- Bucket shop (stock market)
Bucket shop is a
brokerage firm that “books" (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 Glossary, US Commodity Futures Trading Commissionwebsite.] These brokerages are also often called boiler rooms.
Bucket Shop is a specifically defined term under the criminal law of many states in the United States which make it a crime to operate a bucket shop. [For example, see California's [http://caselaw.lp.findlaw.com/cacodes/corp/29000-29008.html definition] , Washington State's [http://apps.leg.wa.gov/RCW/default.aspx?cite=9.47.080 definition] , Pennsylvania's [http://members.aol.com/StatutesP9/18PA7316.html definition] , or Mississippi's [http://www.mscode.com/free/statutes/87/001/0021.htm definition] . ] Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a
derivativeinterest in a securityor commodity future, but there is no transaction made on any exchange. The transaction goes 'in the bucket' and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Operating a bucket shop would also likely involve violations of several provisions of US federal securities or commodity futures laws [http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=4th&navby=docket&no=001488p See, for example, CFTC v. Baragosh (currency futures bucket shop)] .
History in the United States
Bucket shops specializing in stocks and commodity futures flourished in the United States in the late 1800s and early 1900s. [ [http://www.historycooperative.org/cgi-bin/justtop.cgi?act=justtop&url=http://www.historycooperative.org/journals/jah/93.2/hochfelder.html David Hochfelder | "Where the Common People Could Speculate": The Ticker, Bucket Shops, and the Origins of Popular Participation in Financial Markets, 1880–1920 | The Journal of American History, 93.2 | The History Cooperative ] ] .
Edwin Lefèvre, who is believed to have been writing on behalf of Jesse Lauriston Livermore, describes the operations of bucket shops in the 1890s in detail [cite book|title=Reminiscences of a Stock Operator |date=1923|author= Edwin Lefèvre] .In the United States, the traditional pseudo-brokerage bucket shops came under increasing legal assault in the early 1900s, and were effectively eliminated in the 1920s. However, the term came to apply to other types of scams, some of which are still practiced. They were typically small store front operations that catered to the small investor, where speculators could bet on price fluctuations during market hours. However, no actual shares were bought or sold: all trading was between the bucket shop and its clients. The bucket shop made its profit from commissions, and also profited when share prices fell.
The terms of trade were different for each bucket shop, but bucket shops typically catered to customers who traded on thin margins, even as low as 1%. Most bucket shops refused to make
margin calls, so that if the stock price fell even momentarily to the limit of the client's margin, the client would lose his entire investment
The highly leveraged use of margins theoretically gave the speculators equally large upside potential. However, if a bucket shop held a large position on a stock, it might sell the stock on the real stock exchange, causing the price on the
ticker tapeto momentarily move down enough to wipe out its clients margins, and the bucket shop could take 100% of their investments. [ Edwin Lefèvre(1923) " Reminiscences of a Stock Operator", reprinted 1968, New York: Simon & Schuster. (the book is regarded as a "roman a clef" of the life of actual stock operator Jesse Livermore).]
Origin of the term
There are two reported origins of the term "bucket shop". First, that it was applied to low-class London drinking establishments that sold the dregs of other saloons - by the bucket. Second, it described London grain dealers who dealt in smaller grain contracts than did the Board of Trade. In either case, "bucket shop" came to apply to low-class pseudo stock brokerages that did not execute trades. [Ann Fabian (1999) "Card Sharps and Bucket Shops", New York: Routledge, p.189.]
The term "bucketshop" as now applied in the United States, was first used in the late  70s, but it is very evident that it was coined in London as many as fifty years ago, when it had absolutely no reference to any species of speculation or gambling. It appears that beer swillers from the East Side (London) went from street to street with a bucket, draining every keg they came across and picking up cast-off cigar butts. Arriving at a den, they gathered for social amusement around a table and passed the bucket as a loving cup, each taking a 'pull' as it came his way. In the interval there were smoking and rough jokes. The den soon came to be called a bucketshop. Later on the term was applied, both in England and the United States, as a byword of reproach, to small places where grain and stock deals were counterfeited. [Hill, John Jr., "Gold Bricks of Speculation", (Chicago, Il.,: Lincoln Book Concern, 1904) p.39. Quoted in Markham, Jerry "The History of Commodity Futures Trading and its Regulation", (New York, Praeger, 1987) Chapt. 1 n.13.]
House stock scam
The term bucket shop is now applied to any fraudulent stock-selling operation such as a boiler room, which has an undisclosed relationship with the company being promoted or undisclosed profit from the sale of
house stockbeing promoted. A bucket shop promotes (via telephone or email) thinly traded or even fraudulent investments.
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