Regulatory reform and trade settlement failures in USA equity markets: Does regulatory reform matter?

Stock trades pass through several phases before completion, from placing an order via a brokerage firm, to the delivery of securities versus payment. This paper sheds light on the later phases of the trading process for equity securities in USA capital markets. In a continuous effort to improve the settlement process, the National Securities Clearing Corporation makes several substantial changes every year to the rules and regulations that govern the settlement process. This paper investigates the impact of rule changes on the efficiency of settlement, based on the volume of shares that failed to deliver from 2004 to 2017. The rule changes are modeled with a dummy variable in a vector autoregressive (VAR) model, where the quantity of fails and market returns are both included in the VAR model as endogenous variables. The results show a considerable impact of rule and regulation changes on the quantity of shares failed to be delivered in time for settlement; especially, the regulations implemented to improve short selling had a statistically significant impact on reducing settlement failures and improving market returns. The finding of this study provides important information for regulators and investors with regard to the settlement process and investment strategies.