BROWSE

Late-Day Trading

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]
… a relatively greater contribution from large banks involved in clearing security-related flows, while the late-day peak can … the federal funds market to suggest that information on the value of assets available to some traders but not … “Periodic Market Closure and Trading Volume: A …

The intraday variability of soybean futures prices: Information and trading effectsThe intraday variability of soybean futures prices: Information and trading effects
ageconsearch.umn.edu [PDF]
… a relatively greater contribution from large banks involved in clearing security-related flows, while the late-day peak can … the federal funds market to suggest that information on the value of assets available to some traders but not … “Periodic Market Closure and Trading Volume: A …

Overreaction and trading strategies in European iSharesOverreaction and trading strategies in European iShares
jai.pm-research.com [PDF]
… a relatively greater contribution from large banks involved in clearing security-related flows, while the late-day peak can … the federal funds market to suggest that information on the value of assets available to some traders but not … “Periodic Market Closure and Trading Volume: A …

The mutual find scandal: A day trading simulationThe mutual find scandal: A day trading simulation
scholarworks.uni.edu [PDF]
… a relatively greater contribution from large banks involved in clearing security-related flows, while the late-day peak can … the federal funds market to suggest that information on the value of assets available to some traders but not … “Periodic Market Closure and Trading Volume: A …

Do leveraged ETFs really amplify late-day returns and volatility?Do leveraged ETFs really amplify late-day returns and volatility?
www.sciencedirect.com [PDF]
… a relatively greater contribution from large banks involved in clearing security-related flows, while the late-day peak can … the federal funds market to suggest that information on the value of assets available to some traders but not … “Periodic Market Closure and Trading Volume: A …

Time of Day and Market ImpactTime of Day and Market Impact
jot.pm-research.com [PDF]
… a relatively greater contribution from large banks involved in clearing security-related flows, while the late-day peak can … the federal funds market to suggest that information on the value of assets available to some traders but not … “Periodic Market Closure and Trading Volume: A …

The causal impact of media in financial marketsThe causal impact of media in financial markets
onlinelibrary.wiley.com [PDF]
… a relatively greater contribution from large banks involved in clearing security-related flows, while the late-day peak can … the federal funds market to suggest that information on the value of assets available to some traders but not … “Periodic Market Closure and Trading Volume: A …

Secure financial transaction gateway and vaultSecure financial transaction gateway and vault
patents.google.com [PDF]
… a relatively greater contribution from large banks involved in clearing security-related flows, while the late-day peak can … the federal funds market to suggest that information on the value of assets available to some traders but not … “Periodic Market Closure and Trading Volume: A …

Settlement Liquidity and Monetary Policy Implementation—Lessons from the Financial CrisisSettlement Liquidity and Monetary Policy Implementation—Lessons from the Financial Crisis
papers.ssrn.com [PDF]
… a relatively greater contribution from large banks involved in clearing security-related flows, while the late-day peak can … the federal funds market to suggest that information on the value of assets available to some traders but not … “Periodic Market Closure and Trading Volume: A …



Q&A About Late-Day Trading


How does late trading differ from other forms of insider information?

It differs because it involves a financial transaction and not just an informational one.

Is this form of trading illegal?

Yes, it is illegal under SEC rules.

What distinguishes late trading from official after-hours trading?

After-hours trading involves placing orders for mutual fund shares after the close of the stock market, but still getting that day's closing price rather than next day's opening price. The price of mutual funds is usually set only once per day so intraday prices are not applicable.

Who benefits from late trading?

Hedge funds and other favored investors who were able to obtain that day's price notwithstanding their orders were received after hours.

What are some examples of material information?

Material information includes earnings reports or other news that can affect stock prices.

What is the definition of late trading?

Late trading is when trades are executed after the market closes, while charging the share price of when the market was still open.

What is late-day trading?

Late-day trading is an unethical (if not illegal) practice of a hedge fund purchasing and then selling securities after the close of a trading day, but making the transactions appear as though they occurred before the market close.

Why would anyone want to engage in this type of activity?

The short answer is greed; however, there are other reasons why someone might engage in this type of activity including insider knowledge about future events that will impact stocks or simply taking advantage of others' ignorance about how markets operate by exploiting loopholes in order to make money without actually doing anything productive for society. It's important to note that many people engaged in this type of activity probably don't even realize they're doing something wrong since most people don't understand how markets work anyway; therefore, it's easy for unscrupulous individuals to take advantage of others' ignorance about how markets function while simultaneously convincing themselves they're doing nothing wrong because "everyone else does it."

How does late-day trading work?

Hedge funds involved in late-day trading work out a special relationship with a mutual fund that allows them to buy and sell shares after hours but record the trade at 4pm. This practice gives them 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 actual asset value which won't materialize until the market opens again - at which time late-day traders sell their shares at a profit.

Why do investors use mutual funds?

Mutual funds offer diversification and professional management for those who don't have time or expertise to manage their own investments.