SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
The regression results in Panel B confirm this finding and shows that the effect is larger for
Listed Stocks. Panel B also confirms the results for the daily horizon but indicates that absolute
returns increased over the 30-minute horizon for pilot stocks relative to control stocks. While the
30-minute results are mixed, the absolute return results suggest that the tick and bid tests have no
effect on the magnitude of daily returns while they seem to dampen the magnitude of five minute
returns. Further, the tick test seems to dampen short-term returns more than the bid test.
The return variance results in Panels A and B are quite a bit weaker. Panel A shows that
the changes to return variances experienced by pilot stocks are statistically similar to the changes
in return variances experienced by control stocks for both Listed Stocks and Nasdaq NM Stocks,
and this result holds for all three return horizons. Panel B confirms this result for the 30 minute
and daily return horizons but finds that pilot Listed Stocks seem to experience an increase in
return volatility over the 5 minute horizon relative to control Listed Stocks. In summary, the bid
test seems to have no effect on return variance over any time horizon while the tick test might
dampen return variance over the five minute horizon.
Because the results above suggest that price restrictions may dampen transitory volatility,
we next focus on variance ratios that are specifically designed to capture transitory volatility by
comparing the short horizon volatility to longer horizon volatility. If no transitory volatility
exists, variance ratios are designed to equal one. We examine three different variance ratios.
We compare five minute variance to thirty minute variance, five minute variance to daily
variance, and thirty minute variance to daily variance. Panels A and B show that the variance
ratio of five to thirty minute returns increased for pilot Listed Stocks relative to control Listed
Stocks. Further, Panel B shows that the change for Listed Stocks differs significantly from that
of Nasdaq NM Stocks. However, none of the other variance ratios changed significantly.
Prepared by the Office of Economic Analysis 44
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