Bucket shop (stock market)

 

Before playing with DeFi or cryptocurrency trading, you should know what a "bucket shop" was (so you can avoid putting your money in one): https://t.co/J7LuYnl6Wf

— Gavin Andresen (@gavinandresen) July 6, 2020

 

 

As defined by the U.S. Supreme Court, a bucket shop is “an establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in”.^[1]

A person who engages in the practice is referred to as a bucketeer and the practice is sometimes referred to as bucketeering

 

Definition and term origin

According to The New York Times in 1958, a bucket shop is “an office with facilities for making bets in the form of orders or options based on current exchange prices of securities or commodities, but without any actual buying or selling of the property”.^[2]

People often mistakenly interchange the expressions “bucket shop” and “boiler room”^{[citation needed]}, but there is actually a significant difference. A boiler room has been defined as a call centre where high-pressure salespeople call lists of potential investors (known as “sucker lists”) to peddle speculative, even fraudulent, securities. In contrast, a bucket shop could be better thought of as a place where people go to gamble – similar to a bookie.^{[citation needed]} In the UK, a “bucket shop” usually means a travel agency that specialises in providing cheap air tickets.

The origin of the term bucket shop has nothing to do with financial markets, as the term originated from England in the 1820s. During the 1820s, street urchins drained beer kegs which were discarded from public houses. The street urchins would take the dregs to an abandoned shop and drink them. This practice became known as bucketing, and the location at which they drained the kegs became known as a bucket shop. The idea was transferred to illegal brokers because they too sought to profit from sources too small or too unreliable for legitimate brokers to handle.^[3] The term bucket shop came to apply to low-class pseudo stock brokerages that did not execute trades.^[4][5]

Legality

“Bucket shop” is a defined term in the many U.S. states that criminalize the operation of a bucket shop.^[6] Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but there is no transaction made on any exchange. The transaction goes “in the bucket” and is never executed. Because no trading of actual securities occurs, the customer is essentially betting against the bucket shop operator in a game based on abstract security prices. While trading in a legitimate exchange also provides a similar game or wagering aspect, the one distinctive characteristic of a bucket shop is the mimicry of trading securities when no actual securities are traded. The bucket shop’s exchange is a fiction, which the parties agree to imagine themselves as following the events occurring in a real exchange. Alternatively, the bucket shop operator “literally ‘plays the bank’, as in a gambling house, against the customer”. ^[7]

Bucketing of orders violates several provisions of U.S. securities law.^[8][9] These prohibitions apply to legitimate brokerages as well as bucket shops.

 

From Wikipedia, the free encyclopedia

---

What Is a Bucket Shop?

A bucket shop is a brokerage firm that engages in unethical business practices. Historically, the term was used to refer to firms that allowed their customers to gamble on stock prices, often using dangerously high levels of leverage.

More recently, the term is associated with firms that practice bucketing, which involves profiting from a client’s trades without their knowledge.

Understanding Bucket Shops

Bucket shops are brokerage firms that have clear and unmitigated conflicts of interest with their customers. Traditionally, they functioned as gambling houses in which customers were encouraged to take on substantial leverage in order to speculate on future stock prices. When customers occasionally profited on their trades, the gains would be advertised by the bucket shop to recruit new customers. In most instances, however, the customers would face large or even total losses. As with all gambling activities, the bucket shops benefited from their customer’s losses.

Bucket shops became common in the late 1800s, when the spread of new communications technologies, such as the telegraph, made it possible to speculate on stock prices in a timely manner. Bucket shops emerged to let clients gamble on stock prices in the same way that they might otherwise bet on racehorses,

One possible explanation for the origins of the name “bucket shop” has to do with another technique used by these firms to profit off their clients. After executing their trades throughout the day, bucket shops would sometimes throw the trade tickets into a bucket. After mixing the tickets together, the firm would then allocate winning and losing trades to specific clients based on their assessment of which clients would likely generate the most profit for the firm. This practice is of course prohibited by today’s legal and regulatory standards.

Today, the term is used more precisely to refer to brokerage firms that unethically profit from their clients’ transactions. Specifically, it refers to firms that engage in bucketing, which is the practice of misleading clients about the actual price at which a requested transaction was executed and using this deception to profit from their trades.

Real World Example of a Bucket Shop

To illustrate bucketing, consider a case where a client asks to purchase 1,000 shares of stock at a price of $20 per share. An unscrupulous broker might tell the client that the shares were purchased for $20, when in fact they were purchased for $19.

The difference of $1 per share would be pocketed by the broker as profit, without disclosing this fact to the client. Effectively, the broker would have stolen $1,000 worth of profit from the client. This type of transaction is known as bucketing, and firms which engage in it are described as bucket shops.

« Back to Glossary Index