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With the markets in the tank, and brokers desperate to meet their production targets, expect to see a rise in unauthorized trading.  ‘Unauthorized trading’ is the term for what happens when your broker buys or sells a security in your account without first getting your permission.  It is a violation of industry rules.  If it happens to you, you have a right to recover from the brokerage firm.  In Part 1 of this multi-part article, we’ll address why unauthorized trading is so prevalent and why we can expect to see more of it in the near future.

When most people hear the word “stockbroker,” they think of someone who will make investment decisions for them.  Many people assume that stockbrokers are allowed to buy or sell without clearing each trade with the customer.  In fact, only stockbrokers who have gotten their customer to sign paperwork giving the broker “discretion” over the account have that kind of control.  Most accounts are “non-discretionary,” meaning that the broker must get customer permission for each trade. 

Because stockbrokers understand this mass misunderstanding, they frequently get away with flagrant and frequent unauthorized trading.  They engage in that trading for at least a couple of reasons.  First, getting customer permission for each trade takes more work.  The broker has to get the customer on the phone, and then sell him on the idea of making this particular trade.  It is so much easier simply to make the trade and tell the customer about it later.  As long as the customer’s account is worth more than it was last month, the customer is unlikely to complain.

Second, brokers engage in unauthorized trading because they need to earn commissions.  If they have monthly production goals to meet, they may engage in unauthorized trading near the end of the commission month to get their numbers up to the production target.

And that is why we can expect a dramatic rise in unauthorized trading.  People are afraid now.  What is left of their nest eggs is sitting in cash.  As long as it sits there, the broker earns nothing from it.  He has likely not met his production goals in two months, and the pressure is mounting.  The paycheck he has taken home has not been enough to cover his monthly expenses.  He is therefore under ever-increasing pressure to generate commissions.  If the customers are not asking for the trades, nor agreeing to them when the broker tries to talk them into it, there is incredible temptation to make the trades without permission.

In Part 2 of this series, we will examine why brokers frequently get away with unauthorized trading even though it is an offense that can get a broker barred from the industry.