SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

DRAFT
evidence. 11 Both indexes are driven by fundamental risk and future economic prospects
as opposed to trust in the markets. Therefore, we don’t believe that this evidence tells us
much about how an uptick rule would affect the investor trust component of investor
confidence.
4. Form of the Restriction
A number of commenters submitted analyses that have implications for the different
forms of uptick proposed (BATS, Professor Charles Jones, NASDAQ, and Credit
Suisse). Some of these analyses highlighted the potential restrictiveness of the proposals
based on the percentage of historical executions that would have been affected. Others
highlighted the magnet effect evidence on circuit breakers.
BATS found that on its own market 12% to 13% of all executions were short sellers
trading at a price less than the last execution price. At the same time, Professor Charles
Jones found that an average of 37% of submitted short sale orders were priced at the bid
or below. 12 Together, if the samples are comparable, these results suggest that the
alternative uptick rule would affect short sellers more than the traditional uptick rule.
These numbers represent a rough estimate of the short sale transactions that would be
affected by different forms of uptick rules. However, these numbers do not indicate how
severely the short sellers would be affected, how this changes in different market
conditions, or whether these numbers would result in changes in market quality. These
analyses also necessarily suffer from the problem that they cannot account for how order
submission strategies would differ from rule to rule and they may not generalize because
they are based on data on certain market centers. However, this critique merely suggests
that some effects could be weaker or stronger than those suggested by the commenters.
Some commenters (NYSE Euronext, Charles Schwab) have also speculated about a so
called “magnet effect”, where sellers – both long and short – push a stock to its Circuit
Breaker out of fear of being unable to sell short once the Circuit Breaker is triggered.
Both NASDAQ and Credit Suisse cited studies that there is no clear evidence supporting
this effect. We agree with this conclusion. In fact, many academic studies that have
analyzed circuit breakers in other contexts found no evidence of such trading patterns. 13
We recognize, however, that some of studies were conducted in markets dissimilar from
and September 2009; the Rasmussen Investor Index has increased over 60% from its March 9, 2009, record
low of 54.7 to a level of 91.8 on September 21, 2009.
11
Among the others: “U.S. fund managers’ exposure to stocks rose for a second consecutive month in May
to their highest point this year”, Reuters, May 28, 2009; “Stock Funds Take in Dollars for 12 th week”, WSJ,
June 11 2009).
12
Marketable orders are both market orders to sell short at the bid and limit orders to sell short where the
limit price is below the existing bid.
13
Credit Suisse cited the following studies studying the existence ofa possible magnet effect: Abad and Pascual
(2005) studying the Spanish stock exchange; Chan, ef al (2005) studying the Kula Lumpur Stock Exchange; Hall
and Karfman (2001) studying five agriculture futures contracts; Berkman and Steenbeek (1998) studying futures
contracts on the Osaka Securities Exchange; Arak and Caak (1997) studying treasury bond futures
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