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9 Best Online Trading Platforms for Day Trading

At NerdWallet, we strive to help you make financial decisions with confidence. To do this, many or all of the products featured here are from our partners. However, this doesn’t influence our evaluations. Our opinions are our own.

If you’re an active trader looking to try your hand at beating the market, you probably have a good idea of what you want in a brokerage: low costs, premium research, innovative strategy tools and a comprehensive trading platform. Below, we’ve selected the best online brokers in a variety of categories so you can choose one based on your personal priorities.

One note before you begin: Pattern day traders — as defined by the SEC — must have at least $25,000 in equity in their accounts and be approved for margin trading, regardless of whether their broker’s account minimum is lower.

» New to this world? Learn the basics with our guide to how day trading works.

on Interactive Brokers’s website

Interactive Brokers IBKR Pro

0.25% reduction on margin loans. Tiers apply

on Interactive Brokers’s website

0.25% reduction on margin loans. Tiers apply

Large investment selection.

Extensive tools for active traders.

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Powerful trading platform.

NerdWallet users who sign up get a 0.25 percentage point discount on margin rates.

Complex pricing on some investments.

Website is difficult to navigate.

on TD Ameritrade’s website

TD Ameritrade

cash credit with qualifying deposit

on TD Ameritrade’s website

cash credit with qualifying deposit

Commission-free stock, ETF and options trades.

High-quality trading platforms.

No account minimum.

Good customer support.

Large investment selection.

Costly broker-assisted trades.

on TradeStation’s website

TradeStation

cash credit with a qualifying deposit

on TradeStation’s website

cash credit with a qualifying deposit

High-quality trading platforms.

Commission-free stock, ETF and options trades.

Active trader community.

Free trading on advanced platform requires TS Select.

No transaction-fee-free mutual funds.

Plans and pricing can be confusing.

Want to compare more options? Here are our other top picks:

Summary of Best Online Trading Platforms for Day Trading

on E*TRADE’s website

cash credit with a qualifying deposit or transfer

on E*TRADE’s website

Interactive Brokers IBKR Pro

on Interactive Brokers’s website

0.25% reduction on margin loans. Tiers apply

on Interactive Brokers’s website

on TD Ameritrade’s website

cash credit with qualifying deposit

on TD Ameritrade’s website

on TradeStation’s website

cash credit with a qualifying deposit

on TradeStation’s website

in Transfer Fee Rebates

cash credit with qualifying deposit

in cash bonus with qualifying deposit.

No promotion available at this time

No promotion at this time

Last updated on April 1, 2020

Methodology

NerdWallet’s ratings for brokers and robo-advisors are weighted averages of several categories, including investment selection, customer support, account fees, account minimum, trading costs and more. Our survey of brokers and robo-advisors includes the largest U.S. providers by assets under management, plus notable and/or emerging players in the industry. Factors we consider, depending on the category, include advisory fees, branch access, user-facing technology, customer service and mobile features. The stars represent ratings from poor (one star) to excellent (five stars). Ratings are rounded to the nearest half-star.

To recap our selections.

NerdWallet’s Best Online Trading Platforms for Day Trading

Frequently asked questions

We’d recommend starting with our guide for how to day trade — it covers a lot of the day trading basics you need to know. But then, practice makes perfect — or as close to it as you can get, as you’ll quickly learn there is no perfect in day trading, and even the pros lose money sometimes.

The best way to practice: With a stock market simulator or paper-trading account. Many brokers offer these virtual trading platforms, and they essentially allow you to play the stock market with Monopoly money. Not only do you get to familiarize yourself with trading platforms and how they work, but you also get to test various trading strategies without losing real money. The link above has a list of brokers that offer these play platforms.

In short: You could lose money, potentially lots of it.

Day trading is exactly what it sounds like: Buying and selling — trading — a stock, or many stocks, inside of a day. It’s all about making predictions and timing the market, with the goal of making a small profit on each trade. In an ideal world, those small profits add up to a big return.

But research has shown that only 1% of day traders consistently earn money; many, many lose it. It’s essentially a full-time job, because you need to constantly be watching — and timing — the market, waiting for your next move. It isn’t for beginner, or casual, investors.

If you’re interested in day trading, our recommendation is to allocate a small portion of your overall portfolio to the strategy – no more than 5% or 10%, tops. That way, if you lose money — as you are likely to do, at least at first — those losses are at least capped. The rest of your portfolio should be invested in long-term, diversified investments like low-cost index funds .

Day trading is risky, but it isn’t illegal. However, the Securities and Exchange Commission imposes specific regulations on pattern day traders.

The SEC defines day trading as buying and selling or short-selling and buying the same security — often a stock — on the same day. A pattern day trader, according to the SEC, is a trader who:

  • Day-trades four or more times within five business days and
  • Those day trades represent more than 6% of their total trading activity during that five-day period

If you fall into that category, you’re required to maintain at least $25,000 in equity in your account. That equity can be in cash or securities.

Note that once a broker has identified you as a pattern day trader due to the above activity, your account will likely be considered a pattern day trading account going forward, even if you don’t continue to meet the definition. If you decide to stop day trading, you’ll want to contact your brokerage and ask that they remove the minimum equity requirement from your account.

This is a loaded question. The SEC requires that you maintain a minimum of $25,000 in equity to engage in pattern day trading, but that equity can be in cash and eligible securities. That’s the minimum amount you need to maintain in your account; on top of that, you also need the money you’ll use to day trade.

But just as important is setting a limit for how much money you dedicate to day trading. Our recommendation is that those dipping into this kind of active trading should risk only a small portion of their account balance — 5% to 10% of your investable assets, at most.

Margin is essentially a loan from your broker. When you open a brokerage account, you’ll be asked if you want a cash account or a margin account.

A margin account allows you to place trades on borrowed money. Often called leverage, trading on margin can magnify your gains — and, in the worst-case scenario, your losses. To read more about margin, how to use it and the risks involved, read our guide to margin trading .

A few things are non-negotiable in day-trading software:

  • Low or no commissions. You might’ve gathered by now that day traders place a lot of trades. Pay close attention to a broker or day trading platform’s fees and commissions. Many brokers will offer no commissions or volume pricing.
  • Research and strategy tools. Day traders use data to make decisions: You want not only the latest market data, but you also need a platform that lets you quickly create charts, identify price trends and analyze potential trade opportunities.
  • Speed. Time is literally money with day trading, so you want a broker and online trading system that is reliable and offers the fastest order execution. Many platforms will publish information about their execution speeds and how they route orders.

Another feature we’d recommend is a broker or trading platform that offers paper, or virtual, trading, so you can practice with simulated trades before the real thing.

If we knew, we’d be very rich. This is the bit of information that every day trader is after.

That said, we can give you some general guidance. There are a few things that make a stock at least a good candidate for a day trader to consider:

  • Highly liquid, with large trade volume.
  • Relatively volatile. You want frequent price changes, which allows you to make a profit quickly.
  • Known to you. An understanding of the stock’s price history, and how it reacts to various events — earnings reports, economic shifts — is key. Many day traders trade only a few specific stocks, developing expertise in those companies and narrowing their focus. (Here’s some detailed guidance on how to research stocks .)
  • Newsworthy. Coverage of a stock will trigger people to buy or sell it. As a day trader, you’ll want to follow the news to find trade ideas.

You can use your online broker or trading software’s stock screener to look for stocks that seem ripe for day trading.

Robinhood Review

Robinhood’s fees no longer set it apart

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  • Account Minimum: $0
  • Fees: $0

Robinhood’s claim to fame is that they do not charge commissions for stock, options, or cryptocurrency trading. Due to industry-wide changes, however, they’re no longer the only free game in town. The firm’s target customer base is young people new to investing, who are drawn to the app by advertising that leans heavily on words such as “free” and “democratization.” By and large, this tactic has succeeded, drawing in 10 million customers. But what happens to them when they outgrow Robinhood’s meager research capabilities or get frustrated by outages during market surges?

Important

During the sharp market decline, heightened volatility, and trading activity surges that took place in late February and early March 2020, Robinhood experienced extensive outages that affected its users’ ability to access the platform at all, leading to a number of lawsuits. However, Robinhood’s customer agreement, a multi-page document most customers electronically sign without reading, is intended to legally absolve the firm of any responsibility for these outages.

We’ll look at Robinhood and how it stacks up to more established rivals now that its edge in price has all but evaporated.

Key Takeaways

  • Robinhood’s low fees and zero balance requirement to open an account are attractive for new investors.
  • Customers must pay at least $5 per month for Robinhood Gold in order to trade on margin, view market depth data, and access research, such as Morningstar reports on high-volume stocks. Robinhood customers can try the Gold service out for 30 days for free.
  • Robinhood does not publish their trading statistics the way all other brokers do, so it’s hard to compare their payment for order flow statistics to anyone else. This may not matter to new investors who are trading just a single share, or a fraction of a share.

Who Robinhood Is For

Robinhood is best suited for newcomers to investing who want to trade small quantities and require little in terms of research beyond seeing what others are trading. Robinhood’s overall simplicity makes the app and website very easy to use, and charging zero commissions appeals to extremely cost-conscious investors who trade small quantities. That said, the offerings are very light on research and analysis, and there are serious questions about the quality of the trade executions.

Trading costs are very low and cryptocurrency trades can be placed in small quantities

Very simple and easy to use

Customers have instant access to deposited cash

Trades appear to be routed to generate payment for order flow, not best price

Quotes do not stream, and are a bit delayed

There is very little research or resources available

Pros Explained

  • Robinhood allows cryptocurrency trades to be placed in very small quantities. Most other cryptocurrency-friendly platforms require certain minimums in order to trade.
  • Robinhood’s mobile app and the website are extremely easy to use.
  • Robinhood is very efficient at getting your cash into the market. All customers have instant access to deposits and immediate access to funds after closing positions, and your buying power is increased as soon as you initiate a deposit into your account.

Cons Explained

  • There is no commission charged by Robinhood for trades, but the spread we saw for our cryptocurrency transactions was considerably wider than those we saw on other platforms.
  • Though prices update on the Robinhood app and the website, they lag other real-time data providers by several seconds.
  • New investors who are dedicated to improving their trading skills will outgrow the resources provided by Robinhood, especially options traders.

Usability

Robinhood is very easy to navigate and use, but this is related to its overall simplicity. Robinhood’s initial offering was a mobile app, followed by a website launch in Nov. 2020. As a result, Robinhood’s app and the website are similar in look and feel, which makes it easy to invest through either interface. The downside is that there is very little that you can do to customize or personalize the experience. Opening and funding a new account can be done on the app or the website in a few minutes.

The opening screen when you log in is a line chart that shows your portfolio value, but it lacks descriptions on either the X- or Y-axis. You can hover your mouse over the chart, or tap a spot if you’re on your mobile device, to see the time of day for each data point.

An order ticket pops open whenever you are looking at a particular stock, option, or crypto coin. All the asset classes available for your account can be traded on the mobile app as well as the website, and watchlists are identical across platforms. Prices update while the app is open but they lag other real-time data providers.

The mobile apps and website suffered serious outages during market surges of late February and early March 2020. The founders said in a blog post that their systems could not handle the stress of the “unprecedented load” and pledged to beef up their systems. 

Trade Experience

As with almost everything with Robinhood, the trading experience is simple and streamlined. Robinhood deals with a subsection of equities rather than the entirety of the market, but on every quote screen for the stocks and ETFs you can trade on Robinhood, there is a straightforward trade ticket. All the asset classes available for your account can be traded on the mobile app as well as the website, and watchlists are identical across the platforms.

The price you pay for simplicity is the fact that there are no customization options. If you want to enter a limit order, you’ll have to override the market order default in the trade ticket. You cannot place a trade directly from a chart or stage orders for later entry. Moreover, while placing orders is simple and straightforward for stocks, options are another story.

Placing options trades is clunky, complicated, and counterintuitive. Although Robinhood allows options trading, the platform seems geared entirely towards making market orders for assets rather than actually attempting to strategically use options to profit. This perception is reinforced by the fact that pricing refreshes every few seconds, but the actual pricing data lagged behind two other platforms we opened simultaneously by 3–10 seconds. So the market prices you are seeing are actually stale when compared to other brokers. This will not faze anyone looking to buy and hold a stock, but this data lag kills any idea of using Robinhood as a trading platform.

Range of Offerings

Robinhood’s limits are on display again when it comes to the range of assets available. Robinhood allows you to trade cryptocurrencies in the same account that you use for equities and options, which is unique, but it’s missing quite a few asset classes, such as fixed income. Investors using Robinhood can invest in the following:

  • Stocks: Long only. No short selling. No OTCBB (penny stocks).
  • Simple and multi-leg options.
  • Cryptocurrency: Bitcoin (BTC), Bitcoin Cash (BCH), Bitcoin SV (BSV), Dogecoin (DOGE), Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC). Data is additionally available for ten other coins.
  • No mutual funds, fixed income, futures, or futures options.
  • Fractional share investing has been announced but not currently available to all customers.

Order Types

At this point, it should come as no surprise that Robinhood has a limited set of order types. You can enter market or limit orders for all available assets. You cannot enter conditional orders. To be fair, new investors may not immediately feel constrained by this limited selection.

Trading Technology

Robinhood does not publish its trading statistics the way all other brokers do, so it’s hard to compare its payment for order flow statistics to anyone else. The industry standard is to report payment for order flow on a per-share basis. Robinhood reports on a per-dollar basis instead, claiming that it more accurately represents the arrangements it has made with market makers. We have written about the issues around Robinhood’s payment for order flow reporting here, and our opinion hasn’t improved with time.

The way a broker routes your order determines whether you are likely to receive the best possible price at the time your trade is placed. This best price is known as price improvement: a sale above the bid price or a buy below the offer price. Robinhood does not disclose its price improvement statistics, which leads us to make negative assumptions about its order routing practices. The target customer is trading in very small quantities, so price improvement may not be a huge consideration. However, other brokers who also charge $0 for equity trades are offering their customers impressive price improvement, so Robinhood needs to get serious about execution quality in order to stay competitive.

Costs

Robinhood’s trading fees are easy to describe: free. There are some other fees unrelated to trading that are listed below.

  • All equity trades (stocks and ETFs) are commission-free.
  • Options trade for $0—no per-leg fee and no per-contract fee.
  • Trading on margin requires a Robinhood Gold subscription at $5 per month, which includes $1,000 of margin. Margin usage over $1,000 is charged 5% interest, which is relatively low.
  • Account transfer fee is $75.
  • Exercise and assignment fee is $0.
  • Wire fees to send or receive: $25 for domestic wires, $50 for international. It is unusual to be charged to receive a wire.
  • Check fees: $35 to send a domestic check overnight.
  • Live broker fee is $10 per transaction, though it’s not obvious how to contact a broker.

How This Broker Makes Money From You and for You

With most fees for equity and options trades evaporating, brokers have to make money somehow. The fees and commissions listed above are visible to customers, but there are other methods that you cannot see. Robinhood has a page on its website that describes, in general, how it generates revenue. 

  • Interest on cash: Like most brokers, Robinhood generates interest income from the difference between what you are paid on your idle cash and what they can earn on customer cash balances. Robinhood clients, once they make it off the waitlist and design their own Mastercard debit card, can earn modest interest on their uninvested cash, which is swept to its network of FDIC-insured banks. On several pages of the website, the cash feature is labeled “Coming Soon.” 
  • Payment for order flow: Quite a few brokers generate income by accepting payment from market makers for directing their customer’s equity and options orders to those trading venues. This is called payment for order flow (PFOF). We discussed Robinhood’s lack of transparency around PFOF above, but it is worth repeating that this appears to be a major revenue stream for the broker.
  • Stock loan programs: Stock loan programs generate revenue for brokers when the stock held in your account is loaned to another trader or hedge fund, usually for the purposes of selling that stock short. Robinhood retains all the income it generates from loaning out customer stock and does not share it with the client.
  • Margin interest: Robinhood’s margin interest rates are lower than average, though using margin requires paying $5/month for their Gold program whether you are using margin or not.
  • Portfolio Margining: Portfolio margining, which can lower the amount of margin you may need, is not offered by Robinhood.

Account Amenities

  • Robinhood does not offer portfolio margining.
  • Robinhood does not have a stock loan program.
  • Robinhood clients can earn interest on their uninvested cash, which is swept to its network of FDIC-insured banks.
  • Cash sweeps are automatic once a client is enrolled in the program.
  • Clients cannot enroll in dividend reinvestment programs.

Research Amenities

Robinhood’s research offerings are, you guessed it, limited. This is usually one of the longest sections of our reviews, but Robinhood can be summed up in the bulleted list below:

  • There are no screeners for stocks, ETFs, or options.
  • There are no investing-related tools or calculators.
  • The trading idea generators are limited to stock groupings by sector. Once you click on a group, you can add a filter such as price range or market cap.
  • News is available from The Wall Street Journal, Reuters, and Barron’s in addition to videos from CNN Business, Cheddar, and Reuters.
  • Third-party research from Morningstar can be accessed by Robinhood Gold clients ($5/month subscription).
  • The charting is extremely rudimentary and cannot be customized.

Portfolio Analysis

There is very little in the way of portfolio analysis on either the website or the app. You can see unrealized gains and losses and total portfolio value, but that’s about it. The start screen shows a one-day graph of your portfolio value; you can click or tap a different time period at the bottom of the graph and mouse over it to see specific dates and values. There is no asset allocation analysis, internal rate of return, or way to estimate the tax impact of a planned trade. There is no trading journal.

To perform any kind of portfolio analysis, you’ll have to import your transactions into another program or website.

Education

Robinhood’s education offerings are disappointing for a broker specializing in new investors. There’s a “Learn” page that has a list of articles, displayed in chronological order from most recent to oldest, but it is not organized by topic. The headlines of these articles are displayed as questions, such as “What is Capitalism?” or “What is Inventory?”   There are no videos or webinars available, but the daily Robinhood Snacks three-minute podcast gives some market information.

Customer Service

  • All customer service is done via the app or the website.
  • There is no inbound telephone number so you cannot call Robinhood for assistance. If you work your way through an extensive menu designed to narrow down your support issue, you can enter your own phone number for a callback.
  • You can place a trade through a live broker for $10, but they are not there to offer help otherwise.

Security

Robinhood’s technical security is up to standards, but it is missing a key piece of insurance.

  • Mobile app users can log in with biometric (face or fingerprint) recognition or a custom pin.
  • Robinhood encourages users to enable two-factor authentication.
  • New logins from unrecognized devices also need to be verified with a six digit code that is sent via text message or email in case two-factor authentication is not enabled.
  • Robinhood carries no excess Securities Investor Protection Corporation (SIPC) insurance.
  • Through calendar 2020, there were no significant data breaches reported by the Identity Theft Research Center. 

Our Verdict

If you’re brand new to investing and have a small balance to start with, Robinhood could be the place to help you get used to the idea of trading. The extremely simple app and website are not at all intimidating and provide a smooth on-ramp to the investing experience, especially for those exploring stocks and ETFs. While it’s true that you pay no commissions at Robinhood, its order routing practices are opaque and potentially troubling. Robinhood also has a habit of announcing new products and services every few months, but getting them into production and available to all clients takes a long, long time.

If you’re a trader or an active investor who uses charts, screeners, and analyst research, you’re better off signing up for a broker that has those amenities. Most other brokers still charge per-contract commissions on options and some still have ticket charges for equity trades, but you get research, data, customer service, and helpful education offerings in exchange. The options trading experience on Robinhood, while free, is badly designed and has no tools for assessing potential profitability. Even if you are a new investor only interested in buying and holding stocks, there are many zero-fee brokers to choose from now. They may not all have the flashy marketing that backs up Robinhood, but they have a lot more meat to their platform and much more transparent business models.

Is Your Forex Broker a Scam?

If you do an internet search on forex broker scams, the number of results is staggering. While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business.

When you’re looking to trade forex, it’s important to identify brokers who are reliable and viable, and to avoid the ones that are not. In order to sort out the strong brokers from the weak and the reputable ones from those with shady dealings, we must go through a series of steps before depositing a large amount of capital with a broker.

Trading is hard enough in itself, but when a broker implements practices that work against the trader, making a profit can be nearly impossible.

Key Takeaways

  • If your broker does not respond to you, it may be a red flag that he or she is not looking out for your best interests.
  • To make sure you’re not being duped by a shady broker, do your research, make sure there are no complaints, and read through all the fine print on documents.
  • Try opening a mini account with a small balance first, and make trades for a month before attempting a withdrawal.
  • If you see buy and sell trades for securities that don’t fit your objectives, your broker may be churning.
  • If you are stuck with a bad broker, review all your documents and discuss your course of action before taking more drastic measures.

Separating Forex Fact From Fiction

When researching a potential forex broker, traders must learn to separate fact from fiction. For instance, faced with all sorts of forums posts, articles, and disgruntled comments about a broker, we could assume that all traders fail and never make a profit. The traders that fail to make profits then post content online that blames the broker (or some other outside influence) for their own failed strategies.

One common complaint from traders is that a broker was intentionally trying to cause a loss in the form of statements such as, “As soon as I placed the trade, the direction of the market reversed” or “The broker stop hunted my positions,” and “I always had slippage on my orders, and never in my favor.” These types of experiences are common among traders and it is quite possible that the broker is not at fault.

Rookie Traders

It is also entirely possible that new forex traders fail to trade with a tested strategy or trading plan. Instead, they make trades based on psychology (e.g., if a trader feels the market has to move in one direction or the other) and there is essentially a 50% chance they will be correct.

When the rookie trader enters a position, they are often entering when their emotions are waning. Experienced traders are aware of these junior tendencies and step in, taking the trade the other way. This befuddles new traders and leaves them feeling that the market—or their brokers—are out to get them and take their individual profits. Most of the time, this is not the case. It is simply a failure by the trader to understand market dynamics.

Broker Failures

On occasion, losses are the broker’s fault. This can occur when a broker attempts to rack up trading commissions at the client’s expense. There have been reports of brokers arbitrarily moving quoted rates to trigger stop orders when other brokers’ rates have not moved to that price.

Luckily for traders, this type of situation is an outlier and not likely to occur. One must remember that trading is usually not a zero-sum game, and brokers primarily make commissions with increased trading volumes. Overall, it is in the best interest of brokers to have long-term clients who trade regularly and thus, sustain capital or make a profit.

Behavioral Trading

The slippage issue can often be attributed to behavioral economics. It is common practice for inexperienced traders to panic. They fear missing a move, so they hit their buy key, or they fear losing more and they hit the sell key.

In volatile exchange rate environments, the broker cannot ensure an order will be executed at the desired price. This results in sharp movements and slippage. The same is true for stop or limit orders. Some brokers guarantee stop and limit order fills, while others do not.

Even in more transparent markets, slippage happens, markets move, and we don’t always get the price we want.

Communication Is Key

Real problems can begin to develop when communication between a trader and a broker begins to break down. If a trader does not receive responses from their broker or the broker provides vague answers to a trader’s questions, these are common red flags that a broker may not be looking out for the client’s best interest.

Issues of this nature should be resolved and explained to the trader, and the broker should also be helpful and display good customer relations. One of the most detrimental issues that may arise between a broker and a trader is the trader’s inability to withdraw money from an account.

Broker Research Protects You

Protecting yourself from unscrupulous brokers in the first place is ideal. The following steps should help:

  • Do an online search for reviews of the broker. A generic internet search can provide insights into whether negative comments could just be a disgruntled trader or something more serious. A good supplement to this type of search is BrokerCheck from the Financial Industry Regulatory Authority (FINRA), which indicates whether there are outstanding legal actions against the broker. And if appropriate, gain a clearer understanding of the U.S. regulations for forex brokers.
  • Make sure there are no complaints about not being able to withdraw funds. If there are, contact the user if possible and ask them about their experience.
  • Read through all the fine print of the documents when opening an account. Incentives to open an account can often be used against the trader when attempting to withdraw funds. For instance, if a trader deposits $10,000 and gets a $2,000 bonus, and then the trader loses money and attempts to withdraw some remaining funds, the broker may say they cannot withdraw the bonus funds. Reading the fine print will help make sure you understand all contingencies in these types of instances.
  • If you are satisfied with your research on a particular broker, open a mini account or an account with a small amount of capital. Trade it for a month or more, and then attempt to make a withdrawal. If everything has gone well, it should be relatively safe to deposit more funds. If you have problems, attempt to discuss them with the broker. If that fails, move on and post a detailed account of your experience online so others can learn from your experience.

It should be pointed out that a broker’s size cannot be used to determine the level of risk involved. While larger brokers grow by providing a certain standard of service, the 2008-2009 financial crisis taught us that a big or popular firm isn’t always safe.

The Temptation to Churn

Brokers or planners who are paid commissions for buying and selling securities can sometimes succumb to the temptation to effect transactions simply for the purpose of generating a commission. Those who do this excessively can be found guilty of churning—a term coined by the Securities and Exchange Commission (SEC) that denotes when a broker places trades for a purpose other than to benefit the client. Those who are found guilty of this can face fines, reprimands, suspension, dismissal, disbarment, or even criminal sanctions in some cases.

SEC Defines Churning

The SEC defines churning in the following manner:

Churning occurs when a broker engages in excessive buying and selling of securities in a customer’s account chiefly to generate commissions that benefit the broker. For churning to occur, the broker must exercise control over the investment decisions in the customer’s account, such as through a formal written discretionary agreement. Frequent in-and-out purchases and sales of securities that don’t appear necessary to fulfill the customer’s investment goals may be evidence of churning. Churning is illegal and unethical. It can violate SEC Rule 15c1-7 and other securities laws.

The key to remember here is that the trades that are placed are not increasing your account value. If you have given your broker trading authority over your account, then the possibility of churning can only exist if they are trading your account heavily, and your balance either remains the same or decreases in value over time.

Of course, it is possible that your broker may be genuinely attempting to grow your assets, but you need to find out exactly what they are doing and why. If you are calling the shots and the broker is following your instructions, then that cannot be classified as churning.

Evaluate Your Trades

One of the clearest signs of churning can be when you see buy and sell trades for securities that don’t fit your investment objectives. For example, if your objective is to generate a current stable income, then you should not be seeing buy and sell trades on your statements for small-cap equity or technology stocks or funds.

Churning with derivatives such as put and call options can be even harder to spot, as these instruments can be used to accomplish a variety of objectives. But buying and selling puts and calls should, in most cases, only be happening if you have a high-risk tolerance. Selling calls and puts can generate current income as long as it is done prudently.

How Regulators Evaluate Churning

An arbitration panel will consider several factors when they conduct hearings to determine whether a broker has been churning an account. They will examine the trades that were placed in light of the client’s level of education, experience, and sophistication as well as the nature of the client’s relationship with the broker. They will also weigh the number of solicited versus unsolicited trades and the dollar amount of commissions that have been generated as compared to the client’s gains or losses as a result of these trades.

There are times when it may seem like your broker may be churning your account, but this may not necessarily be the case. If you have questions about this and feel uneasy about what your advisor is doing with your money, then don’t hesitate to consult a securities attorney or file a complaint on the SEC’s website.

Already Stuck With a Bad Broker?

Unfortunately, options are very limited at this stage. However, there are a few things you can do. First, read through all documents to make sure your broker is actually in the wrong. If you have missed something or failed to read the documents you signed, you may have to assume the blame.

Next, discuss the course of action you will take if the broker does not adequately answer your questions or provide a withdrawal. Steps may include posting comments online or reporting the broker to FINRA or the appropriate regulatory body in your country.

The Bottom Line

While traders may blame brokers for their losses, there are times when brokers really are at fault. A trader needs to be thorough and conduct research on a broker before opening an account and if the research turns up positive for the broker, then a small deposit should be made, followed by a few trades and then a withdrawal. If this goes well, then a larger deposit can be made.

However, if you are already in a problematic situation, you should verify that the broker is conducting illegal activity (such as churning), attempt to have your questions answered, and if all else fails, and/or report the person to the SEC, FINRA, or another regulatory body that could enforce action against them.

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