SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
Then, the put and call option trading volume is averaged across days for each stock for period
before the pilot and for the period of the pilot. The change in put option trading volume is
calculated as the average daily put (call) volume during the pilot minus the average daily put
(call) volume before the pilot. Finally, the change is averaged across stocks to yield the results
reported in Table 4. Averaging across stocks allows us to maintain the independence of the
observations and perform a t-test comparing the mean of the pilot stocks to the mean of the
control stocks. The results for open interest and signed option volume use the same
methodology.
If the price restriction drives would-be stock short sellers to trade options to implement
their investment strategies, then the lifting of the price restrictions on the pilot stocks would lead
to a significant decline in option trading for pilot stocks relative to the control stocks. As
indicated in table 4, between the Pre-Pilot Period and Pilot Period, we do observe a slight
increase in average trading volume for calls and puts on Listed Stocks, a decrease in average
trading volume of calls and puts on Nasdaq NM Stocks, and an increase the average open
interest of all categories. Based on the paired t test, however, we find no statistically significant
changes at the 5% confidence level. We also observe that open interest increased less on average
for control stocks than for pilot stocks, but again, based on the two-sample t test, we find no
statistically significant differences between the changes in the pilot and control samples.
As an additional measure, we examine signed option volume. This is computed by
subtracting the change in the put volume from the change in the call volume. A positive signed
option volume suggests either an increase in long side buyer speculation or a decrease in short
side seller speculation. A negative signed option volume suggests either a decrease in long side
buyer speculation or an increase in short side seller speculation. For example, if the change in
Prepared by the Office of Economic Analysis 37
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