What does the term 'churning' refer to in trading activities?

What does the term 'churning' refer to in trading activities?

• A. Executing trades based on market trends
• B. Trading solely for commissions without client benefit
• C. Pursuing aggressive investment strategies for profits
• D. Reducing the number of active trades in an account

Answer: (B)

The term 'churning' specifically refers to the practice of executing trades in a client’s account primarily to generate commissions for the broker, rather than to benefit the client. This behavior is considered unethical and can violate regulatory standards because it disregards the best interests of the client. Churning often involves a high volume of trades that are unnecessary for the client's investment goals, leading to excessive commissions that the client must pay. This ultimately can erode the client’s investment returns and may result in a loss of trust in the broker or firm involved.

While other options illustrate various trading strategies or behaviors, they do not capture the essence of churning, which centers on the conflict of interest arising from prioritizing the broker's financial gain over the client's welfare.