SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report 2/12/2007
to capture different aspects of volatility. The daily price range measures the degree to which
prices fluctuate within a day by comparing the high price to the low price in a day. The daily
price range declines from the Pre-Pilot Period to the Pilot Period for each subsample. This
decline is statistically significant for both Listed and Nasdaq control samples and for the Nasdaq
pilot sample, but not for the Listed pilot sample. Panel A suggests that the decline was
statistically similar for pilot and control stocks, while the Panel B regression suggests that the
daily price range increased for pilot stocks relative to control stocks for both the Listed and
Nasdaq samples. Taken together, the daily price range results are mixed on whether the tick and
bid tests dampen volatility.
To explore intraday volatility further, we examine our next two volatility measures,
absolute returns and return variance, over three time horizons, 5 minutes, 30 minutes, and one
day. 53 These measures would increase for pilot stocks over the shorter horizons if the tick and
bid tests dampen transitory volatility. The measures would increase for the pilot stocks over the
longer horizons if the tick and bid tests dampen permanent volatility. Economically, transitory
volatility captures the efficiency of the trading mechanism while permanent volatility captures
the effects on equilibrium prices. We separately analyze absolute returns and return variance
because each measures volatility slightly differently. Return variance has a tendency to put more
weight on larger price movements than absolute returns.
The average absolute returns are lower during the Pilot Period for the control sample
across all three return horizons. The univariate results in Panel A show that the pilot stocks
experienced a statistically similar decline in the absolute returns as the control stocks for the 30
minute and daily horizons. At the five-minute horizon, however, the pilot sample experienced an
53 The 5 and 30 minute absolute returns and variances are estimated without including the first half hour of the
trading day, after hours trading, or pre-open trading.
Prepared by the Office of Economic Analysis 43