i've been hearing news -CNN/Newsweek, etc. about The NY Attorney General (Spitzer?) and Canary Investments with Strong mutual funds fraud. i have to confess, I'm confused. In an article about Spitzer and Canary, Spitzer says that Canary Investments has to return $40 million because they were making trades in mutual funds after the market close, doing what Spitzer called 'betting on the horse the day after the race'. Fine. i get that. What i don;t get is the claim of fraud in what Newsweek called market timing.

Why are mutual fund managers being charged with fraud for this? Is market timing illegal? i see that Sy HArding, Mark Young and just this morning a newletter posted by Alan Newman talks about the seasonal cycle. IF THIS IS ILLEGAL - How can money managers do it, but mutual fund managers can't? and i guess the real question is- what the hell is market timing anyway??Really. What is going on here?

nicci

Some of the mutual funds were allowing large, institutional accounts to trade the fund "after" the official trading cutoff. Why is this wrong? Example: Cisco announces earnings after the close. They're unreal good and the AH (after hours)tech market is screaming. A big hedge fund buys at 4:30 eastern at the 4:00 NAV closing price. (Much lower than where the NASDAQ will open tomorrow morning.) This is a blatantly unfair trading advantage and apparently illegal as well.

ufo

///because they were making trades in mutual funds after the market close,///

think you answerd your own question.

nicci, "market timing" is just a descriptive phrasing of the after hours trading I outline above. Market timing in the sense of when to buy/sell is not the same thing.

ufo

There are two (count'em 2) separate claims.
#1 is this obviously illegal trading after the close. As stated before, I get THAT. (They called it "backward pricing")
#2 is the market timing claim. That's where I'm stuck. MARKET TIMING - illegal or not? If it is- why are some of the money managers on this board still doing it?

OK- i guess the real question is the one i phrased int he first place.

What is "Market Timing" ?

They're calling after hours trading "market timing" erroneously. What you and I might call "maket timers" are just people who use EW or indicators or sentiment to "time" market entries and exits. I don't know why they chose "market timing" to describe this after hours practice, but they did. Don't get hung up in semantics. Newsweek obviously isn't.

ufo

When a fund's prospectus states that they do not have high turnover, and are long term oriented, they expect people to be "buy and hold" investors. Typically, that fund will bar managers from frequent trading of thier own accounts in the fund, and "traders" that go in and out may become subject to additional fees or simply not accept thier money.

Those people that are being cited for illegal market timing are those managers that have traded frequently in the funds they manage and were not subject to the same fees and rules that were imposed on individual investors. Furthermore, in some cases the policy of the fund was not to allow those managers to do this, but they looked the other way.

The difference between what the fund managers did...and the prospectus is what made it illegal.