For every naked short there is a buyer.
What happens on a fail to deliver?
The buyer is expecting shares.
I am only familiar with a central share registry, and netting of all positions.
I don't understand why the buyer doesn't know that they don't have the shares they paid for.
Perhaps they settle after options expiry when call options are not exercised?
Technically the fails do not appear on the ultimate buyer’s account.
You, as a customer are credited, although the shares do not yet truly exist.
The ultimate ‘seller’ in thus case has no shares to sell, hence fails to deliver. You never see that because at DTC they simply make a book entry (logically like a overdraft) showing the seller with a negative position.
Since these are securities, not money, the seller is naked and us exposed to loss or gain when, or if, they ever settle.
Again, a retail or institutional buyer never sees this.
if there is a share split this is all quite inconvenient because the seller is liable for number of shares, not monetary value.
Yes, as I showed above the DTCC/DTC do operate a continuous settlement system, but has giant sized loopholes, disclosed in arcane and very fine print, understood by few.
Options and forwards as well as other derivatives are quite different. Bluntly those are designed to mask costs to buyer of these instruments while giving gigantic profits to originators.
The regulations governing these protect only originators. Retail and even institutions usually lose by using these instruments. The legitimate use for hedging sometimes comes with better pricing, but that is almost exclusively for insiders.
Enthusiasts, including some who know better, think they can ‘beat the house’ . They cannot. Using these is quite similar to casino gambling. Some win, for a long time. Eventually the house wins. The only winners have the ability to manipulate the system.
Long ago most of this was illegal. During the last few decades the US has systematically dismantled all investor protections while keeping protective vocabulary.