"Fail to Deliver" in the Stock Market

This article was orignally published on CEOBLOC:

Hello there, fellow investors! Today, let's talk about a common issue in the stock market - the "fail to deliver" (FTD). This term refers to a situation where a securities transaction doesn't go as planned, resulting in a buyer not receiving their purchased shares or a seller not receiving the expected cash. There are a few reasons why this can happen.

One reason is the lack of available shares. In some cases, investors may try to purchase shares of a stock that are in high demand or have limited supply. If there aren't enough shares available to fulfill all the purchase orders, some buyers may not receive their shares as expected. This can be especially tricky for short sellers who borrow shares of a stock with the hope of buying them back at a lower price later. If the shares aren't available, the short seller may not be able to complete the transaction, leading to a fail to deliver.

Another factor that leads to a fail to deliver is an issue with the settlement process. When a securities transaction occurs, there's a period between the trade date and the settlement date. During this time, the buyer and seller must exchange cash and shares, and the securities must be transferred from the seller's account to the buyer's account. If there are any issues with this process, such as a delay in the transfer of funds or shares, it can result in a fail to deliver.

Fails to deliver can also occur due to errors or fraud, like a brokerage firm failing to deliver shares to a buyer due to a clerical error or a miscommunication with the seller. Alternatively, sellers may intentionally fail to deliver shares in an attempt to manipulate the market or profit from illegal activities like naked short selling.

Regardless of the cause, a fail to deliver can have significant consequences for investors and the market. It can result in a loss of potential gains and a delay in investment plans for buyers, while sellers may suffer from a loss of liquidity and potentially even financial hardship. Fails to deliver can create uncertainty and instability in the market, as investors may lose confidence in the integrity of the trading system.

Regulators have implemented rules and procedures to monitor and prevent fails to deliver, such as the SEC requiring brokers to buy back shares of a stock that fail to deliver for a certain period after the settlement date. Additionally, the "buy-in" process allows buyers to purchase shares on the open market and charge the seller for any price difference if the seller fails to deliver shares on the settlement date, creating a strong incentive for sellers to deliver the shares they've sold.

Although these measures are in place, fails to deliver still occur in the stock market. Some investors argue that these failures are evidence of market manipulation or other illegal activities, while others see them as a natural part of a complex and interconnected trading system. Regardless of the cause, it's clear that fails to deliver can have significant implications for investors and the market as a whole, and it's important to remain aware of the risks associated with them.

That's it for today's post, folks. Stay informed, stay alert, and happy investing!