Securities Arbitration Lawyer Blog
An in and out trading strategy refers to short-term trading in an investor’s account. In other words, buying in and selling out of securities in a short period of time with no real basis for the stockbroker’s recommendation in either the suitability of the securities or the trading strategy.
In and out is a trading strategy that is commonly associated with day trading. While the strategy may be suitable for some investors or desired by other investors, it is a highly speculative trading strategy for most retail investors. A staple of the strategy is that it generates fees and commissions for the stockbroker and the broker-dealer while costing the investor money. Generally, the investor will be hit with high per-trade transaction costs and even principal losses if the stockbroker is selling investments at a loss in order to engage in the strategy. In and out trading is not appropriate for most investors, and stockbrokers should, at a minimum, have a reasonable basis to recommend this strategy to a particular investor.
Under FINRA rules, a stockbroker is required to perform reasonable due diligence to understand two key areas: 1) the stockbroker’s in and out trading strategy recommendation and 2) the impact the stockbroker’s recommendation has on the account’s ability to turn a profit. To do so, it must assess the cumulative impact that commissions and fees associated with an in and out trading strategy will have on an investor’s ability to earn a profit. Failure to observe these considerations about the quantitative suitability of the trades may lead to investor claims against a stockbroker for unsuitable and excessive trading. Investors may also have a failure to supervise claim against the broker-dealer firm if the trading activity in an account warranted further review by a supervisor, if the trading exceeded turnover and cost-to-equity ratios, and if the broker-dealer failed to take action or ignored its own system’s alerts.
In and out trading is not limited to buying and selling equities. Investors reviewing their account statements should consider whether the short-term trades are occurring in securities that are most appropriately described as long-term. One way to determine this is by understanding whether the investor has incurred any upfront sales charges, which would make the securities suitable only if held in the long-term. These securities may include municipal bonds, mutual funds, unit investment trusts (UITs), corporate bonds, preferred shares, etc. Investors should confirm the date of purchase, date of sale, and date of maturity of any securities in their portfolio.
How Reg BI Affects Claims for Excessive Trading
Bottom line: a series of recommended transactions should be appropriate and not excessive for an investor. Under the previous suitability standard, a stockbroker had to have either in fact or de facto control over the trading in an investor’s account. Reg BI eliminated the requirement of control. Accordingly, FINRA amended its suitability rule to apply the best interest standard to a series of recommended transactions, irrespective of whether a stockbroker exercises actual or de facto control over a customer’s account.
Cost is another important consideration under Reg BI in the context of an in and out trading strategy. It must always be considered by a stockbroker when making a recommendation. Cost includes the cost of purchase and any costs that may apply to the future sale or exchange of a security, such as deferred sales charges or liquidation costs.
Investors should not ignore a pattern of buying and selling of an entire position within a short period of time in their accounts. The frequency of these transactions is a significant red flag to investors that their stockbroker may be engaged in excessive trading and ignoring the investor’s investment objectives and risk tolerance. In addition to reviewing their trading activity, investors should check their account opening documents to confirm that these accurately reflect their investment objectives, goals, time horizon, and risk tolerance. An in and out trading strategy is not appropriate for investors seeking long-term growth.
If you have lost money due to an in and out trading strategy which was recommended to you by your stockbroker, please contact New York securities arbitration lawyer Jorge Altamirano of Iorio Altamirano LLP at jorge@ia-law.com or toll-free at (855) 430-4010 for a free and confidential evaluation of your account.
Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. We pursue FINRA arbitration claims nationwide on behalf of investors to recover financial losses arising out of wrongful conduct by financial advisors and brokerage firms.