Academic research into delivery failures in the US cash equity and options market support the idea that prior to Reg SHO, market makers deliberately failed to deliver securities in a strategic way.
Leslie Boni, an economist at the University of New Mexico, wrote a paper entitled "Strategic delivery failures in US equity markets" while a visiting financial economist at the SEC last autumn. Boni found that most US equity issues experience at least a small percentage of failures-to-deliver every day. On average failed shares account for just 0.15% of the outstanding shares of listed companies and 0.91% of unlisted shares. Some 42% of listed stock issues and 47% of unlisted stock issues, have persistent fails of five days or more.
Any clearing member with a failure to receive position has the option of asking the NSCC to force a "buy in" on its position. Buy-ins, however are rarely requested. In a 2003 paper, Wharton and University of North Carolina economists found that options market makers with cash equity failures-to-deliver were only bought-in in 86 of the 69,063 transactions examine, or just 0.12% of cases.
Academics argue that persistent fails are primarily due to market makers strategically failing to deliver because the data show that the likelihood of persistent fails in a stock increases with its borrowing cost. Persistent fails, they note, are also more likely when a stock is illiquid. The likelihood of persistent fails in a security also increases if it has options listed because option market makers can hold short stock positions for longer than equity market makers.