AMC Entertainment Holdings Inc (AMC)

[senordarkness]

Understanding Failure To Deliver

Whenever a trade is made, both parties in the transaction are contractually obligated to transfer either cash or assets before the settlement date. Subsequently, if the transaction is not settled, one side of the transaction has failed to deliver. Failure to deliver can also occur if there is a technical problem in the settlement process carried out by the respective clearinghouse.

Failure to deliver is critical when discussing naked short selling. When naked short selling occurs, an individual agrees to sell a stock that neither they nor their associated broker possess, and the individual has no way to substantiate their access to such shares. The average individual is incapable of doing this kind of trade, but an individual working as a proprietary trader for a trading firm and risking their own capital, may have the ability to carry out such an order. Though it would be considered illegal for them to do so, some such individuals or institutions may believe the company they short will go out of business, and thus in a naked short sale they may be able to make a profit with no accountability.

Subsequently, the pending failure to deliver creates what are called "phantom shares" in the marketplace, which may dilute the price of the underlying stock. In other words, the buyer on the other side of such trades may own shares, on paper, which do not actually exist.