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

Fisher College of Business Working Paper No. 2007-03-002

Charles A. Dice Center WP No. 2006-13

45 Pages Posted: 22 Jun 2006  

Karl B. Diether

Tuck School of Business at Dartmouth College

Kuan-Hui Lee

Seoul National University Business School

Ingrid M. Werner

The Ohio State University - Fisher College of Business

Date Written: August 14, 2007

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 Classification: G00, G18, G20, K22

Suggested Citation

Diether, Karl B. and 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: https://ssrn.com/abstract=910614 or http://dx.doi.org/10.2139/ssrn.910614

Karl B. Diether

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

Kuan-Hui Lee

Seoul National University Business School ( email )

703 LG-bldg, Business School,
Seoul National Univ., 1 Kwanak-Ro, Kwanak-Gu
Seoul, 151-916
Korea, Republic of (South Korea)
+82 2 880-6924 (Phone)

HOME PAGE: http://sites.google.com/site/kuanlee70/

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)

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