SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
Table 3 shows how removing the price restrictions affects the level of short selling, based
on three different measures, including (i) the number of shares sold short on a given day divided
by the total share volume, (ii) the number of trades involving short sales, and (iii) short interest.
Panel A shows the Pre-Pilot Period to Pilot Period comparison while Panel B reports the average
coefficients from regression analysis. In the Listed market, short volume increases significantly
from 24.4% to 26.3% of total volume in the pilot sample, while the change is not statistically
significant for the control sample. A comparison of these two changes reveals that short selling
volume increases by about 2% of total volume as a result of removing the tick test, suggesting
that the tick test imposes economic costs on short sellers. The same conclusion can be drawn
from the statistics on short selling as a percentage of trades.
Similarly, both volume and trade measures for Nasdaq NM Stocks suggest that the
application of the bid test reduces short selling. The regression analysis in Panel B confirms
these conclusions and also shows that the effect of the tick test is stronger than the effect of the
bid test.
Although our results indicate that price restrictions appear to constrain the volume and
frequency of short sales, these effects are not reflected in short interest. As indicated in Table 3,
both pilot and control stocks exhibited significant increases in short interest around the time of
the Pilot Period. However, none of the tests indicate any significant difference between pilot and
control stocks. Both the univariate results in Panel A and the regression-based results in Panel B
lead to the same conclusion: price restrictions appear to have no effect on short interest for Listed
Stocks or for Nasdaq NM Stocks. The same result is observed whether short interest is measured
in percentage of shares outstanding or in “days to cover.”
Prepared by the Office of Economic Analysis 35
DRAFT