These market timing or stale price
trades inflict harm on existing investors in a fund, who are normally small investors who simply buy and hold a fund for the long term.
CHICAGO, May 25 /PRNewswire/ -- A used vehicle with a stale price
likely will not sell quite as well, a cars.
From this set of bonds, only those bonds with a sufficient level of liquidity will be included: they must trade with enough frequency to prevent stale price
quotations and a reasonable two-way market must exist.
However, in "crumbling quote" situations, D-Peg orders stay pegged to the primary, which helps the order avoid adverse selection, defined as trading at soon-to-be stale prices
That means that the fund's current net asset value relies on stale prices
for 24 stocks out of a total of 28.
Other investors were allowed to conduct market timing trades to take advantage of stale prices
used by funds to calculate their net asset values at funds with stated policies against such trading.
Someone who can buy or sell to exploit the gap between stale prices
and real prices - a "market timer" - can make a killing.
As a result any nontrading bias in the basis due to stale prices
should be small.
Market timing refers to the short-term trading of fund shares to take advantage of stale prices
for foreign or illiquid securities held by the fund, or to utilize the fund's liquidity in a way that is harmful to other shareholders.
Commenting on the importance of this topic, Will Goetzmann, Professor of Finance at Yale School of Management stated, "Multiple studies have shown how the average investor may be hurt by speculators seeking to exploit the stale prices
of mutual funds.
Additional findings include: * Two out of five respondents wait to review stale prices
after five days of no pricing changes, while only 18 percent perform an analysis on stale pricing every day.