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Late-Day Trading

Late-Day Trading
TradingTrading StrategiesAdvanced Trading Strategies and InstrumentsAdvanced Strategies and Instruments

What Is Late-Day Trading?

Late-day trading is the illegal practice of recording trades executed after hours as having happened prior to a mutual fund's calculation of its daily net asset value (NAV). It is regularly associated with hedge funds setting orders to buy, or recover, mutual fund shares after the current period's (generally daily) NAV is formally calculated, however getting a price, typically more advantageous, in light of the prior time frame's NAV that has previously been reported.

Late-day trading can weaken the value of a mutual fund's shares, hurting long-term investors, and ought not be confused with the completely legal and acceptable practice of after-hours trading.

Seeing Late-Day Trading

Late-day trading is the practice of setting orders to buy or reclaim mutual fund shares after the latest NAV has previously been calculated. These trades empower the investor to lock in the previous day's NAV to their advantage, such as, in the case when a large component of a mutual fund declares earnings after-hours that substantially affects the fund's value the next day.

Illegal late-day trading schemes regularly include hedge funds setting up special associations with mutual funds to buy and sell that mutual fund's shares after hours yet having that trade recorded as being executed prior to when that mutual fund's NAV is calculated (ordinarily 4:00 p.m. Eastern Time). This practice gives hedge funds an opportunity, that isn't accessible to all investors, to possibly profit from events that happen after the market closes. These hedge funds may then share a portion of the illegal gains with mutual funds in exchange for their cooperation.

Late-day trading violates federal securities laws with respect to the price at which mutual fund shares must be bought or reclaimed. The Securities and Exchange Commission (SEC) has concluded that this type of activity defrauds innocent investors in those mutual funds by giving the late-day trader an advantage not accessible to different investors.

Late-Day Trading Regulations

Late-day trading is illegal under several federal securities laws, including Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.

The original late-day trading rules required broker-dealers and investment advisors to check when trades were placed. In the event that mutual funds received orders after working out NAV for the afternoon, they could in any case execute trades after the fact in the event that they were certified as being placed before. The thought was to empower customers to place batch trades, yet the drawback was that mutual funds had not a chance of knowing whether any illegal trades were being placed.

These rules caused many issues in the past. For example, Geek Securities is a broker-dealer and investment advisor that was prosecuted for getting trading guidelines from its customers after 4:00 p.m. Eastern Time and executing those trades as though trading guidelines had been received prior to that time. Telephone conversations were undocumented and the advisor utilized a period stamp machine to conceal late-trading activities.

The SEC rolled out critical improvements to late-day trading rules in 2003 and 2004. The new rules required that mutual fund purchase and redemption orders be received by the fund prior to the time it calculates NAV and increased mutual funds' prospectus revelations related to market timing. These rules moved the responsibility to mutual funds to guarantee enforcement.

Late-Day Trading Fines

The former United Kingdom hedge fund Pentagon Capital Management was fined $98.6 million dollars by the SEC for late-day trading infringement happening between February 2001 and September 2003. The hedge fund placed late-day trades through its broker-dealer, Trautman Wasserman and Co., to illegally profit from data delivered after mutual funds prices were fixed toward the finish of every day.

The hedge fund contended that the trades didn't include fraud or double dealing under federal securities laws and that it couldn't be held obligated as a investment advisor since it didn't communicate straightforwardly with mutual funds. Nonetheless, the courts ruled that underhanded intent is inherent in the act of late trading and that the hedge fund had the last say over the consent of communications even however the broker-dealer was eventually responsible for setting the trades.

Features

  • Late-day trading is the illegal practice of recording trades executed after hours as having happened prior to a mutual fund's calculation of its daily net asset value (NAV).
  • Late-day trading ought not be confused with the completely legal and acceptable practice of after-hours trading.
  • Late-day trading is regularly associated with hedge funds setting orders after the current period's (normally daily) NAV is authoritatively calculated, however getting the price in view of the prior time frame's NAV that has previously been archived.