Fails-to-deliver, short selling, and market quality

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Fotak, Veljko ; Raman, Vikas ; Yadav, Pradeep K.
  • Publisher: University of Warwick
  • Subject: HB | HG

We investigate the collective net impact on market liquidity and pricing efficiency of equity trades that result in fails to deliver (“FTDs”). Given the nature of the US electronic trade settlement system for stocks, such “FTD \ud trades” should originate almost exclusively from short sales, and we confirm this empirically on the basis of a \ud natural experiment arising from a regulatory event. For a sample of 1,492 NYSE common stocks over a 42-month period from 2005 to 2008, we find that such trades lead to the same beneficial impact on liquidity and pricing efficiency as short sales that result in timely delivery. We do not find evidence that such trades are causally related to subsequent price declines or distortions, or to the failure of financial firms during the 2008 financial crisis.
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