SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report 2/12/2007
the Pilot stocks through empirical analysis. We will examine, among other things,
the impact of price tests on market quality (including volatility and liquidity),
whether any price changes are caused by short selling, costs imposed by a price
test, and the use of alternative means to establish short positions.
To the extent that price restrictions have discernable effects, these should appear as
differences between the pilot stocks, which the Commission selected to be a representative
subsample of the Russell 3000 index, and the rest of the Russell 3000, which serve as control
stocks. The results observed from the Pilot will help inform any subsequent rulemaking that the
Commission may consider at the conclusion of the Pilot.
B. Overview
The goal of this study is to examine whether eliminating price restrictions has had any
impact on market quality, broadly defined. We compute and compare various market statistics
for pilot and control stocks both before and during the Pilot. The pilot stocks and control stocks
are statistically similar prior to the Pilot. The analysis is conducted separately for both Listed
Stocks and for Nasdaq NM Stocks to help distinguish the tick test from the bid test.
We designed this study to evaluate the various policy alternatives outlined in the first
Pilot Order. 10 For example, the results of the Pilot might suggest eliminating all price
restrictions, extending a uniform test to all securities, or removing price restrictions for a subset
of stocks. Any of these alternatives would potentially affect not only the stocks in the Russell
3000, but others that have a lower market capitalization and perhaps are less actively traded than
those in the pilot study. Price restrictions may have different effects for larger and smaller
market capitalization stocks, or for more actively traded and less actively traded stocks.
Accordingly, as part of our comparison of pilot and control stocks, we partition the sample into
10 See SEC Release No. 34-50104, July 28, 2004.
Prepared by the Office of Economic Analysis 5