SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report 2/12/2007
Our second approach to testing whether eliminating price restrictions may lead to an
increase in price patterns indicative of market manipulation involving short sales is to examine
the relative frequency of large negative and positive price reversals, as explained in section V-C,
above. Our results are presented in Table 11. Panel A reports results for return reversals
occurring over subsequent 5-minute intervals, and Panel B reports results based on 30-minute
intervals.
In this table, the line corresponding to “Reversal Size > 2” reports the number of times
(per 100,000 observations) that a stock price move of 2 standard deviations or more was reversed
in the subsequent period. So, for example, the number 338.4 in the first column of Panel A
indicates that for Listed, pilot stocks, the frequency of negative five-minute reversals greater than
two standard deviations in magnitude is approximately 0.003384, or 338.4 out of 100,000. In this
table, statistical significance is ascertained using a nonparametric bootstrapping procedure
outlined in section V-C. This test indicates whether the observed frequency of reversals would
constitute a rare event under the null hypothesis that the distribution of reversals is the same for
control and pilot stocks. Results are reported for thresholds ranging from two to nine standard
deviations.
Our results in Panel A indicate that the pilot stocks tend to experience significantly more
5-minute return reversals than the control stocks, at least for thresholds in the range of two to
four standard deviations. This same result is observed for Listed Stocks and Nasdaq NM Stocks.
If price restrictions deter price patterns consistent with downward manipulations but not upward
manipulations, we might expect to see more negative price reversals in the pilot sample than the
control sample, but no difference in positive reversals. In our sample, however, the effect of the
Prepared by the Office of Economic Analysis 49