SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
of the limit order book. In the Nasdaq market, which operates more like a dealer market than the
listed market, stocks spend more time in a downbid situation, about 47% of the time.
Liquidity is the next important group of statistics. We measure displayed liquidity using
quoted and effective spreads measured in absolute terms and also relative to prices, and using
aggregated quoted ask and bid depth at the National Best Bid and Offer (NBBO). We measure
realized liquidity using the NBBO for both Listed and Nasdaq NM Stocks. Like the earlier
measures, the liquidity measures show that the pilot and control stocks are statistically similar for
all measures. While the magnitude of some of the measures, particularly the quoted ask depth
and quoted bid depth, appears higher for control stocks than for pilot stocks, the measures are
actually statistically similar.
The final group of statistics gives the distribution of returns and prices over various
periods. Table 2 gives average returns, average absolute returns, the skewness of the returns, and
the variance of the returns over 5 minute, 30 minute, and 1 day periods. It also shows the daily
price range and three variance ratios. The variance ratios measure the transitory volatility by
comparing the variance of returns measured over short and long horizons. Overall, the pilot and
control samples are statistically similar in the means, skewness, and transitory and total
volatility. It is interesting to note that the returns for all samples and all horizons are positively
skewed. This positive skewness has been documented in previous work and is correlated with
short selling restrictions.
Prepared by the Office of Economic Analysis 27
DRAFT