Matthias: Market Timing Is America's Problem

November 7, 2003 ( - The head of the European investment fund industry says an early-stage investigation in Europe uncovered no evidence of market timing or late trading.

Steffen Matthias, Secretary General of FEFSI in an interview with CBS MarketWatch made the conclusion that these maligned practice are not evident in Europe after conducting a poll among FEFSI members.   The FEFSI represents 900 fund management companies and over 41,100 funds with 4.5 trillion euros ($5 trillion) of investment assets.

Matthias cited the structure of the European system as the main reasons for the absence of market timing –the rapid trading in and out of mutual funds to take advantage of inefficiencies in the market  – and late trading – allowing mutual fund trades to be place after the net asset value (NAV) is determined.   “We have more country funds (inEurope), and they are normally smaller, and in some cases, it might be that the regulatory environment is different and that there are different types of funds,” Matthias said in the interview.

Further, Matthias points to the procedure of “forward-pricing” for mutual fund trading conducted in the United Kingdom and other European countries.    Under this process, once the day’s price for a fund is set, all orders to buy or sell that fund are done at the price which is set the next day.   In fact, the UK made forward pricing the standard approximately five years ago to stem abuse of fund pricing.

Across the pond, the United States market has no such system and is currently rife with scandal.   The US Securities and Exchange Commission reports as many as half of all mutual funds allow market timing and a quarter permit late trading (See  SEC: One Quarter of All Mutual Funds Allowed Late Trading ).

That is not to say firms across the pond will not feel the heat.   For example, shares of London-based Amvescap dropped 7.6% after it was reported that New York Attorney General Eliot Spitzer had set his sights on the company’s Invesco unit for failing to prevent short-term trading in its funds. Amvescap denied receiving notice from the AG’s office.   Also impacted has been Germany’s largest bank Deutsche Bank, which had to hand over records earlier this year in connection with alleged market-timing and late-trading inquiries.