Market timing
is a short-term trading strategy that some investors use to take
advantage of small changes in securities prices. While market
timing is legal, a high volume of short-term trades in a mutual
fund portfolio can raise portfolio expenses, penalizing a fund's
long-term investors. In the past, market timing has especially
affected funds holding international stocks and bonds, in which
arbitrageurs
would attempt to profit from out-of-date securities prices that
some funds used to calculate their
net asset values (NAVs).
Mutual funds calculate their NAVs at 4 PM — the end
of the U.S. trading day — based on the prices at which
the underlying securities most recently traded. But these prices
may not be accurate because they don't reflect activity in
overseas markets that open and close at different times all
over the world.
A few funds have allowed some investors to further profit from
stale prices by allowing them to trade in and out of funds after
markets close — an illegal practice called late trading.
