What is 'Bucketing'

Bucketing is a situation where, in an attempt to make a short-term profit, a broker confirms an order to a client without actually executing it. The broker will tell the client the order is executed and quote them a price. Then, the broker will attempt to execute the price in the open market at a more favorable price than was quoted to the client. The broker pockets the difference for a profit. A brokerage which engages in unscrupulous activities, such as bucketing, is often referred to as a bucket shop.

BREAKING DOWN 'Bucketing'

Bucketing is an unethical practice, and a disadvantage to the client because it does not provide the available execution price for their order. A broker should not intentionally seek the best price for their client in the name of generating profits for their firm. When bucketing occurs, the broker quotes the client an execution price without actually achieving that price. Then, the broker goes to the market to seek a better execution price. If the client's order is a sell order, the broker seeks a higher price than was quoted to the client. If the client's order is a buy price, they seek a lower price than quoted to the client. The broker pockets the difference between the price quoted to the client and the actual price obtained in the market.

Example of Bucketing

For example, Bert is Ernie's client. Ernie works at XYZ Brokerage. Bert tells Ernie to sell 100 shares of ABC stock. Ernie comes back to Bert and says he made the sale and the price was $45/share. Then, Ernie goes to the market and actually gets a price of $50/share. Ernie pockets the difference of $5/share.

RELATED TERMS
  1. Stock Ahead

    Stock ahead refers to a situation in which an order is placed, ...
  2. Bucket

    Bucket has various meanings in business and finance related to ...
  3. Give Up

    Give up is a procedure in securities or commodities trading where ...
  4. Carrying Broker

    Carrying broker refers to a commodities or securities broking ...
  5. Two Dollar Broker

    A two dollar broker is a floor broker who executes orders for ...
  6. Discretionary Account

    A discretionary account is an investment account that allows ...
Related Articles
  1. Retirement

    A Sanity-Saving Retirement Stock Portfolio

    The market rollercoaster has many retirees calling it quits on stocks. Big mistake.
  2. Taxes

    The 3 Bucket Approach to Retirement Savings

    The three-bucket approach to retirement savings helps minimize taxes in your golden years.
  3. Personal Finance

    Research Report Red Flags For Brokers

    Discover how to look past analysts' ratings to find winning stocks for your clients.
  4. Financial Advisor

    Why Near-Retirees Shouldn't Sweat the Volatility

    With the stock market bumpy, some folks nearing retirement might be nervous. Here's how to create some wiggle room for your portfolio.
  5. Financial Advisor

    Manage Your Clients' Expectations

    You can't control how they react to the market, but you can help them understand the reality of the situation.
  6. Insurance

    Brokers: Do You Want To Sell Stocks Or Insurance?

    Know the difference between working as a broker or an insurance rep.
  7. Managing Wealth

    Asset Manager Ethics: Acting In the Benefit of Clients

    Investment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
  8. Investing

    How to Choose a Forex Broker: Everything You Need to Know

    Take your time when looking for a forex broker because a bad decision can be costly.
  9. Trading

    Price Shading In The Forex Markets

    This practice puts brokers ahead of their clients, but it doesn't have to be a negative for traders.
  10. Financial Advisor

    How to Construct an Annual Review for Clients

    One of the greatest value drivers advisors can provide to clients is an annual review of their financial situation. Here are some guidelines for conducting a well-considered review.
RELATED FAQS
  1. What is the difference between a broker and a market maker?

    A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts ... Read Answer >>
  2. Why Do Brokers Ask for Personal Information?

    There are 3 reasons a broker needs personal information: suitability, record-keeping and the law. Read Answer >>
Trading Center