SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
activity level. The evidence shows that for most size and activity levels, the pilot and control
stocks experienced a statistically similar return on the first day of the Pilot. The Listed pilot
stocks had a lower return than the control stocks in the largest size group while the Nasdaq NM
pilot stocks had a lower return than the control stocks in the highest turnover group. Hence, the
prior results seem to be driven by the large Listed Stocks.
Table 22 compares the pilot stock six-month alphas to the control stock six-month alphas
for the various size and activity groups. Like the May 2 results, the pilot alphas are statistically
similar to the control alphas in every size and activity level. Therefore, the tick and bid tests do
not promote or hinder pricing efficiency for any size or activity level.
Recall from Table 11 that negative and positive five-minute price reversals are more
prevalent in the pilot sample than the control sample, especially for Listed Stocks. Repeating our
analysis across deciles, we find the difference between pilot and control Listed Stocks is
significantly more pronounced for stocks with the lowest market capitalization (results not
presented). These findings are consistent with our other results indicating that smaller stocks tend
to be more volatile when the tick test is removed. However, for the smallest Listed Stocks, we
observe a greater number of positive than negative price spikes, suggesting that removing the
tick test does not make smaller stocks unduly susceptible to negative price pressure.
VII Summary and Conclusions
The pilot program established by Regulation SHO exempted approximately one third of
the Russell 3000 stocks from the “tick test” (Rule 10a-1) for Listed Stocks and the “bid test”
(former NASD Rule 3350) for Nasdaq NM Stocks traded on Nasdaq or traded OTC and reported
to an NASD facility. The pilot was designed to facilitate comparison between the pilot stocks
Prepared by the Office of Economic Analysis 54
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