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.

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