Fisher finance scholars participate in first SEC 'natural experiment'

The SEC invited Ingrid Werner, the Martin and Andrew Murrer Professor of Finance, to participate in a Sept. 15 roundtable to discuss a Fisher team’s study of the recent change in short-sale rules, which is part of SEC’s Regulation SHO.

Werner, along with colleague Karl Diether, assistant professor of finance, and doctoral student Kuan Hui Lee, analyzed the effects of the new rules.

The SEC pilot is a large scale “natural experiment” which suspended the New York Stock Exchange uptick rule on short-sale price tests and NASDAQ-bid price rule for 1,000 stocks. A control group of 2,000 listings continued to trade under the old rules. The stocks were drawn from the Russell 3,000. The Fisher team was asked to examine the effects of the suspension of the rules on the market.

While the team did not discover a dramatic change, they found the suspension of the rules had a statistically significant effect on NYSE-listed stocks. "NASDAQ stocks appeared to be unaffected because that market had less onerous restrictions on short-sales to start with," Werner said.

The entire research paper is available at

Those findings, along with similar research on short-sales conducted by two other groups of business scholars, were presented at the roundtable in Washington D.C. The research presentations were followed by a panel discussion between leading academics and industry representatives. The audience consisted of SEC Commissioners and staff, NYSE and NASDAQ economists and industry practitioners. The SEC organized the roundtable to collect feedback on the rules’ effect on the market.

The commission is considering making permanent changes to the rules, but officials first wanted to obtain empirical evidence and feedback from leading scholars and economists, Werner said.

“We had a chance to give feedback directly to the regulators. The commissioners were there to ask questions and get clarification on our research,” she added.

SEC official Amy K. Edwards, a Fisher Ph.D. alumnus who is a financial economist in the Office of Economic Analysis, was instrumental in developing the experiment. Edwards served as a roundtable moderator.

“Amy had the great insight to suggest that the SEC material and data should be made available to academics so that they could conduct an independent study of the change,” Werner said.
The SEC always seeks feedback and comments from academics and industry professionals before considering changes to market regulations. However, this was the first time the SEC conducted a “natural experiment,” Werner said.

“The SEC decided to evaluate short-sale price tests because different rules applied in different markets in the United States on how you could execute short-sales,” Werner said.

Regulation SHO came into effect in 2005, so researchers conducted a before-and-after comparison of pilot stocks. “Our findings show that the rules have a minor effect on market quality, but that they distort how people trade. We therefore recommend that the short-sale price tests be abandoned,” she said.

Achieved audio of Werner’s participation in the morning session of the SEC roundtable discussion is available online at