SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
The next group of statistics measures the level and nature of short selling. These statistics
measure short interest, the short selling volume and location, and option volume and open
interest. In Listed Stocks, short selling comprises about 24% of share volume and 27% of trades.
The level jumps to 36% of share volume and 37% of trades in Nasdaq NM Stocks. Still, the
level of short selling in pilot stocks is similar to that of control stocks prior to the start of the
pilot. Because the bid test does not apply to all markets, we examine the share of short sales
executed on Nasdaq to measure whether investors appear to be routing short sales away from
Nasdaq. While we estimate this statistic for Listed Stocks as well, we focus on the Nasdaq NM
Stocks for results. Rows ten to fifteen of Table 2 show that prior to the pilot, the pilot and
control stocks have similar average option volume and open interest, statistically
indistinguishable from each other.
The next set of statistics measures mechanical aspects of trading and quoting, in
particular, the percentage of trades occurring on a downtick or zero downtick and the percentage
of the day during which the last change in the bid was downward. These measures were selected
because they both determine when a short sale can be executed and are influenced by the
application of the price restrictions. Prior to the pilot, about 46% of trades in Listed Stocks occur
on downticks or zero downticks, while slightly over 50% of trades in Nasdaq NM Stocks do.
These percentages are similar for the pilot and control stocks. Likewise, the percentage of the
day during which the most recent change in the bid was downward is similar for pilot and control
stocks. For Listed Stocks, the most recent change in the bid was downward for about 39% of the
day. This is indicative of the nature of a limit order book market to have short-lived liquidity
imbalances followed by long periods of liquidity building. In other words, a large order quickly
executes, removing several price levels in the limit order book, followed by a slow replenishing
Prepared by the Office of Economic Analysis 26
DRAFT