Question about Stock Brokerage Integrity and Hidden Client Risk . by Alice B. Clagett

Published on 18 February 2020

  • PUTTING SAVINGS IN BANKS
    • Potential Risks
  • INVESTING IN STOCKS AND BONDS THROUGH A STOCK BROKERAGE FIRM
    • Potential of Brokers Skimming Margin Cream
      • Question: Is This Type of Skimming Maybe Common Practice?
    • Possible Need to Liquidate a Client’s Holding without Their Knowledge: A Workaround
    • The Temptation for Stock Brokers to Advocate High-Risk Instruments to Cover ‘Phantom’ Trades
    • My Question, and Why I Am Asking It

Dear Ones,

I have a question about stock brokerages. If any of my readers knows anything about it, would you please comment on this blog about it? First some background regarding putting savings in banks, and then the question regarding investing in stocks and bonds …

PUTTING SAVINGS IN BANKS

If banks, say, take our savings into a savings account or CD, then they are allowed to provide us a low rate of interest, and then they may invest that money in somewhat riskier ways, so as to earn our profit on the money we invest … Did I get that right?

Potential Risks

Then in that case the potential risk for the person who places his or her savings into a savings account or CD is the possibility of large-scale bank failures, as in the case of the Great Depression, when I recall my mom said people lined up on the streets trying to withdraw their savings from the banks, but were not able to because the banks failed.

These days, as I understand it, our bank savings are secured by the SEC or maybe FINRA, up to a certain per-person limit, so that may mitigate the risk of large-scale bank failures … at least, up to a point, I guess.

INVESTING IN STOCKS AND BONDS THROUGH A STOCK BROKERAGE FIRM

Potential of Brokers Skimming Margin Cream

When we invest our savings in stocks and bonds, say, in a margin account, then it seems to me that the opportunity exists for the stock broker to benefit from our holdings in a way a little reminiscent of banks. For instance, might not the stock broker use our margin account to day trade equities or maybe bonds in hopes of skimming some cream off our account, with the client being none the wiser?

Question: Is This Type of Skimming Maybe Common Practice? Is that allowed, on Wall Street? Maybe it is common practice amongst stock brokerages, and I am not familiar with the practice? This is the question I have: Do any of my readers know whether this skimming of margin cream is standard stock brokerage practice? If it is, then, I feel, here would be a potential problem …

Possible Need to Liquidate a Client’s Holding without Their Knowledge: A Workaround

I know, from a year of day trading myself, that it is hard to beat the market through day trading. Sometimes, though, people get into the thrill of day trading, so much so that they don’t want to look at the bottom line and find out for sure whether they bettered the market over the course of a year. Do you not feel this to be true? I myself found, using the best software I could find, that after a great deal of work every morning, and plenty of thrills, I ended up with no profits (and no losses) at the end of a year.

The best of stock brokers intent on skimming margin cream would most likely know what I learned … that the chance exists that some of the client’s stocks would need to be liquidated because of a margin deal gone south, unbeknownst to the client.

I remember in my mom’s time, stocks and bonds were actual pieces of paper that a brokerage handed to a client. Thus the client knew for sure what he or she owned; there was the paper to prove it.

Today, however, investors often chose to leave their stock and bond certificates with their brokers. It is true, the investor can see on their monthly statement that they have such-and-such investments, numbered such and such. That, however, is the only proof they have that they have purchased and know own these stocks and bonds.

In a way, these stock brokerage statements are but figments; surely it might be possible, through sleight of hand, to sell some of the underlying instruments to pay off margin debt, without the client being wiser, the presumption be that similar instruments might be purchased, and their CUSIPs, for example, jimmied round, in the event the client wishes to sell the (already sold) stock or bond, or to transfer the entire account to another brokerage.

In a sense, then, the holdings of the client might be considered, potentially, to be ‘phantom’ holdings. While possible, it seems to me such an approach to skimming margin cream might cause some last-minute sweat of the brow on the part of the broker if the client decides to trade or transfer a ‘phantom’ stock or bond.

The Temptation for Stock Brokers to Advocate High-Risk Instruments to Cover ‘Phantom’ Trades

Here is a more difficult call from an ethical standpoint: The broker might wish to cover losses from ‘phantom’ margin trades by persuading the client to accept risky stocks and bonds that are likely to decrease in value. Then the risky instruments might be sold by the broker … while remaining as if held on the client’s statement … and the money from the sales used in ‘phantom’ day trading, with profit going to the broker, and losses covered by the decreased cost of the broker’s purchase of the risky stocks as they go down in price.

What I am thinking is that the desire of a stock and bond broker to profit from ‘phantom’ trades might lead them to push very risky stocks onto a client, to cover the broker’s losses. So in that instance, the financial interests of the broker would be opposed to the financial interests of his client, do you not think?

My Question, and Why I Am Asking It

I ask this because, in a stock and bond account I held a few years ago, I noticed that the annual statement of activity on the account apparently differed from the individual transactions listed online for the year. How could this be, I wondered? That is how with I came up with the above theory, and the above question.

The greater question is this: Could there be industry-wide abuse of a stock and bond client’s interests, as outlined above? If anyone knows about this, please comment on the blog. I would be very eager to learn more about it.

In love, light and joy,
I Am of the Stars

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finance, banks, banking, stock brokerages, stocks, bonds, economy, economics, disclosure,

1 thought on “Question about Stock Brokerage Integrity and Hidden Client Risk . by Alice B. Clagett

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