Evidence of market manipulation – MarketWatch

ANNANDALE, Va. (CBS.MW) — Is the stock market being manipulated?

Is the Pope Catholic?

The latest evidence of manipulation came Monday, the last day of the quarter. On that day, the majority of mutual funds beat the market. While that would seem to be a mathematical impossibility, researchers take it as evidence of a manipulative practice that is known in the mutual fund world as “marking the close.”

The SEC defines “marking the close,” which is illegal, as “attempting to influence the closing price of a stock by executing purchase or sale orders at or near the close of the market.”

Right before the close, in other words, funds will place buy orders on stocks that they already own. That will cause the prices of their stocks to rise and thus make the performances of their funds look better than they otherwise would.

Four researchers, led by Mark Carhart, co-head of quantitative strategies at Goldman Sachs Asset Management, have collected overwhelming evidence that mutual funds have engaged in this illegal behavior for years.

For example, they found that trading volume tends to spike significantly in the final minutes before the close of each quarter in the very stocks that top mutual funds are holding.

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(Their research, “Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds,” appeared in the April 2002 issue of the Journal of Finance. Those interested in a more detailed discussion of their research should read an article I wrote about it in the Oct. 6, 2002, New York Times. I should also note that I have witnessed investment newsletters engaging in this practice in an attempt to boost their Hulbert Financial Digest performance ratings.)

Other evidence suggesting that mutual funds are marking the close comes from the percentage of them that beat the market averages on the final trading days of each calendar quarter.

For example, the researchers found that on the last trading days of the calendar quarters between July 1993 and June 1999, some two-thirds of all domestic equity funds beat the S&P 500 — about three times higher than the percentage of them that beats this index on all other days.

This pattern was apparent in mutual funds’ performances for this past Monday, when the S&P 500 index
fell by 0.18 percent.

The average fund in 11 of Lipper’s 12 major domestic equity fund categories did better than this.

To be sure, the performance boost that mutual funds enjoy because of marking the close will be short lived in most instances. In fact, the practice will tend to dampen their performances over the long run, since the stocks they buy right before the close of a quarter will tend to be relatively high priced.

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But, according to the researchers, many funds are more than willing to pay that long-term price in order to boost their standings in the short-term performance sweepstakes.

This means that you should not invest in mutual funds on the last day of a quarter, since by doing so your purchase price will be artificially inflated. You’d be surprised how many investors nevertheless invest in funds on those dates.

Many firms’ retirement plans, for example, invest each month’s employee contributions as of the end of each month.

Just by changing the investment date to any other day, according to the researchers, you should be able to increase your returns significantly — by more than 4 percent per year in the case of small-cap funds, for which marking the close tends to have the greatest impact.

It’s too late to change what happened on Monday, of course. But it’s not too late to start lobbying your retirement fund to change its investment dates, so that come this coming Sept. 30 you won’t once again pay the price for many mutual funds’ manipulative behavior.

View more information: https://www.marketwatch.com/story/evidence-of-market-manipulation

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