SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
Study Diether, Lee, and Werner
(2006)
Efficiency
Returns
Conclusion While the suspension of the
NYSE tick test is found to be
associated with larger spreads
and higher short-term volatility,
this evidence is consistent with
the distorting effects of the tick
test on short sellers (i.e., forcing
them to be liquidity suppliers)
rather than any benefit to
investor welfare.
Alexander and Peterson (2006) Wu (2006) SEC
No impact except for the following
measures for NYSE stocks:
higher autocorrelation of fiveminute
returns, greater likelihood
of a lower price for the second
trade after a short sale, and
greater likelihood of a higher
trade price for the first trade after
a short sale. The authors
examine the autocorrelation of
five- and thirty-minute returns,
upside minus downside r-
squared, and price runs.
No significant impact on returns
surrounding the announcement
date of the Pilot stocks, on the
initiation day of the Pilot, or during
the first month of the Pilot.
Concerns about the removal of
the price tests leading to a
degradation of market quality are
unfounded. Price tests do not
further the stated objectives of
short sale regulation.
Hasbrouck pricing errors
show no significant change
with pilot.
Intraday return
autocorrelations (30 and 60
minute) did not change with
pilot.
Tick test reduces short selling
and narrows the spread
primarily for small stocks.
Tick test does not seriously
constrain short sellers from
trading on their information.
Higher five-minute return
reversals.
Higher five-minute semiautoregression.
No impact on thirty-minute
return reversals, thirty-minute
semi-autocorrelation, or on
skewness in five-minute, thirtyminute,
and daily returns.
Listed pilot stocks had a 24
bps lower return than control
stocks on the initiation day of
the Pilot but had statistically
similar cumulative return during
the 6 months after the Pilot.
Prepared by the Office of Economic Analysis 88 DRAFT
Most evidence shows that the
pilot had a minor effect. The
most intriguing results are in
volatility. Some evidence that
the tick test has a bigger effect
in small stocks.