Beating or churning is excessive trading on a client account by a broker to generate more commissions. It is illegal in many markets and subject to fines and imprisonment. It is not always easy to prove, but investors should contact their broker for an explanation and move their account if necessary.
Beating is a slang term that is defined as excessive trading on a client account by a broker. The purpose of the activity is not to benefit the investor, but to generate additional commissions for the broker. Also known as twisting, the practice of churning is considered highly unethical and is illegal in many markets.
Abuse of a customer’s account is a practice expressly illegal in the United States. Shaking is understood by the Securities and Exchange Commission to be a form of unauthorized trading in a discretionary account. For this reason, the practice is subject to fines, up to and including imprisonment. However, churn is not always easy to prove, as the activity could simply be a series of bad decisions by the broker, with no intention of defrauding the investor.
Along with the SEC, the turmoil is also a violation of the NASD rules when it comes to the trading process. Brokers who appear to be breaking the rules may find themselves temporarily barred from trading. During this period, an investigation will be launched to determine whether recent transactions on a client’s account were carried out without regard to the client’s financial well-being. In the event that the broker is found to have executed orders in good faith, his trading privileges are reinstated.
There are circumstances that lend themselves more easily to the potential for upheaval. When the broker is given broad powers to act on behalf of a client, such as with authorized access to a discretionary account, it is possible for the broker to quickly complete transactions involving similar securities. This wave of buying and selling with no apparent gain to the investor could indicate oversold activity.
However, it is also possible that a quick succession of exchanges is not, in fact, a hectic activity. In the event that an investor notices this type of activity in their brokerage account, it’s certainly a good idea to contact the broker and ask for an explanation for the series of trades. If the broker cannot articulate the reasoning behind the trades to the satisfaction of the investor, then it is definitely time to move the account to another brokerage firm.
Smart Asset.
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