February 26, 2004
As usual, The Mutual Fund industry is laughing all the way to the bank on this one. Ironically, they have actually been reaping huge invisible profits on the backs of short term traders for years. This is done through the use of subjective pricing of daily fund net asset value NAV calculation. Fund companies have sophisticated software that provides real-time data on daily inflows and redemptions. At the end of the day, the fund manager can choose to price the fund at either the high end or the low end of the spread depending on weither there are high inflows or redemptions. This creates a situation in which short term traders are consistantly buying high and selling low relative to subjective daily NAV pricing. The resulting catured spread is a costly defacto tax on short term traders that rewards the long term investor and more than offsets any increased trading costs that mutual fund companies incur. In my opinion, other than late day trading, which is blatently illegal and special arrangement trading, which is blatently unethical, the SEC should back off from further increasing the costs to investors of owning and trading mutual funds. Many mutual fund companies have acted illegally and-or unethically as highlighted by the recent mutual fund scandal. The proposed new two percent trading fee would succeed only in shifting mutual fund companies guilt of improper and abusive practices to the short term investor all the while substantially increasing profits for the already highly profitable Fund Industry. Additionally, why is it that mutual fund investors and traders are not allowed the same rights to low cost liquidity made available to other investors and traders? Does it not burden the investing public with the costs of increased volitility when giant pools of capital move into or out of the market on the floor of the NYSE and the NASDAQ on any given day? So why are mutual fund investors being singled out? Should we pay more just so the bigger problem can be swept under the rug? Daniel M. Prescott, Prescott Capital Management.