Bucket Shops: unethical brokerages

What Is a Bucket Shop?

A bucket shop is a brokerage firm that engages in unethical business practices. Historically, the term was used to refer to firms that allowed their customers to gamble on stock prices, often using dangerously high levels of leverage.

More recently, the term is associated with firms that practice bucketing, which involves profiting from a client’s trades without their knowledge.

KEY TAKEAWAYS

  • A bucket shop is a brokerage firm that engages in unethical business practices.
  • Historically, they would facilitate gambling on stock prices, often encouraging their clients to use dangerous levels of leverage.
  • Today, bucket shops are associated with so-called bucketing transactions, which involves illegally profiting from clients’ trades.

 

Understanding Bucket Shops

Bucket shops are brokerage firms that have clear and unmitigated conflicts of interest with their customers. Traditionally, they functioned as gambling houses in which customers were encouraged to take on substantial leverage in order to speculate on future stock prices. When customers occasionally profited on their trades, the gains would be advertised by the bucket shop to recruit new customers. In most instances, however, the customers would face large or even total losses. As with all gambling activities, the bucket shops benefited from their customer’s losses.

Bucket shops became common in the late 1800s, when the spread of new communications technologies, such as the telegraph, made it possible to speculate on stock prices in a timely manner. Bucket shops emerged to let clients gamble on stock prices in the same way that they might otherwise bet on racehorses,

One possible explanation for the origins of the name “bucket shop” has to do with another technique used by these firms to profit off their clients. After executing their trades throughout the day, bucket shops would sometimes throw the trade tickets into a bucket. After mixing the tickets together, the firm would then allocate winning and losing trades to specific clients based on their assessment of which clients would likely generate the most profit for the firm. This practice is of course prohibited by today’s legal and regulatory standards.

Today, the term is used more precisely to refer to brokerage firms that unethically profit from their clients’ transactions. Specifically, it refers to firms that engage in bucketing, which is the practice of misleading clients about the actual price at which a requested transaction was executed and using this deception to profit from their trades.

 

Real World Example of a Bucket Shop

To illustrate bucketing, consider a case where a client asks to purchase 1,000 shares of stock at a price of $20 per share. An unscrupulous broker might tell the client that the shares were purchased for $20, when in fact they were purchased for $19.

The difference of $1 per share would be pocketed by the broker as profit, without disclosing this fact to the client. Effectively, the broker would have stolen $1,000 worth of profit from the client. This type of transaction is known as bucketing, and firms which engage in it are described as bucket shops.

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Judge Mehta’s questioning left little doubt that he was deeply skeptical about the arguments from Mr. Trump’s legal team, led by William S. Consovoy.

Mr. Consovoy essentially argued that the Constitution does not give Congress the power to investigate potential presidential corruption because determining whether someone broke the law is a function reserved for the executive branch. But Judge Mehta pointed out that under that logic, many famous historical congressional oversight investigations were illegitimate.

“Is it your view that the Whitewater and Watergate investigations were beyond the authority of Congress?” the judge asked, referring to congressional inquiries of the Nixon and Clinton presidencies. “They were looking at violations of criminal law.”

Judge Mehta, a 2014 appointee of President Barack Obama, also said he saw no need for further briefings or arguments because the dispute turned on a question of law, and the Constitution does not permit Mr. Trump’s legal team to compel the House to turn over internal documents as evidence. He said he would let lawyers submit any additional materials they wanted through Friday, then he would make his decision.

Any ruling by Judge Mehta is likely to be only the beginning of the case. Both sides acknowledged that an appeal was virtually certain, and Mr. Consovoy asked the judge, if he does rule against Mr. Trump, to stay his ruling pending appeal so that the subpoena deadline for Mazars USA, the accounting firm, is not set off before the litigation fully plays out.

But Douglas Letter, the general counsel for the House, asked the judge not to stay any such ruling — or, if he does, to make it conditional on the Trump team expeditiously filing an appeal. The larger threat, he said, was that the Trump team could use the courts to run out the clock on this Congress, thwarting its ability to perform oversight.

“Any delay undermines the House’s ability to do what the Constitution allows it to do,” Mr. Letter said.

The judge’s comments and questioning suggest he is likely to agree with the House that the information it is seeking is within its legitimate oversight roles, rejecting the Trump team’s argument that the subpoena is an illegitimate effort to obtain political dirt without any tie to Congress’s function of deciding whether to enact new laws.