SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report 2/12/2007
In 1976, the Commission proposed three alternative temporary rules that would have
suspended the tick test for some or all registered securities. 27 In response to the proposal, several
market participants, including the NYSE, opposed the proposal, and expressed concerns that
abolishing the tick test might lead to increased volatility or decreased liquidity. The Commission
withdrew the proposals in 1980. 28
A House Report submitted by the Committee on Government Operations dated
December 6, 1991 discusses several aspects of short selling, including the tick test. 29 The report
suggests that short selling has negative price effects that “can have important and lasting
consequences” and asserts that the tick test is “effective in stabilizing the market for exchange-
listed stocks for the benefit of issuers and investors,” although no evidence is cited in support of
this view. The report also recommends that the tick test should be extended to the Nasdaq
market.
On September 6, 1994, the Commission approved NASD Rule 3350 (the “bid test”) as a
temporary rule. 30 This created a bid test for trades executed by NASD members or their
customers, but with exemptions for both equity and option market makers. Specifically, this rule
prohibited short sales at or below (or less than one penny above) the best bid price whenever the
prevailing inside bid price is lower than the previous inside bid. The bid test might appear less
restrictive than the tick test, because it allows for unrestricted short selling at any price when the
bid price is higher than the previous bid, and because of the market maker exemptions. Since its
27 See SEC Release No. 13091, December 21, 1976.
28 See SEC Release No. 34-42037, October 20, 1999.
29 Short-Selling Activity in the Stock Market: Market Effects and the Need for Regulation (Part 1) (House Report),
H.R. Rep. No. 102-414 (1991), reprinted in CCH Federal Securities Law Reports Number 1483 Part II (1992).
30 See SEC Release No. 34-34277, July 6, 1994.
Prepared by the Office of Economic Analysis 14