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SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

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34%. These findings clearly indicate that short selling is both non-trivial and an integral part of<br />

the IPO price process on the first trading day. 17<br />

Figure 2 shows the time distribution of short sales on the offer day by trading market. Thirty<br />

six percent of the IPOs in the sample trade on the NYSE or Amex while 64% trade on the<br />

Nasdaq. Because IPO trading does not always open at 9:30, as noted by Aggarwal and Conroy<br />

(2000), we measure the volume in fifteen minute increments from the time that trading actually<br />

opens and through the first four hours.<br />

In all markets, the largest amount of short selling occurs close to the open. On average, 42%<br />

of short sale volume in NYSE/Amex IPOs occurs in the first fifteen minutes of actual trading and<br />

this percentage is the maximum for the day. Likewise, almost 40% of Nasdaq short sale volume<br />

occurs in the first fifteen minutes. This pattern is similar to the intraday pattern for all trading<br />

volume, with the Nasdaq trading volume in the first fifteen minutes accounting for almost 50%<br />

of daily volume and NYSE/Amex volume accounting for 43%. Our findings on volume are<br />

consistent with Krigman, Shaw and Womack (1999) who document that over 50% of the first<br />

trading day volume in IPOs occurs in the first hour of trading. Overall, these results suggest that<br />

short selling is an integral part of the price formation process at the opening of trade despite the<br />

supposed impediments to short selling.<br />

Figure 3 presents short selling as a percent of shares offered, trading volume and daily<br />

returns over the first month of trading. As can be seen in the graph, the initial trading day has the<br />

highest proportion of return, volume, and short sales. Short selling occurs over the first month of<br />

17 Note that some of this short selling may be investors who are allocated IPO shares that are “shorting against the<br />

box” to circumvent restrictions on flipping such as penalty bids. However, this strategy is indistinguishable from<br />

other short sales in its execution. Although the investor may be long the shares of the IPO because of their<br />

allocation, she must still borrow the shares for delivery and thus, faces the same constraint on availability and cost of<br />

borrowing shares as any other short seller. If the investor were to use allocated shares for delivery on T+3, this<br />

would constitute a long sale.<br />

11<br />

<strong>SEC</strong>_<strong>OEA</strong>_<strong>FCIC</strong>_002462

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