The Impact of Late Trading Mutual Funds

The process of trading mutual funds is a relatively simple one that many investors get involved in. The act of late trading in the mutual fund market complicates things and is illegal. Here are a few things to consider about late trading and the impact it has on the marketplace.

What is Late Trading?

In order to understand the impact that late trading has on the mutual fund market, you need understand the basics of late trading itself. All mutual funds are bought and sold the same way. At the end of the trading day at 4:00 Eastern time the net asset value of the mutual funds is determined. This is calculated based upon a number of different events that occurred throughout the trading day. Investors that place an order for shares in a mutual fund will have the order processed once the net asset value is calculated at 4:00. Therefore, you do not know the actual price of the shares until after you placed the order. You can guess based on the previous day's price, but you will not know the exact price.

Late trading is the process of allowing trades to go through after 4:00 p.m. for shares of mutual funds. If an investor decides to purchase shares of a mutual fund after 4:00 p.m. than their order is supposed to go through at 4:00 p.m. the following day. Many mutual fund companies were allowing orders to go through after the deadline for some time. While this might not seem like a big deal, it can drastically affect several aspects of the market.

Impact of Late Trading

If you are allowed to place your orders after the deadline, this puts you at a significant advantage over the rest of the market place. After the market closes, investors can look at a number of different factors, such as the futures market or currencies market to determine what tomorrow's price will be. Therefore, this allows investors to somewhat take advantage of the market place.

Most of the time, this was happening with large institutional investors. These larger investors were making more profit because they were allowed to late trade. With a mutual fund, every investor in the fund is responsible for the transaction costs involved. This means that individual investors were hurt by these transactions and actually helped subsidize these illegal trades for large institutional investors. This creates a scenario where the "little guy" is losing money and the more prominent players in the industry were locking in early profits for the next day's trading.

Lasting Effects

Prior to this incident, the mutual fund industry was thought of as a great option for individual investors. It allowed smaller investors to get involved and build a diversified portfolio without a lot of trading capital. However, this late trading scandal has left a lasting impact on the market and made individual investors more skeptical about getting involved.

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