“Late-day trading” is the practice of executing a trade after hours and then recording it as if it was executed prior to the end of market trading that day.
Late-day trading allows traders to use market information that may not have been otherwise available to other market participants during trading hours.
It is a felony to engage in late-day trading and doing so can lead to both civil and criminal charges of securities fraud.
While this practice is illegal, some hedge fund managers and certain favored investors have been allowed to obtain a price from a previous trading day–even though the order was received after hours–because mutual fund managers allegedly allow them to record these trades as if they had occurred during regular trading hours.
Federal agencies have been targeting these individuals and coming down hard on anyone who engages in late-day trading.
These agencies will do anything within their power to stop traders from using fraudulent “late-day trading” tactics, pump and dump schemes like “quote stuffing,” and momentum ignition strategies like “spoofing” and layering.
In some cases, these charges can cause otherwise honest trader to lose their business, their license to trade, and their physical and financial freedom.
Seek the Assistance of a Federal Securities and Investment Fraud Attorney
Working with a federal securities litigation attorney can help you maintain compliance and avoid the pitfalls of illegal trading tactics.
Our securities litigation team represents public and private companies, officers, directors, employees, investment advisors, broker-dealers, and futures and securities traders who have been accused of committing crimes related to late-day trading.
If you have been charged with “late-day trading” or are currently under investigation, do not hesitate to call us today for a consultation.
Frequently Asked Questions
What is day trading, intra-day trading and high frequency trading?”
Day trading refers to the act of buying a stock and then selling it the same day.
Intra-day trading involves short-term trades lasting less than one day--usually buy and sell orders which are executed within a matter of hours from each other.
High frequency trading involves short-term trades which typically last seconds or even tenths of a second.
What is “late-day trading?”
Late-day trading refers to the practice of placing orders to buy or redeem mutual fund shares after 4:00 p.m. Eastern Time.
After 4:00 p.m. Eastern Time, mutual funds calculate their net asset value (“NAV”).
By placing the trade after 4:00 p.m., the trader receives the price based on the prior net asset value of that day and can then take advantage of prices or information that may not have been otherwise available to other market participants during trading hours.
Is late-day trading illegal?
Yes, late-day trading violates federal securities laws concerning the price at which shares must be bought or redeemed.
For example, if a late-day trader learned of market moving information concerning a mutual fund after 4:00 p.m. Eastern Time, and then was able to purchase or redeem that mutual funds’ shares at prices set before the market moving information was released, that would give the late-trader an advantage which is not available to other investors.
Has late-day trading always been illegal?
No, prior to 1968, late-day trading was the norm. Back then, it was called “backwards pricing.” “Backward pricing” allowed people to buy mutual funds at the previous closing price. Then, the SEC issued Rule 22c-1 to prevent this type of exploitation.
Pricing of Securities – 17 C.F.R. 270.22c-1
This section specifically requires all orders received after the daily NAV calculation to receive next-day pricing.
In addition to charges of conspiracy, market manipulation and fraud, defendants can also be charged for the improper pricing of securities.
“Market Manipulation” – 7 U.S.C. § 13(a)(2)
Manipulating the price of a stock or commodity is a felony.
In order to convict you of this charge, prosecutors need to prove you intended to manipulate the price of a stock or commodity–either through illegal trade practices or false or misleading statements.
This can involve requests for extensive document production, a long and drawn out investigation and trial, civil fines like restitution, and criminal penalties.
Criminal penalties for market manipulation under this section can include fines of up to $1,000,000, imprisonment for up to 10 years, or both.
“Fraud on the Market” – 18 U.S.C. § 1348
“Fraud on the market” involves knowingly executing a fraudulent “scheme” on the market or in connection with a security.
Even attempting to execute a scheme that would defraud other market participants can subject you to liability under this section.
Depending on your role in the “scheme,” your liability can vary, but you can expect fines of up to $1,000,000, imprisonment for up to 10 years, or both.
“Late-Day Trading” and Market Timing
Knowing the price of a mutual fund after it has locked it’s NAV can allow traders to take advantage of futures and international markets due to market timing.
“Market timing” is legal and using market timing techniques can indeed benefit a mindful investor.
However, when used in conjunction with late-day trading, and the collusion of mutual fund and hedge fund managers, it takes away from the transparency of the markets.
For example, international stocks, traded on foreign exchanges, operate in different time zones and close earlier that U.S. markets.
Usually, when U.S. markets close higher than they opened, this will cause international markets to open higher the following day.
This is exacerbated when the U.S. markets and international markets are both trending downward before the closing bell, and then after the international markets close, the U.S. market rebounds at the end of the day.
In that case, it is extremely likely that foreign markets will open higher the next morning.
Having this information and being able to act on it and trade after hours would allow certain traders to lock in short-term profits as soon as the market reopens the next day.
Detection, Investigation and Reporting
The Securities and Exchange Commission (“SEC”) is the main governmental body responsible for investigations into charges of securities fraud like late-day trading.
The Financial Industry Regulatory Authority (FINRA) and the individual exchanges like the New York Stock Exchange (“NYSE”) also assists in the regulation of the securities markets. If you sell stocks or bonds, your firm should be a member of FINRA.
FINRA represents and regulates all stock and bond brokerage firms and their employees and administers background checks and licensing exams to all employees registered to sell securities.
Other Illegal Trading Practices
“Spoofing” and Layering
- : “Spoofing” and layering are considered “disruptive practices” and are both felonies. “Spoofing” and layering involve placing false orders to purchase or sell a security with no intent of carrying out the trade. When you place an offer to buy, other market participants may raise their bids in response to your offer. By raising their bids in response to your offer, they are driving up the price of the security. And if you do not finalize the offer to buy after the price has been driven up and, instead, sell at the inflated price, you may be engaging in “spoofing.” (
- 7 U.S.C. § 6(a)(5)(c).)
- Quote stuffing is method of algorithmic trading which is used to slow down your competitor. It involves overloading the capacity of exchange servers with quotes and cancellations. By loading the server with thousands of quotes in a fraction of a second, you may be able to slow down your competitor—or their algorithm—as they attempt to process this data. The rapid cancellation of quotes delays the speed at which trade information is reported and allows you to take advantage of the market. (
- FINRA Rule 5210
Publication of Transactions and Quotations
Best Defenses to Late-Day Trading
- You lacked the intent to manipulate the market.
- You had no knowledge of the late-day trading scheme.
- The witnesses against you lack credibility.
- You did not collude with a mutual fund manager.
- You did not collude with a hedge fund manager.
High Profile Case of Late-Day Trading
Canary Capital Partners, LLC
In 2003, New Jersey hedge fund company Canary Capital Partners, LLC was charged with “late-day trading” and colluding with Bank of America.
Bank of America was also charged in the case for permitting Canary to purchase mutual fund shares, after the market had closed, at the closing price for that day.
The subsequent SEC investigation into Canary Capital Partners, LLC revealed the practice of “front running,” which involved certain mutual fund companies sending alerts to favored customers when someone planned on buying a large stock position.
The mutual fund company would then allow the customer to “skip the line” and purchase the stock position prior to the original order and the subsequence increase in price.
This would allow the customer to lock in short-term profits once the position is realized.
Every Major U.S. Investment Bank Has Been Charged with Defrauding Investors
On April 28, 2003, major U.S. investment banks like Lehman Brothers, Merrill Lynch, Goldman Sachs, JP Morgan Chase, and Citigroup were found to have aided and abetted efforts to defraud investors. As a result, the firms were fined $1.4 billion by the SEC.