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Posted on 10 April 2011 | 4,341 views

Bucket Shops Before the Stock Market Crash of 1929

A “Bucket Shop” was an institution where one could buy and sell stock, though it was not a legitimate brokerage firm. When a customer placed an order it was written on a slip of paper and tossed into a bucket rather than being immediately transmitted to the floor of a stock exchange.

In a traditional bucket shop, however, the brokerage itself is the counterparty to all orders submitted to it and the trades are never executed on an exchange. These bucket shops were typically small store front operations that catered to the small investor prior to the stock market crash of 1929.

The bucket shop would at a later time match up buys and sells to increase its own profit. The customer had little way to know the actual price at any exact moment. The bucket shop could match a buy at $20 with a sell at $19 and pocket the $1 difference. As long as the bucket shop reported prices within the day’s high low range, the customer had no way of detecting the fraud. The bucket shop could shift its recommendations to correct any imbalance in the buy-sell orders in its own bucket.

The bucket shops essentially bet that their customers will lose money in their trades — they do not fraudulently report stock prices or refuse to pay a winner. Because they were willing to work in small sums that were impractical with legitimate brokerages, they handled a decent retail business and collected commissions.

There are several different definitions of a bucket shop, but all involve fraudulent brokering of stock market-related trades. Popular and legal in the early 20th century, the local New York bucket shops are where famed speculator Jesse Livermore sharpened his trading skills.

Today’s instant price quotes and executions have eliminated the original scheme, but the term has come to be applied to any fraudulent brokerage type operation such as boiler rooms. Today, the United States laws and regulation prohibit bucket shops. The Bernard Madoff scandal of late 2008, though widely called a “Ponzi Scheme” also had elements of a bucket shop in that the trades he purported to make were never executed.

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