SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
The fact that we document statistically significant increases in short selling volume but
not in short interest can be interpreted in various ways. One interpretation is that the increase in
short volume is due primarily to increased short selling by parties that close out their short
positions within the day—or, more generally, that the increase in short volume was accompanied
by a decrease in the average horizon over which short positions are held. We should also note
that the absence of a statistically significant result does not imply that no change occurred. Given
that we observe short interest only monthly, it is possible that our statistical test did not have
sufficient power to detect a change in short interest.
Because short sales in Nasdaq NM Stocks executed outside of the Nasdaq market are not
subject to the bid test, short sellers can avoid the bid test by sending orders to markets other than
Nasdaq. The removal of the bid test might result in an increase in short sales on Nasdaq in
Nasdaq NM Stocks because the order routing decision might no longer be affected by the
application of the bid test. The Nasdaq market share statistics in Panel A of Table 3 show that
Nasdaq’s market share in short sales increased 3.9% in pilot stocks and by 1.3% in non-pilot
stocks. The difference of 2.6% is statistically significant, which is consistent with the non-
uniform application of the bid test altering order routing decisions.
2. Option Activity
If price restrictions drive short sellers to trade options in lieu of stocks, then their removal
should decrease option activity. Table 4 summarizes the changes in option trading for pilot and
control stocks between the Pre-Pilot Period and Pilot Period. There are a total of 628 pilot and
1,263 control stocks that had listed options included in the analysis. Put and call option trading
volume is aggregated over all classes and markets for each underlying stock on a daily basis.
Prepared by the Office of Economic Analysis 36
DRAFT