unlike stocks, set a price once each trading day, at 4 p.m. Eastern
time. So, if you buy a fund after 4 p.m., you buy at the next
day's price; if you place an order before 4 p.m., you buy at that
Placing an order for a favored investor after 4 p.m. for that
day's price is illegal since it enables only those preferred investors
to profit from inside and/or late-breaking information when fund
managers know what the closing price is at the end of the market
day. Another practice under scrutiny is when mutual fund officials
permit late trading in order to charge higher fees or gain some
other benefit. Such corruption makes it all the more difficult
for authorities to catch this illegal practice.
timing (short-term trading): Helping favored investors make
quick in-and-out trades to exploit market fluctuations is a strategy
-- not strictly illegal, though certainly risky -- where investors
attempt to buy low and sell high by buying when the market is
turning bearish and selling at the end of a bull market.
In many ways,
this practice is similar to day trading in stocks to make a quick
profit. But, with mutual funds, some investors, or fund managers,
often have better information than the average investor and can
get in and out of these funds on "advantageous terms."
But any gains made for favored investors come at the expense of
all other investors. Mutual fund firms generally discourage market
timing since it adds costs and dilutes overall return on an investment.
Most mutual funds are (technically) closed to new purchases after
4 p.m. Eastern time. However, other international stock markets
may still be open. So, a market fund manager can buy stock at
yesterday's price knowing that the next day, when the fund incorporates
that new information, the manager can sell at a higher price.
fund manager then collected interest on the loan as a management
fee. In return, the insiders got the loans, a computer terminal
to trade directly with the fund, even an updated list of companies
in the fund to take better advantage of the stale prices, at the
expense of the fund's other shareholders," summarized NewsHour
correspondent Paul Solman on Nov. 3, 2003.
also known as "time zone arbitrage," isn't illegal;
still, it effectively swipes money from long-term investors since
it benefits only insider, or preferred, shareholders, and not
every fund investor.
By Elizabeth Harper, Online NewsHour