Fails to Deliver DeMystified

"Fails to deliver" (FTDs) refer to situations where a party does not deliver a security by the settlement date. In the context of a potential short squeeze, a high level of FTDs can be a significant indicator.

Here's what FTDs can tell you about short squeeze potential:

 

Understanding Fails to Deliver (FTDs)

1. Definition:

   • Fails to Deliver: Occurs when one party in a trade (usually a short seller) does not deliver the securities they sold by the settlement date, typically due to borrowing issues or logistical delays.

2. Causes:

   • Short Selling: A high volume of short selling can lead to FTDs if the short sellers cannot borrow enough shares to settle their trades.
   • Settlement Issues: Operational or logistical issues in the trading process.
   • Market Manipulation: In some cases, deliberate attempts to create artificial price movements.

 

FTDs and Short Squeeze Potential

 

 

1. Indicates High Short Interest:

   • A high level of FTDs often correlates with high short interest. Many traders may have shorted the stock, leading to increased borrowing demand and difficulty in locating shares to borrow and deliver.

2. Supply-Demand Imbalance:

   • When there are significant FTDs, it suggests a supply-demand imbalance. The difficulty in delivering shares indicates that there may be more demand to borrow the stock than there is supply, a condition that can precipitate a short squeeze.

3. Market Pressure:

   • Persistent FTDs can create upward pressure on the stock price. Short sellers may be forced to buy back shares at higher prices to close their positions and cover their FTDs, driving the price up further and creating a feedback loop known as a short squeeze.

4. Regulatory Attention:

   • High levels of FTDs can attract regulatory scrutiny. Regulators might impose restrictions on short selling or investigate potential market manipulation, adding to the pressure on short sellers.

 

 

Key Metrics and Indicators

 

1. Days to Cover:

   • Measures the number of days it would take for short sellers to cover their positions based on the average daily trading volume. A high number indicates potential difficulty in covering shorts quickly.

2. Short Interest Ratio:

   • The ratio of shorted shares to the total float. A high short interest ratio indicates a large proportion of shares are being shorted, which can increase the potential for a short squeeze.

3. FTD Reports:

   • Regularly monitoring FTD reports can provide insights into stocks with high FTD levels. These reports are often available from regulatory bodies like the SEC.

 

Real-World Examples

 

1. GameStop (GME):

   • The 2021 short squeeze in GameStop was partly driven by high FTDs, combined with coordinated buying efforts from retail investors and other factors like options trading.

2. AMC Entertainment (AMC):

   • Similar to GameStop, AMC experienced significant short interest and FTDs, leading to substantial price volatility and short squeeze dynamics.

 

Risks and Considerations

 

1. Market Volatility:

   • Stocks with high FTDs can be extremely volatile, leading to significant price swings that can result in substantial losses for both short sellers and long investors.

2. Regulatory Changes:

   • Sudden regulatory changes can impact the dynamics of short selling and FTDs, potentially altering the short squeeze potential.

3. Market Sentiment:

   • Investor sentiment and market psychology play crucial roles in short squeezes. Unexpected news or changes in market sentiment can rapidly change the trading environment.

 

 

High levels of FTDs can be a strong indicator of short squeeze potential, signaling high short interest and supply-demand imbalances.

However, investing in such scenarios carries significant risks due to volatility and potential regulatory actions.

Thorough research and a clear understanding of the market conditions are essential before making investment decisions based on FTD data.

 

 

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