SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
prevalent in a world where prices are manipulated, and investigate to see if these price patterns
are more common for pilot stocks than control stocks. Such a pattern does not necessarily mean
that manipulation has occurred, but indicates that we might have cause for further analysis.
As argued above in section I-B, if price restrictions inhibit manipulation by short sellers
and/or facilitate upward manipulation, we might expect to see more large, sudden price declines
and more price increases in pilot stocks than control stocks. If so, this should be reflected in the
form of decreased skewness in the short-term returns distribution.
Table 10 reports results of statistical tests based on 5-minute, 30-minute, and 1-day
returns. For each returns horizon, we follow the same approach as before and test for changes in
skewness between the Pre-Pilot Period and Pilot Period, separately for pilot and control stocks,
and for Listed and Nadaq stocks, and then test whether the difference of differences is
significantly different from zero.
As the table indicates, we find no significant changes between the Pre-Pilot Period and
Pilot Period, with the single exception that there appears to have been a marginally significant
decline in the skewness of Listed pilot stocks at the 30-minute return interval. However, neither
in this nor any other case do we find any statistically significant differences between pilot and
control stocks. Thus, we find no evidence that the pilot program has had any impact on returns
skewness. The results reported in Table 10 are based on the skewness of returns computed using
trade prices. 55
Our second approach to testing whether eliminating price restrictions may lead to an
increase in price patterns indicative of market manipulation involving short sales is to examine
the relative frequency of large negative and positive price reversals, as explained in section V-C,
55 We also performed the test using returns computed using quote midpoints (results not reported) and again found
no significant differences between pilot and control stocks. Using this alternative measure, the point estimates
indicate an even smaller difference than indicated in Table 9.
Prepared by the Office of Economic Analysis 48
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