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Are Commissions a Big Part of Trading Losses?

To answer this question, we decided to look at some brokerage firms that haven't been very successful. These are predominately firms that charge high commissions and most have been accused of using high-pressure sales tactics. Needless to say, this combination does not bode well for successful trading. We have compiled some information from CFTC complaints on these six brokerage firms.

1. Lexus Financial Group, Inc.

Lexus typically purchases bundles of options costing approximately $1,000 (i.e., options with premiums in the range of approximately $700-$800 plus Lexus' $200 commission charge per option) for its customers.

Lexus opened approximately 826 customer accounts from its inception through June 30, 1996. Over eighty-eight percent (88%) of these accounts suffered net losses. During that time period, Lexus customers invested approximately $10.7 million, of which more than 60% was lost. Total profits in Lexus' profitable accounts for this time period were only approximately $297,716, while total losses in its unprofitable accounts were approximately $6,761,038. Lexus' commissions during this period totalled more than $5.3 million, or well more than three-fourths of customer losses.

2. Trinity Financial Group

During the 15-month period from January 1991 through March 1992, Trinity handled 1,269 customer accounts, which generated $3.6 million in commissions while customers lost $9.2 million, the CFTC complaint charges, adding that 91 percent of the customer accounts handled in the period had lost all or nearly all of their equity by March 31, 1992.

3. Dunhill Financial

*We don't have the amount of commissions on this one, but its still worth looking at.

The complaint further alleges that at least 91.4 percent of the customer accounts opened by Dunhill from October 1995 through September 1998 lost money, and that total net losses, including commissions, were in excess of $9.3 million.

4. Commonwealth Financial Group

The CFTC's complaint states that "Commonwealth's salespeople engage in various trading practices that have no reasonable or adequate basis to obtain profits for their customers and are engaged in only for the purpose of generating commissions." From August 19, 1991, through February 1992, of the 1,137 customer accounts handled by Commonwealth , over 81 percent had lost all or most of their equity by March 1, 1992. During this five-and-half month period, customers lost an aggregate of over $5.7 million and paid over $3.5 million in commissions, the complaint adds.

5. Ceres Trading Group

During the relevant period, the Delray Beach office had at least 875 customers, of which at least 200 traded either grain or heating oil options. Net customer losses at the Delray Beach office during at least part of the relevant period were approximately as follows: 1996 - $8,707,200; 1997 - $11,625,250; 1998 - $4,829,250. For those same years, the commissions earned by Delray Beach ranged from $975,361 to $1,682,504, or between 20 and 33% of the overall commissions earned by Ceres.

6. Wellington Financial Group, Inc.

The CFTC order further finds that approximately 90 percent of Thomas' customers lost money, resulting in total losses of approximately $1.2 million and that more than 90 percent of the accounts opened with Wellington lost money, resulting in total losses of approximately $800,000.

Commissions do add up. Paying $200 a round turn seems to stack the odds against you, unless maybe you are going to take a long-term position. Be careful of brokers who charge $200 commissions and recommend that you should be an active trader - especially daytrading. It's a shame all these traders lost money in the markets, however, the brokers appear to have made a few bucks. I wonder if a good chunk of those commissions went to pay for the ridiculous "get rich quick" infomercials?






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