1. A fraudulent brokerage firm that uses aggressive telephone sales tactics to sell securities that the brokerage owns and wants to get rid of. The securities they sell are typically poor investment opportunities, and almost always penny stocks. 2. A brokerage that makes trades on a client's behalf and promises a certain price. The brokerage, however, waits until a different price arises and then makes the trade, keeping the difference as profit. Investopedia Says... 1. Bucket shops are sometimes called the boiler room. The U.S. has laws restricting bucket shop practices by limiting the ability of brokerage houses to create and trade certain types of over-the-counter securities. 2. The second definition for a bucket shop comes from over 50 years ago, when bucket shops would do trades all day long, throwing the ticket into a bucket. At the end of the day they would decide which accounts to award the winning and losing trades.
I don't like TL Trader's definitions of the term "bucketshop". They are not from authoritative sources. They do not reflect common usage of the term on this board or in the industry generally. I think I gave much better definitions, from authoritative sources, which reflect common usage on this board and in industry, here: http://elitetrader.com/vb/showthread.php?s=&postid=930053&highlight=*webster*#post930053
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Does Investopedia accept advertising revenue from bucketshops? I don't mean bucketshops as defined by Investopedia. I ask this question using instead the authoritative definitions of "bucketshop", coming from Merriam-Webster's dictionary, and Black's Law Dictionary, for which I gave a link. Can anybody answer my question?
In my opinion whenever you use the term like 'bucketshop' you have to put in in context, i.e. know exactly which market you are talking about. I prefer to use the CFTC derfinition: "Bucket Shop: A brokerage enterprise that âbooks" (i.e., takes the opposite side of) retail customer orders without actually having them executed on an exchange." http://www.cftc.gov/opa/glossary/opaglossary_b.htm Notice that is says ON AN EXCHANGE. Thus as far as you are dealing with an exchange-traded product (i.e. a futures contract) the definition is very clear. Whenever we are talking about an Over-the-counter (OTC) market, like spot Forex, the interpretation is more complicated, since in the OTC market your dealer is, by definition, your counter party. In essense the term 'bucket shop' will mean that the dealer has no desire or ability to manage risk, i.e. cover or hedge its exposure resulting from trades by customers. The danger for you as a customer is that such firm has a higher risk of blowing up since it is holding a large and potentially losing position.
If your broker matches every customer order against some other counterparty, so that your broker will not profit from customer losses, then your broker is not bucketing. If your broker stands as a counterparty between both sides of a trade, so that both sides of the trade are guaranteed by the broker, then your broker is not bucketing. Bucketing occurs only when your broker is in a position to profit from customer losses. This occurs when the broker takes the other side of a customer trade, without also immediately matching that trade against an identically priced opposite trade from another customer or from a market-maker. Bucketing creates the conflict of interest which permits, and compels, bucketshops to profit by causing customers to lose money. Misha7 very correctly points out that bucketshops are at high risk for bankrupcty, because they take positions against their customers. But it is at least as important that bucketshops injure their customers not just when they go bankrupt, but on a routine, trade-by-trade basis. They make their money by causing customers to buy at excessively high prices, and to sell at excessively low prices, and to do so using dirty tricks to prevent the customer from perceiving what is happening. The bucketshop business model is basically that of taking candy from babies, a little bit at a time, over and over and over again; and when no meat is left on the carcass, the bucketshop recruits fresh meat to replace it. I think the CFTC definitions are not well-formed, because they do not cover the situation of OTC, as Misha7 explained.
Not taking shots at JimRockford and Misha7 -- their posts are a fair colloquy -- but I don't get these headscratching questions on a meaningful definition of bucketing and bucketshop. To me, the CFTC's definitions are DEAD ON CORRECT, no embellishment or elaboration needed. From the CFTC glossary Misha7 invokes: _______________________________________________ Bucketing: Directly or indirectly taking the opposite side of a customer's order into a broker's own account or into an account in which a broker has an interest, without open and competitive execution of the order on an exchange. Also called âtrading against.â Bucket Shop: A brokerage enterprise that âbooks" (i.e., takes the opposite side of) retail customer orders without actually having them executed on an exchange. _________________________________________________ "Also called 'trading against.'â -- Isn't that where the meat meets the metal? What else is there to say? On the âAboutâ page of the glossary, the CFTC explains in pertinent part: âBecause the definitions of many words and phrases used throughout the futures industry are not readily available in standard references, the CFTC's Office of External Affairs has compiled this glossary to assist members of the public in understanding the specialized words that are used in the industry.â
Here is the problem with CFTC's definitions. They determine the existence of bucketing, based on whether or not trades are executed on an exchange. The problem is that this can't be applied to FX, because there is no centralized FX exchange. The CFTC definitions were not intended, and do not in fact, help to distinguish between an FX bucketshop and a non-bucketshop FX broker.