Key Takeaways
- Daily review of trading activity is required for options accounts.
- Supervisors must identify patterns of unsuitable or excessive trading.
- Exception reports help identify accounts requiring closer review.
- Trading activity must be consistent with customer objectives.
- Concentrated positions require additional scrutiny.
Last updated: January 2026
Trading Activity Review
Effective supervision requires ongoing monitoring of trading activity to identify potential problems before they escalate.
Daily Review Requirements
What to Review Daily
| Area | Focus |
|---|---|
| New accounts | Verify proper opening procedures |
| Large trades | Review for suitability |
| Margin activity | Monitor margin calls and deficiencies |
| Exceptions | Address flagged transactions |
| Complaints | Review any customer concerns |
Exception Reports
Exception reports automatically flag accounts or transactions meeting certain criteria:
| Exception Type | Trigger |
|---|---|
| Concentration | Single position exceeds threshold |
| Loss threshold | Unrealized losses exceed limit |
| Activity spike | Unusual increase in trading |
| Strategy mismatch | Trade inconsistent with objectives |
| Margin warning | Account approaching margin limit |
Identifying Unsuitable Trading
Red Flags for Suitability Concerns
| Pattern | Concern |
|---|---|
| Speculative in conservative account | Strategy mismatch |
| High-risk strategies for inexperienced | Sophistication mismatch |
| Options concentration | Lack of diversification |
| Retirement account speculation | Inappropriate risk |
Churning Indicators
Churning is excessive trading to generate commissions. Watch for:
| Indicator | Description |
|---|---|
| High turnover ratio | Annualized trading vs. account value |
| Cost-to-equity ratio | Commission costs vs. equity |
| In-and-out trading | Frequent position reversals |
| Small account, high activity | Activity disproportionate to size |
Supervisor Action: If churning is suspected, review the account thoroughly, document findings, and escalate to compliance if warranted.
Position Monitoring
Concentration Limits
| Factor | Guideline |
|---|---|
| Single position | Generally no more than 10-25% of account |
| Single sector | Monitor for overexposure |
| Correlated positions | Consider combined risk |
Large Position Review
For significant positions, verify:
- Customer understands the risk
- Position is suitable for account
- Margin is adequate
- Exit strategy is reasonable
Pattern Recognition
Trading Patterns Requiring Review
| Pattern | Potential Issue |
|---|---|
| Consistent losses | Possible unsuitable strategies |
| Short-term reversals | Potential churning |
| Expiration week activity | Possible manipulation concerns |
| After-hours order entry | Timestamp integrity |
Documentation Requirements
For each review, document:
- What was reviewed
- Findings (normal or concerning)
- Actions taken
- Follow-up required
Test Your Knowledge
Which of the following is an indicator of potential churning in an options account?
A
B
C
D
Test Your Knowledge
Exception reports typically flag accounts based on all of the following EXCEPT:
A
B
C
D