What is a "sell-out" in the context of securities trading?

In the context of securities trading, a "sell-out" refers to a situation where the buyer of a security fails to meet the obligations of the contract—specifically, they do not fulfill the purchase by the designated settlement date. In such cases, the broker-dealer is left with the responsibility to mitigate the situation, which involves selling the security in the market to recover their position. This action protects the firm from potential losses due to the buyer's default.

The process is initiated to ensure that the broker-dealer does not face an extended obligation to hold the security without receiving payment. Thus, when they perform a sell-out, they essentially execute a sale of the security to another buyer, thereby closing their position and allowing for the handling of any financial implications arising from the initial failure to purchase by the original buyer. This mechanism is important in maintaining order and efficiency within the trading environment, ensuring that transactions are finalized according to the established timelines in the market.