SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
in Panel B. Panel B also shows that the ask depth is augmented about three round lots more
when a tick test applies than when a bid test applies.
The bid depth results in Table 6 are slightly different than the ask depth results. The bid
depth increases for all sub-samples, but the difference between the pilot and control samples is
not significant in Panel A, while Panel B suggests that the bid depth of the pilot stocks does not
increase as much as the bid depth of the control stocks. This effect is larger for Nasdaq NM
Stocks than for Listed Stocks, therefore, the bid test seems to augment the bid depth more than
the tick test does by about one round lot.
We examine two measures of quoted spread. The first, known as the “absolute spread,”
is simply the difference between the ask price and the bid price, measured in pennies. The
second, called the “relative spread,” is the absolute spread divided by the bid-ask midpoint, thus
measuring the displayed cost to trade as a percentage of the stock’s value. Panel A shows that
the quoted spreads did not change much when the pilot started for either the pilot stocks or the
control stocks. Only the relative quoted spread in control stocks saw an increase but that
increase was not statistically different from the change in relative spreads experienced by the
pilot stocks. The conclusions from Panel B give a more mixed picture. Quoted spreads decline
about 0.3 cents more for pilot stocks, a result that is the same for Listed Stocks and Nasdaq NM
Stocks. This result suggests that the tick and bid tests appear to reduce liquidity. However, the
results on relative quoted spreads yield the opposite conclusion. While these results are
statistically significant, the point estimates are fairly small. The quoted spreads decline by less
than half a penny and the relative quoted spread increases by less than a basis point. Taken
together, these results suggest that the tick and bid tests have a slight effect on quoted spreads, if
any.
Prepared by the Office of Economic Analysis 41
DRAFT