Český finanční a účetní časopis 2012(4):6-14 | DOI: 10.18267/j.cfuc.2

Some Questions about Churning by Derivatives

Petr Dvořák
Doc. Ing. Petr Dvořák, Ph.D. - docent; Katedra bankovnictví a pojišťovnictví, Fakulta financí a účetnictví, Vysoká škola ekonomická v Praze, nám. W. Churchilla 4, 130 67 Praha 3; <dvorakp@vse.cz>.

Churning is one of the unethical practices used by brokers while trading in a customer's account. It consists in an excessive trading in a customer's account that is disadvantageous for the client. This technique is described in more details in the field of non-leverage financial instruments, including quantitative indicators. The aim of this paper is to clarify the differences between the leverage and non-leverage financial instruments in terms of trading volume measurement methods for churning's assessing. The author concludes that the churning assessment has to be based on consistency of number and characteristics of the trades with the investor's strategy. Difference among derivative contracts does not provide single quantitative indicators that could indicate churning by trading of the derivative. It would be possible to use quantitative indicators only for comparing the same type of investment instrument, investment strategy and especially of the same leverage.

Keywords: Churning; Derivatives; Broker; Leverage financial instruments; Non-leverage financial instruments.
JEL classification: G10, G24

Published: December 1, 2012  Show citation

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Dvořák, P. (2012). Some Questions about Churning by Derivatives. Czech Financial and Accounting Journal, 2012(4), 6-14. doi: 10.18267/j.cfuc.2
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    References

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