A:

Late-day trading is the illegal buying and selling of mutual funds after regular market hours. This practice is wrongful and therefore distinct from after-hours trading of stocks because of one fundamental reason: in the after-hours market for stocks, the prices of securities fluctuate according to normal market forces such as demand, supply and new information. However, in the late-day trading of mutual funds, the price of the mutual fund (NAV) remains constant after a certain time of day because no one else is allowed to buy and sell it until the next day. This constant price is sometimes referred to as a stale quote because, late in the day, the price is no longer live and will not change.

So, if any material information affecting the fund becomes public after the fund's price is set, an opportunity is created for traders to capitalize on the stale quote price: traders exploiting this opportunity will buy the fund at the closed price knowing that the material information will affect the NAV, which will have changed at the opening of the market. This practice is unfair because it is done at a time when other investors are not participating in buying and selling the fund, so the late-day traders are exclusively trading at prices that are momentarily suspended and not reflecting the changes in the fund's "actual" worth - if other investors were allowed to trade the fund, the price would be affected by the market forces in real time and no one person would have an advantage.

For example, say a mutual fund company lets me late-day trade (illegally). After 3 p.m. today, that mutual fund's price remains constant at $5. Then, at 6 p.m. some positive material information on a company held by the mutual fund is publicized. I would then buy the mutual fund at the closed $5 price because I am guaranteed the price will increase once it is recalculated the next day. The investors who bought the fund before 3 p.m. today did not have this guarantee, and tomorrow's new investors of the fund will have to buy and sell the mutual fund at the new price, which will already be affected by the information. I, on the other hand, cheated because I bought the mutual fund at today's price but with the knowledge of what will happen tomorrow. Late-day trading is like making your bet after you've seen your opponent's cards - you already know what will happen once he or she lays down the hand.

RELATED FAQS
  1. Can you place a stop-loss order on a mutual fund?

    First, remember that a stop-loss order is a limit order placed with a broker to sell a stock when it reaches a certain price. ... Read Answer >>
  2. How do you find out the price of a mutual fund?

    The easiest way to find out the price of a mutual fund is to look at its net asset value (NAV). NAV is the total value of ... Read Answer >>
  3. Why is it that when investors realize returns on a mutual fund, its price tends to ...

    Mutual funds have been in existence since 1924, when the first open-ended mutual fund was created. Since then, the market ... Read Answer >>
  4. How much of a company's stock can a mutual fund own?

    There is no written rule that stipulates how much of a company a mutual fund can own. Instead, there are two major factors ... Read Answer >>
  5. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  6. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ... Read Answer >>
Related Articles
  1. Mutual Funds & ETFs

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
  2. Mutual Funds & ETFs

    Mutual Funds

    Mutual Funds
  3. Mutual Funds & ETFs

    How Mutual Funds Affect Stock Prices

    Find out how mutual fund trading activity -- and that of other institutional investors -- impacts stock prices, including both short and long-term effects.
  4. Investing

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  5. Mutual Funds & ETFs

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  6. Mutual Funds & ETFs

    The Advantages Of Mutual Funds

    Learn how to get diversification, liquidity and professional management at an affordable price.
  7. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Mutual Funds

    What they are: A professionally managed pool of stocks, bonds and/or other instruments that is divided into shares and sold to investors. Pros: Diversification; liquidity; simplicity; ...
  8. Mutual Funds & ETFs

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  9. Investing Basics

    4 Mistakes to Avoid When Choosing Mutual Funds to Invest in

    Mutual funds are a great way to build wealth but not all of them are the same. Investors have to be mindful of fees, turnover, redundancy and performance.
  10. Mutual Funds & ETFs

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
RELATED TERMS
  1. Late-Day Trading

    An unethical (if not illegal) practice of a hedge fund purchasing ...
  2. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  3. Forward Pricing

    A Securities and Exchange Commission regulation that requires ...
  4. Mutual Fund Timing

    A legal, but frowned-upon practice, whereby traders attempt to ...
  5. After-Hours Market Close

    The last transaction and final price of a security that is traded ...
  6. Exchange-Traded Mutual Funds

    Investopedia explains the definition of exchange-traded mutual ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center