Understanding the Risks of Late-Day Trading in Mutual Funds

Late-day trading has been a problem with mutual funds over the years. Besides being illegal, it hurts the other investors involved in mutual funds. Here are the basics of late-day trading and how it can affect you negatively.

Late-Day Training

In order to understand how this could negatively affect you as a trader, you first need to understand how it works. Late-day trading is when someone places an order for a mutual fund after the trading day has closed and gets credit for it on the same day. When you buy a share of a mutual fund, regardless of what time you place your order, the transaction should go through at the end of the trading day at 4:00 p.m. If you order after this time, it should go on the next trading day.

If a trader is allowed to wait until after 4:00 p.m. to purchase shares, they can take advantage of the market. There are many indicators that can tell investors where the market will open the following day. Therefore, they can get a jump on the market and get guaranteed profits by trading late.

How This Affects You

With a mutual fund, the transaction costs are passed onto all of the investors. Therefore, you will be subsidizing these trades while large institutional investors make more money.