A bad delivery is a delivery of a stock that cannot be legally transferred to the buyer. Often, the reasons are benign, and it may be possible to rectify the situation so the stock can be successfully transferred. In cases where fraudulent activities are involved, as when someone sells a stock without actually having the title, the situation may be reported to regulatory authorities for investigation and potential penalties such as fines or removal of trading licenses.
Usually, a bad delivery involves incomplete paperwork or paperwork lacking endorsements. This can happen for a variety of reasons, especially when trading is heavy and people are trying to keep numerous securities and their paperwork straight. When securities rapidly change hands within a short period of time, sometimes the paperwork can lag behind and create a bad delivery; a person who buys and turns around to sell might not yet have fully endorsed paperwork, for instance.
With a bad delivery, the person responsible for registering the new owner will send a notice informing the buyer that the transfer could not be completed and providing information about why. The buyer can supply the necessary paperwork to complete the transfer, or talk to the seller about the problem and see if it can be resolved. If a bad delivery is clearly the result of fraud, it must be reported, and as much information as possible about the sale transaction and the parties involved should be provided.
Bad deliveries can happen for many reasons. People working with a representative usually leave the work of handling transfers to the representative, rather than dealing with it directly. They may not be aware of bad deliveries until after the fact, when the matter has been resolved and the transfer has been completed. People who handle their own transactions should make sure to keep detailed paperwork, ideally in duplicate, so they can transfer stocks with a minimal fuss when they are sold or traded. It is also advisable to look paperwork over before submitting it to register a transfer, checking for obvious issues like failing to sign on the endorsement line.
The opposite is a good delivery, where stocks are supplied for transfer with all their documentation in order and the registration can be efficiently changed to reflect the new owner. The ratio of good to bad deliveries depends on the market, as well as financial activity at any given time, with most traders working hard to avoid bad deliveries.