What Is Failure To Deliver? (2024)

Updated on June 28, 2022

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Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics.

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In This Article

Definition and Examples of Failure To Deliver
How Does Failure To Deliver Work?
What It Means for Individual Investors

Definition

Failure to deliver is when one party of a financial transaction does not follow through on their end of the deal.

Key Takeaways

Failure to deliver is when one party of a stock transaction doesn’t deliver their part.
For the buyer, this means the cash; for the seller, it means the stock.
Naked short selling is one cause of failure to deliver, but many others exist.
Many failures to deliver are cleared within a few trading days.

Definition and Examples of Failure To Deliver

“Failure to deliver” is the phrase used by the investing community when one party in a transaction doesn’t follow through with their side of an investment contract or transaction. Generally, it happens when shares or funds aren’t delivered to the buyer or seller on the settlement date.

Naked short sales and selling an asset without borrowing it first are two of the leading causes for failures to deliver. In the case of naked short sales, a failure to deliver can have a compounding effect.

For example, imagine that you arranged to purchase an asset on April 26 and take delivery of it on April 27. You then contracted to sell it to another investor on April 27 at a higher price than you paid. On April 26, you pay for the asset, but on the 27th, the other party did not deliver it. What makes it compound is that the investor you were going to sell to did the same thing you did, and the one they were selling to was also going to use it in a naked short sale.

Note

Short sales and naked short sales are not illegal; the SEC says that in some circ*mstances, they help bring liquidity to the market.

A recent example of failure to deliver focused on Gamestop (GME) shares. On January 28, 2021, more than one million Gamestop shares with an average price of $347.51 failed to deliver. Gamestop’s share price had risen from $20 per share two weeks earlier as retail investors from Reddit and other websites bought into the stock. According to the SEC, many investors blamed the failures to deliver on naked short selling.

How Does Failure To Deliver Work?

As explained previously, failure to deliver is not delivering the agreed-on assets or funds. However, the causes of a failure to deliver are not so easy to explain. In most cases, an entity fails to deliver because of circ*mstances out of its control; it might also fail because it didn’t account for and reduce the risks of any scenarios that might keep it from fulfilling its obligations.

Failure To Deliver Causes

Failure to deliver often happens due to errors or processing delays. In these instances, the delivery is expected to settle in the next few days when it’s removed from the Securities and Exchange Commission (SEC) failure list. The party that failed to deliver might be fined for the failure.

Note

The Financial Regulatory Authority (FINRA) is the entity that works to prosecute failures to deliver under Regulation SHO.

You might see instances of failure to deliver among investing transactions of any kind. The most well-known causes are short sales; however, the SEC notes that a failure to deliver can also happen on a long sale.

The SEC tracks daily failures to deliver and publishes the data on its website. The data reported by the agency represents the aggregate net balance of shares not delivered on a particular day.

For example, Ferroglobe PLC (GSM) was on the SEC’s failure to deliver list for February 2022. Its entry for Feb. 11, 2022, is:

SETTLEMENT DATE	CUSIP	SYMBOL	QUANTITY (FAILS)	DESCRIPTION	PRICE
2022021	G33856108	GSM	538	FERROGLOBE PLC ORD SHS (GBR)	6.86

Ferroglobe PLC listed many reasons it could fail to deliver on its annual filing (Form 20-F). Among these reasons are:

Historic cyclicality of the metals industry
Swings in market price and demand
Equipment failures
The ability to renew or acquire permits

Trade secrets, company processes, and several other internal factors are not required to be reported, so it may not be easy to figure out why a company failed to deliver. However, the company may publish why it happened to ease investors’ concerns.

What It Means for Individual Investors

For the most part, individual investors aren’t affected by failures to deliver. Individuals can’t perform naked short selling because SEC regulations require brokers to locate shares before individual transactions.

It’s possible you could be on the other end of a naked short (i.e., the buyer who isn’t delivered shares), but in most cases, you’d be made whole in a few days.

If you’re worried about naked short selling or being delivered phantom shares that don’t exist from a naked short seller, most brokers will offer to send you the physical share certificate for a fee.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

U.S. Securities and Exchange Commission. "Key Points About Regulation SHO," Section II.
U.S. Securities and Exchange Commission. "Staff Report on Equity and Options Market Structure Conditions in Early 2021," Page 18.
U. S. Securities and Exchange Commission. "Staff Report on Equity and Options Market Structure Conditions in Early 2021," Page 29.
Financial Regulatory Authority. "FINRA Fines Cantor Fitzgerald $2 Million for Regulation SHO Violations and Supervisory Failures."
U.S. Securities and Exchange Commission. "Fails to Deliver Data." Click February 2022, first half, download text file.
Ferroglobe PLC. "Form 20-F," Pages 1,2.

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I'm a seasoned financial professional with over a decade of experience in financial planning, derivatives, equities, fixed income, project management, and analytics. My expertise lies in navigating the intricacies of the financial market, and I've encountered various scenarios related to investment transactions.

Now, let's delve into the concepts discussed in the article about "Failure To Deliver" in investing:

Definition and Examples of Failure To Deliver: "Failure to deliver" is a term used in the investing community when one party in a transaction doesn't fulfill their side of an investment contract or transaction. This typically occurs when shares or funds aren't delivered to the buyer or seller on the settlement date. Naked short selling, where an asset is sold without borrowing it first, is a significant cause of failure to deliver.

How Does Failure To Deliver Work: Failure to deliver is essentially not delivering the agreed-upon assets or funds in a financial transaction. The causes are often complex, ranging from errors and processing delays to unforeseen circ*mstances. The Securities and Exchange Commission (SEC) tracks daily failures to deliver and publishes aggregate net balances of shares not delivered on a particular day.

Failure To Deliver Causes: Causes for failure to deliver can include errors, processing delays, and various factors like historic cyclicality, market price swings, equipment failures, and internal issues within a company. The Financial Regulatory Authority (FINRA) works to prosecute failures to deliver under Regulation SHO.

What It Means for Individual Investors: Individual investors are generally not heavily impacted by failures to deliver. Naked short selling, a common cause, is restricted by SEC regulations, requiring brokers to locate shares before individual transactions. In most cases, investors are made whole within a few days. The article suggests that if concerned about naked short selling, investors can request the physical share certificate from brokers for a fee.

In conclusion, understanding failure to deliver is crucial for investors, especially when considering the potential impact on the market and individual transactions. The Gamestop example from January 28, 2021, highlights how failure to deliver can gain attention, with investors often attributing such failures to practices like naked short selling.

FAQs

What happens in a failure to deliver? ›

Failure to deliver occurs when one or more member of a transaction does not deliver on their respective commitments. When trading, once any trade has been made, both parties will need to pay and deliver the underlying asset by a specific settlement date.

Find Out More ›

What happens during failure to deliver? ›

Failure to deliver (FTD) refers to not being able to meet one's trading obligations. In the case of buyers, it means not having the cash; in the case of sellers, it means not having the goods. The reckoning of these obligations occurs at trade settlement.

What does failure to success mean? ›

Failure can turn into success solely because of the option to try again repeatedly. Determination and focus often increase after experiencing setbacks, especially when you are close to attaining your ambition. You might accomplish your goal on the second attempt or it might take several tries.

Learn More Now ›

What does failure does not mean? ›

Failure doesn't mean you are a failure it just means you haven't succeeded yet. – Robert H. Schuller.

Learn More Now ›

Is there a time limit on short selling? ›

Key Takeaways. There is no set time that an investor can hold a short position. The key requirement, however, is that the broker is willing to loan the stock for shorting. Investors can hold short positions as long as they are able to honor the margin requirements.

Get More Info ›

Is short squeeze illegal? ›

Although short squeezes may occur naturally in the stock market the U.S. Securities and Exchange Commission (SEC) states that abusing short sale practices is illegal.

Find Out More ›

What is an example of short selling? ›

For example, let's say a stock is trading at $50 a share. You borrow 100 shares and sell them for $5,000. The price subsequently declines to $25 a share, at which point you purchase 100 shares to replace those you borrowed, netting $2,500.

Find Out More ›

What is bad delivery of shares? ›

Delivery of a share certificate, together with a deed of transfer, which does not meet requirements of title transfer from seller to buyer is called a bad delivery in the market.

Know More ›

What is the meaning of short delivery of goods? ›

Short delivery is an event when a trader fails to deliver the required number of shares on the settlement date. There are various reasons why this scenario might occur. One can be the loaned shares' inaccessibility or errors committed during the settlement process.

Discover More ›