Time zone arbitrage
Time zone arbitrage is a technical term in securities trading and describes a form of market timing in which price determinations on exchanges in different time zones are exploited. The term is often used in connection with late trading .
Time zone arbitrage describes the short-term, systematic speculation with open-ended investment funds by exploiting small price differences that can exist between the closing prices of the funds on the various stock exchanges. A correlation of the fund prices with base indices is assumed. According to Gomolka (2007), time zone arbitrage means buying a mutual fund shortly before the order acceptance deadline, when price changes can be foreseen the next day and the fund price is made up of old - not updated - closing prices. Late trading, on the other hand, refers to trading with known fund prices and is illegal in Germany and the USA.
Time zone arbitrage is not illegal, but it has repeatedly caused financial scandals. A normal investor cannot engage in time zone arbitrage and the fund companies usually guarantee their investors not to engage in such trading because it burdens the price level of the entire fund. If fund companies nevertheless allow preferred large customers to take advantage of these price differences on international financial markets for arbitrage transactions , this constitutes a violation of the company's fiduciary duty.
Web links
source
- Gomolka, Johannes (2007): The Two Faces of the German Fund Industry - Cut Off Time and Time Zone Arbitrage, in: R. Jasny (Ed.), Frankfurter Schriften zur Banking und Finance, No. 6, Stuttgart Ibidem Verlag.