Strategic delivery failures in US equity markets

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. (c) 2005 Elsevier B.V. All rights reserved.