Churning is a manipulative trading tactic (a type of volume manipulation) whereby a stock is excessively traded to inflate its trading volume so that market participants would mistakenly think there is a positive investor sentiment for the stock. Churning involves client accounts/ house accounts from which brokers and/ or traders generate commission fees.
Churning results in large commissions due to frequent trading. It can be spotted by looking at the size of commissions and examining the frequency of trades in the account, which is usually calculated using a measure known as turnover:
Turnover = amount of purchases/ amount invested
Turnover and amount of purchases are for a specific period (the same period of time under examination).
However, the maturity of specific investments must be taken into consideration in the process of examination, particularly those with short-term maturities (short-term investments) such as options, commodities, stocks short-sold, etc. In this case, turnover tends to be higher than in other mid– to long-term investments.
