What is ‘Late-Day Trading’
An unethical (if not illegal) practice of a hedge fund purchasing and then selling securities (usually shares of a mutual fund) after the close of a trading day, but making the transactions appear as though they occurred before the market close.
Explaining ‘Late-Day Trading’
For mutual funds, net asset value is (NAV) determined at 4pm EST (the market close), and it does not change until the market opens again. Hedge funds involved in late-day trading work out a special relationship with a mutual fund that, usually for higher-than-average fees/commissions, allows the hedge fund to buy and sell mutual fund shares after hours but record the trade at 4pm. This practice gives the hedge fund an opportunity to profit when material information affecting the fund is released after the market close. In such cases, because it is stagnant, the NAV may not represent the actual asset value, which won’t materialize until the market opens again – at which time late-day traders sell their shares at a profit.
Further Reading
- Intraday trading in the overnight federal funds market – papers.ssrn.com [PDF]
- The intraday variability of soybean futures prices: Information and trading effects – ageconsearch.umn.edu [PDF]
- Overreaction and trading strategies in European iShares – jai.pm-research.com [PDF]
- The mutual find scandal: A day trading simulation – scholarworks.uni.edu [PDF]
- Do leveraged ETFs really amplify late-day returns and volatility? – www.sciencedirect.com [PDF]
- Time of Day and Market Impact – jot.pm-research.com [PDF]
- The causal impact of media in financial markets – onlinelibrary.wiley.com [PDF]
- Secure financial transaction gateway and vault – patents.google.com [PDF]
- Settlement Liquidity and Monetary Policy Implementation—Lessons from the Financial Crisis – papers.ssrn.com [PDF]
