SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report 2/12/2007
stock prices (September 2000-August 2001). In their sample of 2,275 observations, they find no
significant differences in the overall level of short selling, or the frequency of days with
abnormally negative returns and abnormally high short selling.
Overall, the research above shows that short sales are executed in declining markets
despite the application of the tick or bid tests. However, this does not mean that short sales are
unaffected by the tick and bid tests. We discuss this further in the next section.
2. Short Sale Execution Quality
Another area of research examines whether these rules harm the execution quality of
short sales by reducing the prices received by short sellers, by delaying the execution of short
sales, or by reducing the fill rates.
Martin and Marquette (1977) conduct a simulation calibrated to the Dow 30 stocks, to
estimate the degree to which the rule would have affected execution prices for market short sale
orders submitted during a period of market decline. The simulation results indicate that even
during a period of rapid price declines, randomly arriving short market orders would have
executed at higher prices as a result of the uptick rule. Therefore, short sellers appear better off
because of the tick test.
Albert, Smaby, and Robison (1997) examine the negative abnormal returns to stocks
following large increases in reported short interest, as an estimate of the profitability of short
selling. They find that short selling was more profitable for their Listed sample than their Nasdaq
sample during a period (1987-1991) when only Listed Stocks were subject to a price restriction.
Their findings imply that the uptick rule does not have a significant negative impact on the
bottom line for short sellers.
Prepared by the Office of Economic Analysis 18