It’s SHO Time! Short-Sale Price-Tests and Market Quality

Karl Diether, Kuan Hui Lee and Ingrid M. Werner
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Karl Diether: Ohio State U
Kuan Hui Lee: Rutgers U
Ingrid M. Werner: Ohio State U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

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 NASDAQ listed 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.

Date: 2007-08
New Economics Papers: this item is included in nep-mst
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