Updated: 5/7/2004; 1:21:56 PM.
Tahsin Alam's Radio Weblog
        

Friday, April 23, 2004

[15.522 - Security Design] Mutual Fund scandals

  • Late trading - funds get priced once a day, at 4pm using the closing prices. Some funds allowed customers to trade after 4pm using the 4pm prices. Obviously this meant that if there was a major news event after 4pm, the customer can take advantage of any price movements.

    This is clearly illegal.
  • Market timing - same as the idea of momentum trading. Mtm trading in the market can be expensive because of transaction costs. But trading using mutual funds has no txn costs because you can buy/sell at NAV. Mutual funds have rules against frequent buy/sell because the fund then incurs the txn costs of switching in and out of cash and that cost is spread over all the investors.

    However, the funds waived these rules for some of their customers, allowing them to do momentum investing at the expense of the other fund investors.

    This isn't strictly illegal, but is unethical and may be disallowed by some of their own rules.
  • Front running - Fund insiders were trading ahead of their customers after seeing customer orders (e.g. Strong mutual funds).

 


3:09:02 PM    comment []

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