SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
sales can now execute on downticks. This effect should be more obvious in Listed Stocks than
Nasdaq NM Stocks where the trades occur on downticks half the time even with the bid test.
A second potential mechanical effect is the percentage of time during the day when the
most recent bid change was downward. Table 2 shows that this figure is around 39% when the
tick test applies and 47% when the bid test applies. Removing either price restriction could
increase the percentage of the day with down bids because short sales can more easily hit the bid
to force more downbids. Conversely, if the different price restrictions can explain some of the
divergence in these figures, we expect the percentage of downbids in Listed Stocks and Nasdaq
NM Stocks to converge.
Table 5 shows how the tick and bid tests affect trading and quoting mechanics. The
downtick rows in Panel A show that the percentage of trades on downticks increases from 46%
to almost 50% in pilot Listed Stocks. Conversely, the percentage of trades on downticks in
control Listed Stocks goes down. On net, the percentage of trades on downticks is fairly
balanced when the tick test does not apply and is skewed toward upticks when the tick test does
apply. Nasdaq NM Stocks appear to have much more balanced trading even with the bid test so
that removing the bid test results smaller increase in the number of downticks. Panel B confirms
the result that the tick test has a much larger effect on trading mechanics than the bid test.
The downbid rows in Table 5 measure the percentage of the trading day during which the
most recent bid change was downward. Pilot Listed Stocks experience a small increase in the
prevalence of downbids but this increase is roughly similar to an increase experienced by control
Listed Stocks. The results show a decline in the prevalence of downbids for pilot Nasdaq NM
Stocks, suggesting that short selling under the bid test might shorten the duration of upbids,
reflecting the restriction that short sales can only hit upbids.
Prepared by the Office of Economic Analysis 39
DRAFT