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Investor Protection

The Yin and Yang of Discretionary Trading

April 20, 2020

by Howard Haykin



“Discretionary trading” is when a broker makes trades in a customer’s account without first consulting the customer. That generally means the broker can decide at any time how much of a stock, bond or other security to buy or sell, and at what price, without customer input.
Many broker-dealers do not permit discretionary trading because of the perceived risk that an ‘unchecked’ broker is more likely to execute unsuitable transactions in customer accounts.
But where firms do permit discretionary authority, brokers should embrace the ‘privilege’ by fully complying with firm policies and securities regulations.



That's where one broker with Spencer-Winston Securities Corporation, went wrong.


While the Jersey City, NJ-based firm permitted its brokers to exercise discretionary authority, it required them to submit duly executed Discretionary Trading Forms. The broker abused the ‘privilege’ by submitting to Spencer-Winston at least 10 Discretionary Trading Forms with photocopied (not original) customer signatures. Thereafter, he used his ‘discretionary authority’ to execute nearly 600 transactions in 14 customer accounts.



Three aspects of this case are particularly surprising. The broker knew, or should have known better, in that …

  • He had 13 years’ experience with the firm and was well-versed in its policies.
  • He served the firm in supervisory capacities: as Registered Options Principal, General Securities Principal and Operations Principal.
  • His customers had orally or implicitly given him authority to exercise discretion in their accounts. So providing original signatures would have been, at worst, a minor inconvenience.



INVESTOR TAKE-AWAYS.    Financial institutions require contemporaneous authorizations from their customers for most, if not all, of their services. So assume that written authorizations are required. Which means that, if your broker doesn’t ask for your signature, speak up and volunteer to sign whatever forms are necessary. It's for your protection, and the protection of the firm and your broker.



[For further details, click on … FINRA Case #2018057296401.]