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





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    • Diether and Werner are at Fisher College of Business, The Ohio State University. Lee is at Rutgers Business School at Newark and New Brunswick and at Korea University Business School, Seoul. We thank the New York Stock Exchange for financial support and seminar participants at The Ohio State University, the Wharton School, the New York Stock Exchange, and Brigham Young University for comments. We are also grateful for feedback received at the SEC Roundtable on the Regulation SHO Pilot. We thank Paul Irvine for comments and Yingdi Wang for research support. All errors are our own.


We examine the effects of the Securities and Exchange Commission (SEC)-mandated temporary suspension of short-sale price tests for a set of Pilot securities. While short-selling activity increases 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 distortions in order flow created by the price tests themselves.