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Unauthorized Trading

Two types of customer accounts exist in the retail brokerage firm business. The first account, known as a discretionary account permits a brokerage firm to trade the account without seeking client approval before making the trade. The trading of a discretionary account must be done within the parameters agreed to by the client and the firm. In other words, a broker does not have approval or permission to exceed the authority granted.

The second and most common type of retail brokerage firm account is a non-discretionary account. When a broker purchases or sells a security in an investor account without the prior approval of a customer, the broker has engaged in unauthorized trading. A non-discretionary account requires customer contact and consent prior to the execution of each and every trade.

There are limited instances when a brokerage firm may trade without the consent of a non-discretionary customer. One such instance is when a customer has a margin account and the value of the account falls below the firm's maintenance requirements. Margin liquidation without notice is permitted by the account agreements of almost all brokerage and clearing firms.


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