What is a Bucket Shop
The term bucket shop can be used in multiple contexts to refer to a less than reputable brokerage firm that habitually utilizes unethical practices.
1. A fraudulent brokerage firm that uses aggressive telephone sales tactics to sell securities that the brokerage owns and wants to get rid of. The securities they sell are typically poor investment opportunities, and almost always penny stocks.
2. A brokerage that makes trades on a client's behalf and promises a certain price. The brokerage, however, waits until a different price arises and then makes the trade, keeping the difference as profit. This practice is called bucketing and places that practice this, are known as bucket shops.
BREAKING DOWN Bucket Shop
Bucket shop can be used in multiple contexts, some more current than others. Universally, it is used to refer to a brokerage firm that engages in unethical practices as a means of producing revenue.
1. Bucket shops are sometimes called the boiler room. The U.S. has laws restricting bucket shop practices by limiting the ability of brokerage houses to create and trade certain types of over-the-counter securities.
2. The second definition for a bucket shop comes from more than 50 years ago, when bucket shops would do trades all day long, throwing the tickets into a bucket. At the end of the day, they would decide which accounts to award the winning and losing trades to. This practice is incredibly illegal by today's standards and regulations.