How DTCC Makes Fails to Deliver Disappear

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I came across a fascinating article this morning in an obscure journal for compliance officers. It may explain why fails to deliver in some stocks suddenly go away:

A classic example of the fox guarding the henhouse, the DTCC self-describes itself as providing “settlement services” for the financial markets, but the number of FTDs is so systemic the DTCC has created what it calls its “obligation warehouse,” where FTDs essentially go to die.

Fails to deliver are trades that never settle.

In meme stocks, they commonly shoot up only to disappear at the end of SEC reporting periods. I’ve observed this pattern numerous times in shares of AMC Entertainment Holdings, Inc.

These fails to deliver may be caused by naked short selling:

Naked short selling is among the most fraudulent of schemes. It is the illegal practice of selling shares a short seller has neither borrowed, owns, nor intends to buy, resulting in a “failure to deliver” (FTD) amounting to trillions of dollars in FTDs, as some research indicates.

“It’s like xeroxing your car title 100 times and selling that car to 100 people, but you only have one car,” [attorney Wes] Christian said. “That’s what Wall Street is doing.”

Why does the Depository Trust & Clearing Corporation (DTCC) sweep the fails to deliver under the rug? Perhaps because of how it’s funded.

The DTCC makes money by clearing trades. That means its customers are the hedge funds and mutual funds that do the bulk of the trading.

If calling attention to failed trades from some of your biggest customers might imperil your revenue stream, you shut your mouth.

Furthermore, DTCC is owned by its users. And hedge funds are among its largest users.

I’d like to see more investigation of this “obligation warehouse” issue, along with reforms at DTCC to make it more independent.

Until then, markets will continue to be a hedge fund playground.

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More on markets:

FBI Raids Short Sellers

Huge Payouts for Hedge Fund Informants as SEC Vice Tightens

Melvin Capital Under Federal Investigation

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