SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report 2/12/2007
manipulation. Our approach is to identify certain data patterns that we would expect to be more
prevalent in a world where prices are manipulated, and investigate to see if these price patterns
are more common for pilot stocks than control stocks. Such a pattern does not necessarily mean
that manipulation has occurred, but indicates that we might have cause for further analysis.
As argued above in section I-B, if price restrictions inhibit manipulation by short sellers
and/or facilitate upward manipulation, we might expect to see more large, sudden price declines
in pilot stocks than control stocks. Further, we might expect fewer large, sudden price increases
in pilot stocks than control stocks. Either effect should be reflected in the form of decreased
skewness in the short-term returns distribution.
Table 10 reports results of statistical tests based on 5-minute, 30-minute, and 1-day
returns. For each returns horizon, we follow the same approach as before and test for changes in
skewness between the Pre-Pilot Period and Pilot Period, separately for pilot and control stocks,
and for Listed and Nadaq stocks, and then test whether the difference of differences is
significantly different from zero.
As the table indicates, we find no significant changes between the Pre-Pilot Period and
Pilot Period, with the single exception that there appears to have been a marginally significant
increase in the skewness of Nasdaq NM control stocks at the 30-minute return interval. However,
neither in this nor any other case do we find any statistically significant differences between pilot
and control stocks. Thus, we find no evidence that the pilot program has had any impact on
returns skewness. The 5-minute and 30-minute results reported in Table 10 are based on the
skewness of returns computed using quote midpoints. 56
56 We also performed the test using returns computed using trades (results not reported) and again found no
significant differences between pilot and control stocks.
Prepared by the Office of Economic Analysis 48