A failed trade occurs when a seller does not deliver the agreed-upon items, stocks, or purchased goods. Failures also occur when the buyer does not pay for the agreed items by the settlement date and are not limited to one industry or market.
Failed Trade Details
A failed trade can happen in multiple ways and many different industries. If a stockbroker does not deliver or receive stocks by the specified settlement time, then the trade has failed.
Technical analysts also have fail trades, but this generally refers to when the price does not change in the anticipated direction. Sometimes these events are called failed breaks or false breakouts instead of failed trades.
Depending on the market, firms have 1-3 days to complete the trade once they settle. Stocks generally settle in about two days after the transaction. Corporate bonds also tend to settle in about two days. Options settle in one day.
Example of Failed Trade
An example of a short fail is when a stockbroker agrees to deliver stocks but, for some reason, does not have the stocks ready when the settlement date comes. Because the broker did not deliver the stocks on time, the sale does not go through, and it becomes a short fail.
A long fail happens when the stockbroker has everything ready to transfer, but the buyer does not produce the money. This can occur if the money they use the money set aside for the trade for something else, and no other funds are available to complete the trade.
ABC Bank owes $50,000 to XYZ Bank and is supposed to have it paid back by the end of the year. XYZ Banks owes $70,000 to LMNO Bank and is also supposed to pay it back by the end of the year. However, ABC fails to pay back the full loan before the end of the year. This causes XYZ Bank to fall short on the loan it owes LMNO Bank. Because neither bank paid back their loans in full before the end of the year, ABC Bank and XYZ Bank are at high risk of becoming unstable and possibly going out of business.
Types of Failed Trades
There are two different types of failed trades in the stock exchange. A short fail is when a seller does not deliver the agreed-upon stocks. A long fail is when the buyer fails to pay for the stocks.
Banks have failed trades when they are unable to pay their debt to other banks. The first unpaid debt can lead to other banks missing payments and becoming unstable.
Another reason for failed trades in any industry is incomplete instructions. This could mean instructions that are contradicting, late, or just plain missing. These things can happen when the buyer and seller disagree on what is to be delivered.