It's Sho Time! Short-Sale Price-Tests and Market Quality
Karl B. Diether
Tuck School of Business at Dartmouth College
Seoul National University Business School
Ingrid M. Werner
The Ohio State University - Fisher College of Business
August 14, 2007
Fisher College of Business Working Paper No. 2007-03-002
Charles A. Dice Center WP No. 2006-13
We examine the effects of the SEC mandated temporary suspension of short-sale price-tests for a set of Pilot securities. While short-selling activity increased both for NYSE and NASDAQ-listed Pilot stocks, returns and volatility at the daily level are unaffected. NYSE-listed Pilot stocks experience more symmetric trading patterns and a slight increase in spreads and intraday volatility after the suspension while there is a smaller effect on market quality for NASDAQlisted Pilot stocks. The results suggest that the effect of the price-tests on market quality can largely be attributed to the distortions in order flow created by the price-tests in the first place. Therefore, we believe that the price-tests can safely be permanently suspended.
Number of Pages in PDF File: 45
Keywords: Short-sales, SEC, Regulation, Market Quality, NYSE, Nasdaq
JEL Classification: G00, G18, G20, K22
Date posted: June 22, 2006
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