2 (See " Margin," which read first.) " Bucket shops " are run by irresponsible brokers, not members of any stock exchange, and who do a marginal business upon one dollar a share and upwards.3 As a matter of fact, in the case of a " bucket shop," the stock itself is usually not purchased or sold for the customer. If the order is actually executed upon a bona fida exchange, then the " bucket shop " puts in a contrary order for a like amount. For example, a " bucket shop " would sell an amount equivalent to the customer's purchase, or, likewise, purchase an equivalent amount to his sale, thus in no event carrying stocks. It amounts to the customer wagering his money upon a given stock either going up or down, and the " bucket shop," accepting his wager, gambles the other way; and, in the long run, they, like most other gambling establishments, come out winners. A specific example would be for a person having about $10 to go into a place and buy, say, ten shares of stock, with the anticipation of a rise. He will be charged the buying and selling commission, and interest on the account, the same as in a legitimate broker's office, although no stock will be actually purchased or sold. If the stock goes down more than his dollar margin, unless he puts up more money to protect himself, he will be sold out and the transaction closed, and he will have incurred a loss. If it goes up and he chooses to sell, he will be paid the difference between the buying and selling values of the stock, less the two commissions, and interest on the account, plus his dollar per share originally deposited. In this event the " bucket shop " is the loser for the amount the stock has advanced less the two commissions and interest, unless, by chance, they feared that the stock might advance and to protect themselves had actually purchased. In that case they, in turn, would have had to pay a commission to a legitimate broker. Bear in mind one thing all the time; that the quotations of the legitimate stock exchange are followed in the " bucket shops." Stock exchanges have made strenuous efforts to prevent the installation of " tickers " in concerns of this kind, for if it were not possible for these establishments to get the stock exchange quotations, it would be difficult for them to exist.
1 Inasmuch as legitimate stock exchange brokers have been known to " bucket " their orders - accepting the customer's loss or paying him the profit upon the settlement of the account - it may be sometimes desirable for a customer to know as to whether his orders are actually being executed. This may be done by his demanding the name of the broker on the opposite side of the transaction; that is, the one to whom his security has been sold or from whom it was purchased. The rules of the stock exchange entitle him to this information.
2 " The origin of the term ' bucket shop ' is not now often referred to, and there may be some people who do not know what it is. The old-fashioned stock broker, member of the New York Stock Exchange, for instance, would not take an order to buy or sell less than an even hundred shares of stock on margin. He would refuse to deal in odd lots. So those people whose capital did not admit of their furnishing the necessary margin to trade in so large an amount were shut out from trading. Thus sprang up a class of ' brokers ' not members of the exchange, yet calling themselves brokers, who made a practice of accepting from a number of different customers orders for odd lots until the total amounted to a hundred or some multiple of a hundred shares. Then they would give joint order as one to some regular broker for execution, putting all the small orders together to make one sufficiently large, as the staves of a bucket are put together to make the bucket. Hence the nickname of these intermediate ' brokers ' or jobbers grew to be ' bucket shop keepers.' In more recent times the reputable ' broken lot ' brokers organized an exchange of their own for the direct handling of these small trades, and the term ' bucket 6hop,' accordingly, possesses a present significance less respectable than that of its origin." - Providence Journal.
3 The Constitution of the New York Stock Exchange prohibits its members having any connection whatsoever with " bucket shops," and treats upon the subject as follows:
" Any member of this Exchange who is interested in, or associated in business with, or whose office is connected directly or indirectly by wire or other method or contrivance with, any organization, firm, or individual engaged in the business of dealing in differences or quotations on the fluctuations in the market price of any commodity or security without a bona-fide purchase or sale of said commodity or security in a regular market or Exchange, shall on conviction thereof be deemed to have committed an act or acts detrimental to the interest and welfare of this Exchange."
The curse of this sort of business is that it attracts men and women of very small means, often office boys and the like. It is one of the worst forms of stock gambling known and has done untold injury. The majority of " bucket shops " will advertise that stock can be actually delivered, but as nobody calls for delivery, except in rare cases, they can afford to purchase the stock through genuine brokers to fill the demand of such rare occasions.
" Bucket shops " thrive best on a declining market, for it is natural for the average person to buy stocks in anticipation of their advance in value; or, in other words, the majority of customers wager that stocks will go up. Therefore, a falling market causes the " bucket shop " to win more of its wagers than a rising market.
The magnitude and power of this unwholesome business, centring in New York, is emphasized by the knowledge that at times the daily transactions are almost as large as that reported on the New York Exchange itself. The impression is growing that a large percentage of this business is in the control of a few unscrupulous men commanding enormous financial resources. Under their management the tentacles of this business are reaching out over the country in the shape of branch offices, from which points orders are received at the common centre. Suppose, for example, one of these heavily financially backed concerns finds that it has " orders to buy " a very large number of shares of a given stock. Technically, they are " short " of that stock. It is perfectly feasible for them to go into the market and offer a large block of the same stock for sale, and break the price sufficiently to wipe out all the margins on orders in hand. Stratagems of this kind must be done by the " bucket shop " indirectly, as legitimate stock exchanges do not countenance members accepting orders directly from " bucket shops."