Bucketing

As distinguished from the manner in which a bucket shop operates (see Bucket shop) bucketing of stocks consists in sales by a broker (for his own account and risk) against customers’ purchases or purchases by the broker against customers’ sales. Such a proceeding if not illegitimate is at least considered irregular. The purpose may be to avoid the employment of money in carrying (holding) stocks, but more often the purpose of the broker is to speculate against his customers—or, in speculative vernacular, to take the other end or other side of the customers’ trades. in either case the broker wins if his customers lose or he loses if his customers win. As an example of bucketing, if a broker’s customer buys 100 shares of stock at, say, 100 the broker sells 100 shares at the same price. A cro trade is thus made by the broker; the transactions balance and the broker has not to pay out and lock up for an indefinite period the money representing the cost of the stock purchased for the customer. If the stock goes down to 98 and the customer sells while the broker buys; the transactions again balance and the customer loses 2 per cent while the broker gains 2 per cent. On the other hand, if the stock goes up to 102 and the customer sells while the broker buys the customer makes 2 per cent while the broker loses 2 percent. The broker, however, has reduced his lo by the extent of the commi ion received from his customer. If the commi ion is 1-8 each way—1-8 per cent for buying and 1-8 per cent for selling—his net lo is 1 3-4 per cent. If the customer loses and the broker wins, as in the first illustration, the broker’s gain is really 2 1-4 per cent instead of 2 per cent for the reason that his commi ion is added to his gain in the sanie way that in the second illustration it is subtracted from his lo .: It may be that some customers of a broker have bought while others have sold a stock. If more has been bought than has been sold the broker will sell enough to effect a*balance or if more has been sold than has been bought the broker will buy enough to effect a balance. In bucketing there is always a percentage represented by the commi ion (and augmented by interest charged against: the broker’s customers) in favor of the broker as against the | customers, so that the broker profits by bucketing if he loses on half the transactions while his customers lose on the other half. 89