SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
Stocks a statistically significant difference between the average returns of control and pilot
stocks on May 2, the first day of the pilot. The average control stock experienced a return that
exceeded the average pilot stock by about twenty-four basis points. However, we do not observe
significant differences in returns on other days after the start of the pilot, nor are the cumulative
returns statistically distinguishable at horizons beyond the first day. For Nasdaq NM Stocks, we
observe no differences in daily or cumulative returns at or after the start of the pilot that are
statistically significant at the five percent confidence level. 53 Because the Listed difference does
not persist and because of a lack of a difference in Nasdaq NM Stocks, neither the tick nor the
bid test appear to cause stocks to be over-valued.
Figure 1 displays the returns for the pilot and control samples over the first six months of
the pilot. The figure gives the raw returns as well as the market adjusted returns. Returns in
general appear to be positive over this period but are close to zero when subtracting the market
return. Further, the pilot sample appears to under-perform the control sample, especially for
Listed Stocks. Table 9 confirms that the six month returns of the pilot stocks appears lower than
that of the control stocks. However, this result is not statistically significant. Therefore, the six
month returns for the pilot sample are statistically similar to the six month returns for the control
sample.
Table 9 also shows that the average alphas are negative but very close to zero. This
means that when controlling for risk, the returns of the sample stock are about the same as the
returns of the market portfolio. Further, the univariate results of Panel A and the regression
results of Panel B show that the alphas of the pilot sample are statistically similar to the alphas of
53 On the Nasdaq NM side, we do observe a statistically significant difference on a single day several days prior to
the start of the pilot (April 26). In Table 8, we tested for statistical significance on 21 separate days in two different
markets, for a total of 42 different hypothesis tests. Under the hypothesis that the pilot has no effect, we would
expect random errors to cause roughly two out of the 42 tests to show false positive significance at the five percent
level.
Prepared by the Office of Economic Analysis 46
DRAFT