Two further samples were drawn for special analysis. They are Samples I and J.

Sample I N = 156

Sample J N = 159

It was desired to compare the "direct" and
"daily net balance" stock clearing systems for
their effectiveness in reducing fails. Since
both methods of clearing are operating for
over-the-counter securities within New York
City, samples of over-the-counter trades
which originated from and were settled by
parties within New York City were drawn
separately from Sample B and Sample C.
Sample I was drawn from Sample B, and
Sample J was drawn from Sample C.

The statistical characteristics of the trades and settlements in the several samples of buys are presented in Table B-1. Estimates of the average number of shares and number of dollars in trades and settlements are shown in Table B-2.

*Percentages are shown to the nearest 1%. Thus the sums of percentages, which should always equal exactly 100%, will vary slightly around 100%.

THE MULTIPLE CAUSES OF FAILS

IN STOCK CLEARING

IN THE UNITED STATES

WITH PARTICULAR EMPHASIS IN OVER-THE-COUNTER SECURITIES

VOLUME II

A REPORT PREPARED UNDER THE SPONSORSHIP OF

THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

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PREFACE

From time to time it is possible to work on an important, publicly visible problem of an industry and to work with and among competitors in that industry and enjoy general support for a dispassionate careful approach to understanding the problem, having the freedom to describe the problem as it is. We have enjoyed that kind of general support and freedom in this work on a diagnosis of the performance of the stock clearing system in the United States. Our work has focused upon the stock clearing of over-the-counter securities, but it has examined and learned from stock clearing experience in the listed securities as well. We appreciate the work climate, as well as the sponsorship, provided by the National Association of Securities Dealers, Inc. The work was made possible by the cooperation and help from many organizations and firms. Appreciation for specific kinds of help is noted in Appendix A of this report.

A diagnosis of the problem of fails-to-deliver and fails-to-receive in stock clearing, and the development of guidelines by which to assess the likely usefulness of proposed remedies, are reported here. Our work with the National Association of Securities Dealers, Inc., has continued into the formulation of short-term, intermediate range, and longer range remedies for the problems, but those potential remedies are not discussed in this report.

Early in the work it was clear that many potential influences operated to affect the performance of the stock clearing system in the United States. Our approach to the diagnostic work recognized these many potential influences. I was aided in particular by colleagues at Arthur D. Little, Inc., such as Thorpe E. Wright whose knowledge of the securities industry and whose questions were of constant help. David M. Boodman and Irving H. Plotkin contributed important concepts to the work, as did Irwin Miller. Johannes H. J. Geurts estimated the size of the fails problem from our data and wrote Appendix D. Hubert F. Zieseniss and David F. Beaber assisted in the development of methods for observing and recording data about trades, broker/dealers, and securities and visited the broker/ dealers to observe the data for our Survey 1. David F. Beaber and Catherine E. Walsh did the complex, computer-aided data assembly, editing, and statistical analysis. Valuable support in finding information and coordinating its collection was given by staff at the National Association of Securities Dealers, Inc., particularly Lee C. Monett and Edward R. Gilleran. The usefulness of our work depends upon the conceptual arts of formulating the problem and the approach to the problem, and upon the practical arts of assembling the data necessary to test the concepts. The work has been the product of much joint effort.