SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

34%. These findings clearly indicate that short selling is both non-trivial and an integral part of
the IPO price process on the first trading day. 17
Figure 2 shows the time distribution of short sales on the offer day by trading market. Thirty
six percent of the IPOs in the sample trade on the NYSE or Amex while 64% trade on the
Nasdaq. Because IPO trading does not always open at 9:30, as noted by Aggarwal and Conroy
(2000), we measure the volume in fifteen minute increments from the time that trading actually
opens and through the first four hours.
In all markets, the largest amount of short selling occurs close to the open. On average, 42%
of short sale volume in NYSE/Amex IPOs occurs in the first fifteen minutes of actual trading and
this percentage is the maximum for the day. Likewise, almost 40% of Nasdaq short sale volume
occurs in the first fifteen minutes. This pattern is similar to the intraday pattern for all trading
volume, with the Nasdaq trading volume in the first fifteen minutes accounting for almost 50%
of daily volume and NYSE/Amex volume accounting for 43%. Our findings on volume are
consistent with Krigman, Shaw and Womack (1999) who document that over 50% of the first
trading day volume in IPOs occurs in the first hour of trading. Overall, these results suggest that
short selling is an integral part of the price formation process at the opening of trade despite the
supposed impediments to short selling.
Figure 3 presents short selling as a percent of shares offered, trading volume and daily
returns over the first month of trading. As can be seen in the graph, the initial trading day has the
highest proportion of return, volume, and short sales. Short selling occurs over the first month of
17 Note that some of this short selling may be investors who are allocated IPO shares that are “shorting against the
box” to circumvent restrictions on flipping such as penalty bids. However, this strategy is indistinguishable from
other short sales in its execution. Although the investor may be long the shares of the IPO because of their
allocation, she must still borrow the shares for delivery and thus, faces the same constraint on availability and cost of
borrowing shares as any other short seller. If the investor were to use allocated shares for delivery on T+3, this
would constitute a long sale.
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SEC_OEA_FCIC_002462