Unauthorized trading occurs when your broker buys or sells a security in your account without your prior approval. Unless you sign a formal agreement giving your broker discretion to manage your account without seeking prior approval for each transaction, your broker must follow rules designed to assure that you, in fact, approved each transaction.

Those rules require the broker to make a contemporaneous note of all of the particulars of the trade on an order ticket and read them back to you before actually placing the order. After the order is executed, the broker must call you back to reiterate the pertinent information, including the actual price at which the security was bought or sold. On the next business day, the broker must match up the information on the order ticket with the details of the actual trade on the firm's internal records. The firm must then send you a confirmation within five days, after the trade actually "settles."

Unauthorized trading can occur for any number of reasons. It occurs most often in firms where there is a large incentive for the broker to meet commission goals, or quotas. Some firms, for example, have contests in which they give away expensive trips or other perquisites to the broker who brings in the most commissions for the year. In other instances, the broker may be experiencing personal financial difficulties and is unable to resist the temptation to generate extra income without your permission. Whatever the reason, it is just another form of theft, plain and simple.

As an investor, the first line of defense against unauthorized trading is to examine your monthly statements and all of your confirmations carefully. If you think you are receiving too many confirmations to have the time to look at each one, that is a good sign that unauthorized transactions are occurring and that your account is being "churned," or excessively traded (see related topic). Your confirmations should be received within five days of the trade, and should have the details you agreed to -- the name of the security, whether you bought or sold, the date, and the price at which you bought or sold. If anything seems wrong, call your broker to discuss. Do not accept any explanation such as "It was a typographical error," or "We will correct it on the statement," or even "I'll make it up to you by giving you a free commission on the next trade." If the broker is engaging in unauthorized trading in your account, she is probably doing it in others too, and you would be helping him conceal her fraud.

Do not think you have to accept a trade that you think was placed based upon a misunderstanding. It is the broker's responsibility to obtain unequivocal permission to make the trade, and any doubt must be resolved in your favor. If you are convinced the broker made an honest mistake, you should allow her to correct it, but you must still make sure you receive a corrected confirmation or confirmation of the rescinded transaction. Check your monthly statements to make sure the appropriate transactions and corrected transactions appear there. If this kind of "honest mistake" happens more than once, you should fire your broker and consult with an attorney experienced in securities arbitration.