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Churning

Excessive trading in a customer account driven by the broker's compensation rather than the customer's objectives, measured by turnover rate and cost-to-equity ratio.

Two elements are needed: control over the account, whether formal discretion or de facto influence over a passive client, and excessive activity given the stated objectives. The quantitative evidence is an annualised turnover ratio and a cost-to-equity ratio showing what percentage return is needed simply to break even after commissions.

Rules of thumb used in finra-arbitration treat turnover above six and cost-to-equity above roughly 20% as strongly indicative, though context matters for an account genuinely intended for active trading.

The modern variant is not commission churning but excessive recommended trading in high-cost products and options, which the quantitative limb of suitability and the care obligation in regulation-best-interest both reach.

Related: suitability, regulation-best-interest, finra-arbitration, fiduciary-duty

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