The mechanics of mutual fund trading
Funds are priced daily after the New York markets close at 4pm. Trades must be communicated before 4pm.
- At 3pm, we can estimate the closing level of the Dow Jones and use it to decide whether to buy or sell a given fund.
- For historical data analysis, we assume that exact closing data are available each day to decide whether or not to make trades.
Some basic practical limitations:
- The manager of a fund may prohibit us from trading it.
- We do not have access to 4pm data at 3pm.
- Settlement date rules prevent us from buying one day and selling the next.
Data-mining lesson: Consider carefully and in detail how knowledge could be exploited in real-time. Actions are typically not instantaneous and cost-free.