Churning : Excessive Trading in Retail Securities Accounts

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