Delivery failure close-out

A generally illegal form of short selling in United States equity markets, called "naked shorting," occurs when a seller of stock sells shares that do not exist. This type of short selling has negative consequences that result from the tactic's ability to be used as a tool to artificially inflate an issuer's stock supply, which introduces significant harm to the integrity of the market's natural forces of supply and demand. Newly adopted amendments to the Securities and Exchange Commission's short sale governance regulation, called Regulation SHO, required the mandatory purchasing of shares by certain market participants in order for those participants to close-out previously excused delivery failures, called "grandfathered" failures. This study examines the consequences of this new regulation, in terms of share price and volume, for those few securities that had the most persistent delivery failure problems. Because the regulation mandates the purchase of shares by certain influential market participants, I examine if the stock markets of these securities exhibited unusual volatility which may be indicative of the market maker trying to cover at low cost. Using technical analysis techniques, such as volume surge detection (using moving volume averages), the performance of the target securities will be compared with appropriate benchmark indices for the purpose of detecting unusual activity. Unusual activity may be consistent with my hypothesis that market makers may encourage additional volatility to cause liquidity problems for marginal investors which forces them to sell part or all of their position. As discussed in great detail, the extra marginal shares injected into the market by the action of forced selling by these marginal investors may be used by the market makers to lower their cost of regulation compliance.