شکست استراتژیک در بازارهای سهام آمریکا

Sellers of U.S. equities who have not provided shares by the third day after the transaction are said to have “failed-to-deliver” shares. Using a unique data set of the entire cross-section of U.S. equities, we document the pervasiveness of delivery failures and evidence consistent with the hypothesis that market makers strategically fail to deliver shares when borrowing costs are high. We then show that many firms that allow others to fail to deliver to them are themselves responsible for fails-to-deliver in other stocks. Finally, we discuss the implications of these findings for short-sale constraints, short interest, liquidity, and options listings in the context of the recently adopted SEC Regulation SHO.

U.S. equity shares are normally delivered three days after the transaction. Sellers that have not provided shares by that time are said to have “failed-to-deliver”. Inadvertent failures can result from errors or delays caused by investors holding securities in physical rather than book-entry form. Recent work by Evans et al. (2003) introduces the idea of strategic failures-to-deliver, which result when short sellers choose not to deliver shares that would be expensive to borrow. Evans et al. (2003) show that strategic failures by options market makers can reduce short-selling constraints for stocks that have options listed. More generally, strategic fails may extend beyond those of options market makers, thus reducing short-sale constraints for non-option stocks as well. 1 On July 28, 2004, the Securities and Exchange Commission (SEC) adopted Regulation SHO to modify rules for short sales in U.S. equity markets. The adopting release states that one objective is to restrict “naked” short selling, which “generally refers to selling short without having borrowed the securities to make delivery.”2 Toward that objective, Rule 203 of Regulation SHO imposes a number of new borrowing and delivery requirements on short-sellers, including additional requirements for stocks with long-lived delivery failures. To the extent Regulation SHO reduces strategic delivery failures, short selling will become more tightly constrained. This paper has four goals. First, it provides an empirical description of delivery failures in U.S. equity markets prior to Regulation SHO. It then provides evidence consistent with the hypothesis that pre-Regulation SHO, equity and options market makers strategically failed to deliver shares that were expensive or impossible to borrow. Third, it examines various explanations that have been suggested by market participants as to why firms allow others to fail to deliver shares to them. Finally, it discusses the implications of Regulation SHO for short-selling constraints, short interest, liquidity, volatility, and options listings. We find that prior to Regulation SHO, most U.S. equity issues experienced at least a small percentage of failures-to-deliver each day. While the average amount of failed shares is very small as a percentage of shares outstanding (0.15% for listed stocks and 0.91% for unlisted stocks), a substantial fraction of issues (42% of listed stocks and 47% of unlisted stocks) had persistent fails of 5 days or more. About 4% of U.S. equity issues had fails that would have classified them as “threshold” securities with mandatory close-out requirements under Regulation SHO. We argue that long-lived (“persistent”) fails are more likely the result of strategic fails rather than inadvertent delivery delays. Consistent with the hypothesis that pre-Regulation SHO, equity and options market makers strategically failed to deliver shares that were expensive or impossible to borrow, we find some evidence that these long-lived fails were more likely to occur when stocks were expensive to borrow, as proxied by institutional ownership, book-to-market, and market cap. We find some evidence that strategic fails were more likely for stocks with options listings, consistent with the conclusion of Evans et al. (2003) that options market makers strategically fail when stocks are expensive to borrow. We also provide evidence that strategic fails (i.e., naked short sales) likely accounted for a higher percentage of short interest pre-Regulation SHO than previously understood. Market participants have suggested various explanations for why firms that fail to receive shares allow these fails to persist. We document that many of the firms that allow others to fail are themselves responsible for fails-to-deliver in other stocks. We provide empirical evidence consistent with the hypothesis that many firms allow others to fail strategically simply because they are unwilling to earn a reputation for forcing delivery and hope to receive quid pro quo for their own strategic fails. Finally, our findings support comments of equity and options market makers that the inability to strategically fail to deliver shares post-Regulation SHO will reduce liquidity and increase short-sale constraints, particularly for stocks that are expensive to borrow. The findings also suggest that options listings will decrease for stocks that are likely to be expensive to borrow; short interest will decrease; and illiquid, expensive-to-borrow stocks will be more likely to experience temporary short squeezes and increased price volatility. This paper contributes to the academic literature of short sale constraints generally (for introductions to the literature, see Chen et al., 2002; Lamont and Thaler, 2003). In particular, it extends our understanding of short sales and short interest in U.S. equity markets (see Desai et al., 2002; Chen and Singal, 2003; Christophe et al., 2004), stock loan markets (see D’Avolio, 2002; Duffie et al., 2002; Geczy et al., 2002; Jones and Lamont, 2002), and strategic delivery failures (Evans et al., 2003; Fleming and Garbade, 2002). It is the first paper to our knowledge that documents the pervasiveness of delivery failures (i.e., naked short sales) for the entire cross-section of U.S. equities. The paper is organized as follows. Section 2 describes the institutional framework that provided opportunities for strategic delivery failures in the past and the changes in requirements under Regulation SHO. Section 3 provides the empirical description of delivery failures prior to Regulation SHO. Section 4 presents the evidence consistent with strategic delivery failures. Section 5 examines the hypothesis that firms with fails-to-receive do not force delivery because they want to bank future goodwill. Section 6 discusses the implication of Regulation SHO for short-sale constraints, short interest, liquidity, price volatility, and options listings, and offers suggestions for future research.