Everyone Was Doing It
December 15, 2003
Last week, as news broke that Putnam Investments told the Boilermakers Union to take its money elsewhere, it was reported that both Federal Reserve employees as well as Eric Zitzewitz, the Stanford University professor who researched and wrote a highly publicized report on the effects of market timing, were both guilty of the rapid in-and-out trading method.
In the Fed's case, the timing had been so fast and furious that letters were sent to current and retired shareholders of the agency's employee thrift plan, run by T. Rowe Price, to discourage the practice. Several rule changes have been implemented, as well.
A spokesman for T. Rowe Price, while admitting "frequent trading activity," said that no past or present employee was privy to any insider information that would make the trades illegal. Market timing, while technically not illegal, can have an adverse effect on long-term shareholders because it dilutes the net asset value of the fund.
Zitzewitz, whose study claims that $5 billion per year is lost by shareholders because of market timing, in fact, used the practice over a three-month period this summer, according to published reports. The trades he conducted were not illegal, but did result in some disciplinary action at UBS.AG, the firm that handled his account. He quickly halted the activity in early September.
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