Failure to Deliver

Failure to Deliver (FTD) occurs when one party in a trading transaction fails to meet their delivery obligations by the settlement cycle deadline. Think of it like ordering a pizza and paying for it, but the delivery driver never shows up with your pie. In the stock market, when you buy a share, you're owed that share. The seller is obligated to deliver it to your brokerage account, typically within two business days (a period known as T+2). When they don't, it's a “Failure to Deliver.” While occasional FTDs can happen due to simple administrative errors or technical glitches (the equivalent of the driver getting a flat tire), a persistent and large number of FTDs for a specific stock can be a major red flag. It can signal market plumbing issues or, more controversially, manipulative trading practices like naked short selling. For the savvy investor, understanding FTDs is like learning to spot cracks in the market's foundation—it doesn't mean the house will collapse, but it's certainly worth a closer look.

FTDs can arise from a mix of innocent slip-ups and more deliberate actions. The primary causes include:

• Innocent Mistakes: Good old-fashioned human or system error. A clerk might enter the wrong information, a processing system might lag, or there could be a simple miscommunication between brokers. These are usually resolved quickly and are considered a normal part of a complex system.
• Logistical Hurdles: Sometimes the seller genuinely owns the shares but faces a delay in getting them to the right place. This is more common with less liquid securities or complex transfers between different custodians or countries.
• “Naked” Short Selling: This is the most notorious cause. In a legal short sale, a trader borrows a share before selling it, planning to buy it back later at a lower price. In naked short selling, the trader sells a share they haven't borrowed and haven't even confirmed they can borrow. When it's time to deliver the share, they can't, resulting in an FTD. This practice is illegal for most market participants as it can create “phantom shares” and artificially depress a stock's price.
• Market Maker Operations: Market makers, whose job is to provide liquidity by always being ready to buy and sell a particular stock, have certain exemptions that allow them to create short positions without borrowing first. This is intended to prevent trading logjams and keep markets running smoothly. While this can lead to FTDs, these activities are regulated and monitored.

For the average investor, an FTD in their own purchase is rare and usually fixed quickly by their broker. The real insight comes from looking at the aggregate FTD data for a specific stock.

Yes, a high volume of FTDs can be a flashing red light. A small, random number of FTDs across the market is normal noise. But when you see a specific stock with consistently high FTDs for weeks or months, it suggests something unusual is afoot. It often points to intense selling pressure, potentially from naked short sellers trying to drive the price down. In extreme cases, this can create the conditions for a massive short squeeze. If the short sellers are eventually forced to buy actual shares to cover their failed deliveries, the sudden surge in demand can send the stock price soaring. This dynamic was a key feature in the “meme stock” sagas of companies like GameStop and AMC.

Knowledge is power! In the United States, the SEC (Securities and Exchange Commission) publishes FTD data for all stocks on a regular basis. You can download the files directly from their website. In Europe, the system is more fragmented, but national regulators and central securities depositories sometimes make this data available. A quick search for “[Country Name] FTD data” or “[Stock Exchange Name] settlement statistics” can often point you in the right direction. Looking at this raw data can give you an unfiltered view of settlement pressures on a stock you are researching.

A true value investor is a detective, and FTD data is another clue in the case file. While some might use FTDs to speculate on short squeezes, the value investor's approach is more measured. A high FTD level isn't a buy signal in itself; it's a signal to dig deeper. It tells you that there is a significant disagreement in the market about the company's value. The key questions to ask are:

• Why are so many people betting against this stock? Are there legitimate problems with the company's fundamentals that I have missed?
• Or, is the market's pessimism overblown? Has the intense shorting pressure artificially depressed the stock price far below its intrinsic value?

A high FTD count can be a signpost pointing to a potentially misunderstood and undervalued company. By combining FTD analysis with rigorous fundamental research—examining the company's balance sheet, income statement, and competitive position—the value investor can determine if the market's panic is a warning or a once-in-a-lifetime opportunity. It's about separating the signal from the noise and using market inefficiencies to your advantage.