Churning: Excessive Trading in Retail Securities Accounts

Financial Services Review, 1996

16 Pages Posted: 26 Feb 1997 Last revised: 15 Mar 2017

See all articles by Stewart L. Brown

Stewart L. Brown

Florida State University - Department of Finance

Date Written: January 1, 1996

Abstract

Churning involves excessive trading by stockbrokers in order to generate commissions. Current practice uses the turnover ratio to detect excessive trading. The turnover ratio is a flawed indicator of the actual harm of excessive trading which is commissions. This paper examines the intersection of law and financial analysis in the retail securities arena. A unique set of data from 23 actual churning cases is used to argue that the turnover ratio should be replaced by a more direct measure of the trading costs: the commission to equity ratio. An appropriate benchmark related to the return on common stocks is suggested to gauge excessive trading in a commission context.

JEL Classification: G14

Suggested Citation

Brown, Stewart L., Churning: Excessive Trading in Retail Securities Accounts (January 1, 1996). Financial Services Review, 1996, Available at SSRN: https://ssrn.com/abstract=8141

Stewart L. Brown (Contact Author)

Florida State University - Department of Finance ( email )

Tallahassee, FL 32310
United States
(850) 576-6329 (Phone)
na (Fax)

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