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.