SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
In addition to quoted spreads we also examine effective spreads, estimated for each trade
by computing the absolute value of the difference between execution price and the current bid-
ask quote midpoint. As we did for the quoted spread, we estimate both absolute and relative
effective spreads. The effective spread results in Panel A of Table 6 look quite similar to the
quoted spread results. Only one of the changes is statistically significant, a decline in the
effective spread of pilot Nasdaq NM Stocks. This result alone would suggest that the application
of the bid test decreases liquidity. However, this conclusion is weakened by the lack of
statistical significance in the other sub-samples and the lack of a difference between the pilot and
control stocks. The Panel B results suggest that the tick test has no impact on effective spreads,
but the results on the bid test are mixed. The bid test appears to decrease effective spreads and
increase relative effective spreads. Like the results on quoted spreads, the magnitudes of these
changes are small.
Overall, the Regulation SHO Pilot shows us that the price restrictions appear to augment
depth at both the ask price and the bid price, but price restrictions have little if any effect on
realized liquidity. These results are fairly consistent whether the price restriction is structured as
a tick test or as a bid test, although the tick test augments the ask depth more and the bid test
augments the bid depth more.
2. Return Volatility
The next set of tests examine whether removing the price restrictions alters return volatility.
Table 7 displays test results for several volatility measures and several return horizons to capture
different aspects of volatility.
Prepared by the Office of Economic Analysis 42
DRAFT