Failure to deliver – stocks

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Failure to deliver – stocks

I know there’s been similar questions asked but I haven’t quite had the “aha” moment yet. For failure to delivers (specifically naked short ing), how is this deficiency noticed? Since short sellers don’t really have a time limit for shorting a stock and just buy it back at some point when the price decreases (unless the company goes under), there’s not really an obligation to produce the share? Or is the actual FTD made when a buyer purchases an IOU from a brokerage (since the brokerage has a certain amount of time to actually provide the stock) and the stock is never located? Then the buyer thinks they own the stock but they actually don’t? I know this is really dumb but I’m not quite making the connection and really trying to learn and understand different elements of the stock market. I thank you all for your time!

In: Economics

Anonymous 0 Comments

Short sellers have to actually be able to produce the stock to the person they’re selling it to..

A short seller will normally borrow shares, sell them, buy them back and then return the shares to the owner. They may be able to stretch the borrow period out, albeit at some cost to keep borrowing shares or by borrowing new shares from another lender so they can give them to the original lender. At each stage of this when they sell or transfer shares they’re in possession  of the shares being traded.

Naked shorting is when you don’t possess or control the shares you’re trading. You’re skipping the “borrow shares” stage and just promising to deliver them, figuring you’ll obtain them if needed by the time the trade is due.

The option/contract will specify a date the shares need to be delivered to the buyer, if a naked short seller can’t deliver the shares (because the stock has gone 🚀🚀🚀🌖) they’re in breach of contract and are in a world of shit.