May 7, 2004
1. There is a description that frequent trading forces a fund manager to maintain a pool of cash to the detriment of other traders. Is it not a wise thing to be going into cash when the market is down, which is the time that the fund is probably being sold? Another understanding of this would be - this is good management. If this manager went to cash, the value of the fund would not drop as much, and thus might not be sold.
2. 2 is excessive. It is stated that this is about what it costs the fund, but visits to several web sites show that 1 is often explicitly stated as a fee to cover costs. At times this number is a set dollar amount.
3. Examination of several web sites reveals that fund companies are quite able and willing to enact charges for services that they believe are beyond that which they offer a normal customer.
4. Your examples seem to point to market timing as going beyond a certain holding period that is arbitrarily set, although you do ask for guidance in this periods length. However, I see very little about what is at the very core of the practice, which is to time the market. To do this, you must make frequent trades, and perhaps this is where the rule ought to be focused. Perhaps your five day period could be the definition of a short term trade, but allow the average investor the right to execute four trades like this in a year, and then charge some fee for any trades that have frequencies of less than a month for the rest of the year. Fidelity uses a similar practice. This would allow average investors the ability to avoid medium and long term market movements that many fund mangers seem to be oblivious to.
5. In regard to setting a dollar amount, I have two things to suggest:
a. Why do those in government insist on making laws that we all must abide by, and not learn from the past? There are thousands of examples, but the current one is the minimum income tax, which middle class tax payers are now starting to feel the heat of as inflation ticks on. Why do you need to set a DOLLAR amount that will have to be revised some day when people are politically unwilling. Hows about a percent of the average national salary from the previous year or some such figure?
b. Also in sympathy with the small-time average investor, you suggest the dollar figure of 2500. You might try to remember that to have a decent middle-class retirement these days, a person should have 1,000,000 in his account at retirement. Even well diversified into ten funds, this amounts to 2.5 of a 100,000 account. People need more liquidity than that in order to manage their money well. History has shown us that the fund managers will not be doing it for us. And keep in mind that 20 years from now these numbers will be different.
6. There should indeed be funds available that are meant for short-term trades and thus exempt from any rules of this nature.
7. The issue seems to have started with short-term traders using time zone differences between world wide markets. This would be impractical with a one day time limit.