[kcg]

> that extra 40% will fail to deliver, because those shares don't exist.

That's only true if you force all shorts to be covered at once without a chain of trades. That's not how it happens.

Person A covers their short by buying a share from Person B and returning to Person C. Person D then buys that share from Person C and returns to Person E to cover their short. That's 2 short shares covered with a single underlying share and no failure to deliver.

Yes, the SEC does track failure to deliver, but >100% short interest does not mean there is naked shorting nor does it imply there will be failure to deliver.