ETF Trade Settlement—Fails to Deliver

Trade fails were a topic in the ETF news several years ago. Here are some details about how fails occur and what they mean in the ETF market.

When two entities engage in a transaction—that is, party A is buying what party B is selling—party A pays a mutually agreed price for party B’s security. There is a risk, however, that party B will fail to deliver the security in the mutually agreed-upon time frame, thus creating settlement failure. The settlement, however, may occur a day or two later, still at the original agreed-upon price. This should be contrasted to a “trade failure,” in which, regardless of extra time allotted, the trade will never settle. In both cases, whether settlement failure or trade failure, ...

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