Trader's Glossary

Bucket Shop

Bucket shop is a term used to describe a brokerage that acts as counterparty to its clients’ positions without ever executing them on an exchange. Historically, bucket shops were also known to take the opposite side of traders’ orders in certain situations, taking positions on the real stock exchange so as to affect the ticker tape price enough to wipe out their clients’ margins. The term was popularised by Edwin Lefèvre in his 1923 book ‘Reminiscences of a Stock Operator’. There is some disagreement as to where the term originated, some say it refers to the buckets in which phone-in orders were placed instead of being executed. Others hold that the term originated from Georgian England where street urchins would drain abandoned beer kegs into a bucket and get drunk in abandoned buildings. The place where they would drain the empty kegs came to be known as the bucket shop. In trading the term was adapted to refer to disreputable businesses that profit from the dregs of the market which are thought too insignificant to be worthwhile for bigger brokers. Bucket shops are sometimes confused with boiler rooms, which use high-pressure sales tactics to entice hapless investors to purchase worthless securities, however the two terms refer to different business models. The reason for the confusion is that over the past decade many online brokers have sprung up that effectively operate as bucket shops, but utilise boiler room tactics in order to pull investors in.