Churning: Excessive Trading in Retail Securities Accounts
Financial Services Review, 1996
16 Pages Posted: 26 Feb 1997 Last revised: 15 Mar 2017
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: Suggested Citation