Office of Economic Analysis 10
DRAFT