SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
activity levels without a discernable pattern. Therefore, the depth augmentation from the tick
and bid tests appears unrelated to the size or activity level of the stocks.
As stated above, the increase in the depth at the inside quote affects the displayed supply
of liquidity but might not influence realized liquidity, as measured by effective spreads. Table
18 shows that the tick test has no effect on effective spreads for almost all size and activity
levels. The bid test, however, seems to result in lower effective spreads for large or more active
stocks and potentially higher spreads for small or less active stocks. When significant, however,
the magnitudes are still only a few basis points.
The results above show that transitory volatility is dampened by the tick test with much
weaker evidence on the bid test. Table 19 shows that the tick test primarily dampens the
volatility of small stocks but seems to amplify the volatility of large stocks. The bid test shows a
similar pattern but to a lesser degree. The results across turnover levels are not as striking. The
tick test seems to dampen volatility for most activity levels and the bid test shows similar yet
substantially weaker evidence.
Table 20 summarizes the evidence on how the tick and bid tests affect longer-term
variance. While the tick test does not affect the daily return variance in stocks as a whole, it does
seem to dampen daily return variance in small stocks and increase daily return variance in large
stocks. The bid test shows a similar pattern but the effect is only significant for a few of the
smaller size levels. The tick and bid tests have no effect on daily return variance for any activity
level.
The results above show little evidence that the tick or bid tests affect price levels.
However, there is a 24 basis point return difference between pilot and control Listed Stocks on
the first day of the Pilot. Table 21 summarizes whether this return difference varies by size or
Prepared by the Office of Economic Analysis 53
DRAFT