Posted in Finance, Accounting and Economics Terms, Total Reads: 344
Churning is referred to as excessive trading by the broker in a client’s account to generate commissions. This practice violates SEC rules and has been defined as the illogical and unethical practice.
The problem is that there is no quantitative measure that signifies churning but excessive and frequent trading by the broker that does not fulfills customer requirements may be classified as churning.
The problem is that the churning results into significant losses for the client. Though it may be profitable but it may generate tax liabilities for the client.
Broker can do excessive transaction on the client account in order to generate commissions for them. Since churning can take place only if broker has control over client’s account so it can be avoided if the client maintains full control over the account.