SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

DRAFT
on short selling, particularly bans, impede liquidity and price discovery. 3 This evidence
is generally consistent with the literature published in the top finance journals, and as
such, it has withstood serious scrutiny. Nevertheless, because a ban on short selling is
more general than an uptick rule, these results do not necessarily imply that an uptick rule
would reduce liquidity, instead they are more likely to be relevant for imposing a halt
following a circuit breaker.
On the other hand, Overstock and Life Partner Holdings conclude that short selling does
not provide liquidity in the market. They cite a flawed test in the Shapiro/Pham Study,
which finds no relationship between changes in short interest and changes in trading
volume. 4 The cited Shapiro study also does not reconcile its results to a plethora of
conflicting evidence such as Boehmer, Jones and Zhang (2009), who analyzed the SEC
ban on short sales and found that it resulted in a significant deterioration in market
quality. We believe that the methods in the academic literature are likely to be more
reliable, because of the obvious flaws in the Shapiro study.
Other evidence includes predicting the loss in liquidity resulting from an uptick rule.
Citadel Investment Group (in a joint letter with D.E. Shaw and Renaissance) further
provides evidence that approximately 70% of short sales are done as part of a hedging
trade and that the long position would not exist but for the ability to short. 5 In addition,
Credit Suisse forecasts a drop in overall market volume by 10-50% as a result of
reinstituting a short sale price restriction; and attributed "the phenomenal volume growth
[since the elimination of the uptick rule to] long/short traders that invested heavily in
technology and built successful electronic market-making systems." These predictions
are based on market data and broad assumptions. We are not comfortable with the
assumptions, so we cannot conclude that the point predictions are accurate.
3 For instance, a study of the impact of the ban on short selling on the London Stock Exchange during the
fourth quarter of 2008 found that during the time period that the ban was in place, there was an overall
decline in liquidity and a widening of bid-asked spreads (see ‘The Effect of Short-selling Restrictions on
Liquidity: Evidence from the London Stock Exchange,’ Matthew Clifton and Mark Snape (19 December
2008)). Also, IIROC releases two studies on marketplace trends related to short sales (available online at
http://docs.iiroc.ca/DisplayDocument.aspx?DocumentD=1BB3i\789F8A04628A1C1D2CE68FEDEB4&1,t
lllguage=en) that show that stocks subject to the short sale ban had lower market quality as measured by
spreads and volatility.
4 See OEA Memorandum “Comments on Shapiro and Pham Analysis of FTDs”, June 2, 2009.
5 According to an industry research conducted by Credit Suisse, only 0.7% of investment management
firms (which are commonly believed to be a substantial source of short sales) are dedicated to a short
selling strategy, see
http://www.hedgeindex.com/hedgeindex/documents/CS%20Tremont%20Hedge%20Fund%2008%20Recap
_Final.pdf. Also For example, a fund that is required to keep a 130/30 long/short ratio must invest 30 cents
short for every $1.30 invested long.
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