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It's Sho Time! Short-Sale Price-Tests and Market Quality

Karl B. Diether
Tuck School of Business at Dartmouth College

Kuan-Hui Lee
Rutgers Business School at Newark & New Brunswick; Korea 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

Abstract:
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.

Keywords: Short-sales, SEC, Regulation, Market Quality, NYSE, Nasdaq

JEL Classifications: G00, G18, G20, K22

Working Paper Series

Date posted: June 22, 2006 ; Last revised: August 30, 2007

Suggested Citation

Diether, Karl B., Lee, Kuan-Hui and Werner, Ingrid M., It's Sho Time! Short-Sale Price-Tests and Market Quality (August 14, 2007). Fisher College of Business Working Paper No. 2007-03-002; Charles A. Dice Center WP No. 2006-13. Available at SSRN: http://ssrn.com/abstract=910614

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Contact Information

Ingrid M. Werner (Contact Author) The Ohio State University - Fisher College of Business ( email ) 2100 Neil Avenue Columbus, OH 43210-1144 United States 614-292-6460 (Phone) 614-292-2418 (Fax)
Karl B. Diether Tuck School of Business at Dartmouth College ( email ) Hanover, NH 03755 United States
Kuan-Hui Lee Rutgers Business School at Newark & New Brunswick ( email ) 111 Washington Avenue Newark, NJ 07102 United States (973) 353-5938 (Phone) HOME PAGE: http://kuanlee.rutgers.edu/
Korea University Business School ( email ) Seoul 136-701 Korea +82 2 3290-2836 (Phone)