SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report 2/12/2007
and control stocks, thus creating an unprecedented opportunity to observe in a controlled
environment the effects of removing the price restrictions.
This study has compared pilot and control stocks along numerous dimensions, in an effort
to capture a broad range of possible effects. Our main empirical results are as follows:
• The pilot is associated with increased short selling volume in Listed and Nasdaq NM
Stocks, but appears to have no impact on the level of short interest in either market.
The increase in short selling is slightly higher for small Listed Stocks than for large
Listed Stocks.
• The pilot is associated with an increase in Nasdaq’s share of trading volume in
Nasdaq NM Stocks, suggesting that market participants are routing trades to other
venues in order to avoid the bid test. The market share increases more for smaller
stocks. For the largest Nasdaq NM Stocks, such as those included in the Nasdaq 100,
there is no significant difference in market share.
• We find no evidence that the pilot has had any impact on the level of trading activity
in the options market, as we would have expected to see if market participants are
using option markets to avoid the tick test or the bid test.
• For Listed Stocks, less than 46% of all trades are executed on down bids when the
tick test applies, while the number is close to 50% for pilot stocks, suggesting that
Rule 10a-1 constrains the execution price in four to five percent of trades. For
Nasdaq NM Stocks, Rule 3350 does not explicitly prevent trading on downticks, but
our results show that it effectively constrains trading on downticks for about one half
of one percent of trades.
• The pilot is associated with a decrease in quote depth, especially on the ask side for
Listed Stocks—our evidence confirms that Rule 10a-1 forces some short sellers who
would otherwise be liquidity demanders to act as liquidity suppliers. The decrease in
depth appears unassociated with size or turnover.
• Other than the effect on market depth, the pilot has had no clear effect on market
liquidity—most of our tests indicate that liquidity was not significantly impacted by
the pilot, but some tests indicate small increases or decreases in liquidity, depending
on the measure.
• The pilot is associated with an increase in some measures of intraday volatility.
These increases appear to be confined to the smaller stocks as larger stocks
experienced a decline in volatility during the pilot.
• On average across all types of stocks, the pilot does not appear to have any significant
effect on daily volatility—however, our results indicate the pilot is associated with
Prepared by the Office of Economic Analysis 55