Opinion ID: 222193
Heading Depth: 2
Heading Rank: 1

Heading: Market Timing

Text: Market timing refers, inter alia, to buying and selling mutual fund shares in a manner designed to exploit short-term pricing inefficiencies. See Exemptive Rule Amendments of 2004: The Independent Chair Condition (Apr.2005) (Staff Report), available at http://www.sec.gov/news/studies/indchair.pdf. A mutual fund sells and redeems its shares based on the fund's net asset value (NAV) for that day, which is usually calculated at the close of the U.S. markets at 4:00 P.M. Eastern Time. Prior to 4:00 P.M., market timers either buy or redeem a fund's shares if they believe that the fund's last NAV is stale, i.e., that it lags behind the current value of a fund's portfolio of securities as priced earlier in the day. The market timers can then reverse the transaction at the start of the next day and make a quick profit with relatively little risk. Mutual funds like GGGF that invest in overseas securities are especially vulnerable to a kind of market timing known as time zone arbitrage, whereby market timers take advantage of the fact that the foreign markets on which such funds' portfolios of securities trade have already closed (thereby setting the closing prices for the underlying securities) before the close of U.S. markets. [2] Market timers profit from purchasing or redeeming fund shares based on events occurring after foreign market closing prices are established, but before the events have been reflected in the fund's NAV. In order to turn a quick profit, market timers then reverse their positions by either redeeming or purchasing the fund's shares the next day when the events are reflected in the NAV. Although market timing is not itself illegal, market timing can harm long-term investors in the fund by rais[ing] transaction costs for a fund, disrupt[ing] the fund's stated portfolio management strategy, requir[ing] a fund to maintain an elevated cash position [to satisfy redemption requests], ... result[ing] in lost opportunity costs and forced liquidations ... unwanted taxable capital gains for fund shareholders and [a reduction of] the fund's long term performance. Id. at 32-33. See also Janus Capital Grp. Inc. v. First Derivative Traders, ___ U.S. ____, 131 S.Ct. 2296, 2300, 180 L.Ed.2d 166 (2011) (Although market timing is legal, it harms other investors in the mutual fund.).