SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report 2/12/2007
In July 2004, the Securities and Exchange Commission (the “Commission” or the
“SEC”), adopted Regulation SHO, which contains Rule 202T, allowing the Commission to
establish, by separate order, a pilot program to examine the efficacy of price restrictions. 4 At the
same time, the Commission issued an order (“Pilot Order”) establishing a pilot program (“Pilot”)
exempting a third of the stocks in the Russell 3000 Index (“Russell 3000”) from all price
restrictions. 5 The pilot stocks constitute a sample of Russell 3000 stocks that is stratified across
average daily trading volume levels within each of three groups, corresponding to New York
Stock Exchange (“NYSE,”) Nasdaq, and American Stock Exchange (“AMEX”) issues. 6 The
Pilot went into effect on May 2, 2005, and was scheduled to end on April 28, 2006, 7 but has been
extended to August 6, 2007 to allow the Commission to consider potential rulemaking after
evaluating the results of the Pilot. 8
The Pilot was designed to enable the Commission and the broader community to evaluate
whether the price restrictions have a substantive impact on market quality, and more generally to
achieve a deeper understanding of how price restrictions affect the trading process. In its Pilot
Order, the Commission provided further explanation for the Pilot: 9
The Pilot will enable us to obtain empirical data to help assess whether short sale
regulation should be removed, in part or in whole, for actively-traded securities,
or if retained, should be applied to additional securities. The Pilot will allow us to
study trading behavior in the absence of a short sale price test on the stocks
selected by comparing the trading behavior of the control group stocks to that of
71 FR 38922 (July 10, 2006) (File No. SR-NASD-2006-068). For purposes of this study, we refer to Nasdaq NM
stocks as Nasdaq NM or Nasdaq Stocks and not Nasdaq Global Market stocks. Prior to Nasdaq commencing
operations as an exchange, Nasdaq securities traded on exchanges on an unlisted trading privileges basis were not
subject to any price restriction.
4
See the adopting release, SEC Release No. 34-50103, July 28, 2004.
5
See the first Pilot Order, SEC Release No. 34-50104, July 28, 2004.
6
Stocks were selected for this sample by sorting the 2004 Russell 3000 first by listing market and then by average
daily dollar volume from June 2003 through May 2004, and then within each listing market, selecting every third
company starting with the second.
7
SEC Release No. 34-50747, November 29, 2004.
8
SEC Release No. 34-53684, April 20, 2006.
9
SEC Release No. 34-50104, July 28, 2004.
Prepared by the Office of Economic Analysis 4