Dear Abby Aunt Greg . . . Part II
SEC offers a trove of ‘fail to deliver’ data
NakedShorts has over the last several days received emails asking some intelligent questions about the long-running ‘naked’ short-selling controversy, dramatically revived by last week’s emergency action by the US Securities and Exchange Commission. Today...
QUESTION: I’ve seen a lot of conflicting comments about naked shorting. Some people seem to think that it’s a systemic concern that threatens the very foundations of capitalism and society, while others seem much more blasé — even SEC chairman Cox has said last week that, despite the emergency action, he had no evidence of the increased naked shorting of financial stocks. Can you point me to any reliable sources of information about the extent of the problem?
Publicly available information on the extent of naked shorting, per se, whether abusive or not, is in extremely short supply. But when it comes to ‘fails to deliver’ (FTDs), which ultimately cause whatever harm (and that’s a whole other argument) naked shorting does to investors, some actual facts are out there.
First stop: the US Securities and Exchange Commissions’ office of economic analysis. It has thrown a couple of new logs — cleverly disguised as file memoranda — on the fire. ‘Impact of Recent SHO Amendment on Fails to Deliver,’ dated Jun. 9 2008, examines FTDs both before and after the elimination of the ‘grandfather’ exception in Reg SHO. Long story short (with links to original documents below):
In summary, the results indicate that fails to deliver in non-optionable securities declined significantly after the elimination of the grandfather exception while fails to deliver in optionable securities increased significantly. Thus, the net impact of the amendment across all threshold securities was mixed.
One explanation of these results is that the investors who previously failed to deliver in the equity market have now moved to the options market to establish a synthetic position. Since the option market makers still enjoy an exception to the close-out rule and tend to hedge their positions in the equity markets, the fails may now be coming from the option market makers instead of the equity investors themselves.
In the ‘Fails to Deliver Statistics in Threshold Securities’ memo, dated Mar. 3 2008, covered a nine-month period through Jan. 31 2008.
...we estimate the magnitude of trades that fail to deliver in threshold securities relative to the entire market. We also estimate how many securities persist on the threshold list for more than 17 days. The data, as reported by NSCC, cover all stocks with aggregate fails to deliver of 10,000 shares or more...
Longish story short:
We estimate that on an average day trades in threshold securities that fail to settle within T+3 account for approximately 0.6% of the dollar value of trading in all securities...
...We calculate that 350 unique securities were persistent threshold securities during this nine month time period. Of those securities, approximately 219 or 62.6% where [sic] identified as exchange traded funds or similar products [Emphasis added].
At the individual security level, the SEC earlier this year began providing information on FTDs in a quarterly archive file released “at least two months after the last settlement date of the quarter.” The file reports the “total number of fails-to-deliver (i.e., the balance level outstanding) recorded in the National Securities Clearing Corporation’s (“NSCC”) Continuous Net Settlement (CNS) system aggregated over all NSCC members when that security has a balance of total fails-to-deliver of at least 10,000 shares as of a particular settlement date.
One very important thing needs to be kept in mind when reviewing all these data. In the words of the SEC, quoted by NSCC parent Depository Trust & Clearing Corp, far from every FTD is a function of naked shorting, or even the dread abusive naked shorting:
There are many reasons why NSCC members do not or cannot deliver securities to NSCC on the settlement date. Many times the member will experience a problem that is either unanticipated or is out of its control, such as (1) delays in customer delivery of shares to the broker-dealer; (2) an inability to borrow shares in time for settlement; (3) delays in obtaining transfer of title; (4) an inability to obtain transfer of title; and (5) deliberate failure to produce stock at settlement which may result in a broker-dealer not receiving shares it had purchased to fulfill its deliver obligations.
Impact of Recent SHO Amendment on Fails to Deliver
SEC Office of Economic Analysis
Jun. 9 2008
Fails to Deliver Statistics in Threshold Securities
SEC Office of Economic Analysis
Mar. 3 2008
Fails to Deliver Data
SEC FOIA (Freedom of Information Act) Office
DTCC Clarification on Fails to Deliver
DTCC press release Jun. 28 2006
Related definitions
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