by Lawrence C. Melton, Esq., firstname.lastname@example.org
What is market timing? According to Wikipedia, an online encyclopedia, "market timing is an investment strategy in which an investor tries to profit from short-term market cycles by trading into and out of market sectors as they heat up and cool off." (2003 Mutual Fund Scandal, Wikipedia.com). It is basically the buying and selling of mutual funds within a short time period for the purpose of generating profits. This does not sound illegal, but it can be harmful. Market timing harms other investors the mutual fund because of the costs of excess trading to the fund and the dilution of the profits. When market timing activities are not disclosed to the other investors, the regulators will view such activities as fraudulent.
MARKET TIMING IS THE RAPID AND FREQUENT TRADING IN MUTUAL FUNDS THAT CAN BENEFIT SOME INVESTORS AT THE EXPENSE OF OTHERS
Scandals involving deceptive market timing are frequently in the headlines. In July of this year, Hartford Financial Services Group paid $115 million to settle accusations that it allowed deceptive market timing in mutual funds.
(See, Hartford Group Pays $115 Million to Settle a Claim of Illegal Trading, The Associated Press, at nytimes.com, July 24, 2007). http://www.nytimes.com/2007/07/24/business/24mutual.html?
Also in July, the New York Stock Exchange hit Smith Barney with a $50 million fine for charges centered around market timing activities. The NYSE said that the Smith Barney Division of Citigroup Global Markets, Inc. failed to supervise branch offices and financial consultants "who engaged in market timing, including the use of deceptive trading practices to conceal their own identities of their timing customers, as well as their excessive trading."
(NYSE News Release: NYSE Regulation Fines Citigroup Global Markets for Improper Market Timing of Mutual Funds by Brokers, July 24, 2007).http://www.nyse.com/press/1185186378721.html.
The NYSE explained:
"Market timing, while not illegal, can harm mutual fund shareholders because it can dilute the value of their shares, disrupts the management of the fund's investment portfolio, and cause the fund to incur considerable extra costs associated with excessive trading...Market timing may violate federal securities laws and NYSE Rules if deception is used to conceal the nature or identity of a transaction from a fund or to induce a fund to accept trades that it would not accept under its own market timing policies."
(NYSE News Release: NYSE Regulation Fines Citigroup Global Markets for Improper Market Timing of Mutual Funds by Brokers, July 24, 2007). http://www.nyse.com/press/1185186378721.html.