Churning
Excessive Trading in Retail Securities Accounts
DOI:
https://doi.org/10.1016/S1057-0810(96)90026-8Abstract
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 hartn 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 tum- over 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.
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