SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
the call volume is -10 and the change in the put volume is -5, then the signed option volume
equals -5. On the other hand, if the change in the call volume is -5 and the change in the put
volume is -10, then the signed option volume is 5. Again, we find no significant difference
between pilot and control stocks.
Since short sellers may use short-term options in lieu of equity short sales, Table 4, Panel
B shows the results for short-term options only. 50 The results are quantitatively similar to the
results in Table 4, Panel A. Thus, the conclusions drawn from Table 4, Panel A hold for short-
term options.
Overall, the options market results provide no statistical evidence supporting the
hypothesis that the tick test drives would-be short sellers away from the equity markets and to
the options markets to trade. 51 Option trading volume of pilot Nasdaq NM Stocks show a
decline in option volume relative to control stocks of 15%, but this difference is not statistically
significant.
3. Mechanical Effects
Price restrictions have the mechanical effect of forcing short sellers to be liquidity
suppliers instead of liquidity demanders because short sales can rarely be executed against the
bid price. Therefore, we expect the removal of price restrictions to be associated with changes in
quoting and trading purely because of the mechanics of the rules. In particular, Table 2 shows
that about 46% of trades occur on downticks when the tick test applies. We expect that the
removal of the tick test will lead to more balanced trading around 50% downticks because short
50
Long and short-term options are identified using the Options Clearing Corporation directory as of October 31,
2005.
51
A regression model that controlled for changes in volatility in the pre- and post-periods provided results that were
consistent with those in Table 4.
Prepared by the Office of Economic Analysis 38
DRAFT