SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
actively traded and less actively traded issues. To examine these questions, we run a series of
regression-based tests of the following form:
9
i = α + ∑ βk k = 1
i × ki + β10 i β11
i
Market Quality Pilot Decile Pilot + Pre Market Quality
where “Market Quality” represents a characteristic of interest such as spreads, depth, or
volatility. The “Decile” variables are indicator variables corresponding to each of the nine lowest
deciles, for two different decile partitions. The first partition ranks stocks by market
capitalization on April 28, 2005. The second partition ranks stocks by annualized turnover in the
Pre-Pilot Period as measured by its average daily share volume divided by its shares outstanding
as of April 28, 2005 and multiplied by 250. In each case, the decile indicators take on a value of
one if the stock falls within the designated decile, and zero otherwise. These partitions allow us
to test whether the price restrictions have a larger impact on certain categories of stocks. In
particular, we examine each β10 + βk to measure whether the pilot has a significant effect on
stocks in decile k.
VI Results and Analysis
A. The Nature of Short Selling
1. Short Selling Activity
Price restrictions may impose costs on short sellers in the form of lower fill rates and
delays on execution. If these costs are economically significant, then we would expect the
removal of the price restrictions to result in increased short selling. We would expect short
selling to increase more for pilot stocks than control stocks if the price restrictions are costly, or
be the same for the pilot and control stocks if price restrictions are not costly.
Prepared by the Office of Economic Analysis 34
DRAFT