Stock Trading in Bucket Shops
Jesse Livermore's Early Trading Career
In the late nineteenth and early twentieth century, the little guy who wanted to trade stocks usually did it in a bucket shop rather than through a stockbroker. Bucket shops were set up in all sorts of premises, such as drug stores, hotels, cafés, etc.
In bucket shops, "trades" were carried out instantly at the price quoted on the board. The prices came from Wall Street by a variety of means, including ticker-tape and telephone. The advantages of trading in a bucket shop were:
- Bucket shops were happy to deal in very small amounts of money.
- There was no delay in trading caused by the time taken to telephone the order to the trading floor on Wall Street.
- Each bucket shop was an internal market, trading on quotes from Wall Street but not on Wall Street itself.
This is basically exactly how forex operates today. Accounts can be opened with as little as $250, trades are quickly entered (except when it's to the trader's advantage) and each broker is an internal market (market maker)
Bucket shops, in truth, were little more than betting shops, where fools were quickly parted from their money. Although most bucket shops were not dishonest to the extent that they would refuse to pay a winner or that they would pretend prices had fallen when they had in fact risen, they were adept in more subtle ways of profiting from the greed of the would-be stock trader.
Trading in bucket shops invariably involved margin. If your stocks moved in the right direction, you would profit handsomely. If they moved even slightly against you, you would lose all of your money. The natural ups and downs of daily trading served to wipe out most positions, resulting in bucket shops frequently taking all of the money an individual had "invested".
Sounds a lot like Forex to me...
Livermore's ability to interpret patterns in the stock prices enabled him to beat the bucket shops. He always traded alone - a lifelong habit.
"I began in the smaller bucket shops, where the man who traded in twenty shares at a clip was suspected of being John W. Gates in disguise or J. P. Morgan traveling incognito."
"I kept my business to myself. It was a one-man business, anyhow. It was my head, wasn't it? Prices either were going the way I doped them out, without any help from friends or partners, or they were going the other way, and nobody could stop them out of kindness to me. I couldn't see where I needed to tell my business to anybody else. I've got friends, of course, but my business has always been the same - a one-man affair. That is why I have always played a lone hand."
Livermore's Fortune Reaches $10,000 - But There's Trouble
Livermore's success soon caused him problems. Bucket shop owners began to recognize him as a consistent winner - and they only wanted to trade against losers. He began having to take smaller positions than he wanted to, or even lose money in his first trades, only to later hit the bucket shop with "stings" where he took large winning positions.
As he became widely recognized, the shops began refusing to take his trades. They called him the Kid Plunger. (Plunger = reckless speculator.)
"I tried the other branches one after another, but they all got to know me, and my money wasn't any good in any of their offices. I couldn't even go in to look at the quotations without some of the clerks making cracks at me. I tried to get them to let me trade at long intervals by dividing my visits among them all. But that didn't work."
Despite the bucket shops refusing to deal with him (if they recognized him - Livermore took to disguising himself) or only trading with him under severe handicaps - such as Livermore paying higher prices for stocks he wanted to buy and getting less for stocks he wanted to sell than other customers - Livermore continued to trade profitably. By the age of 20 his fortune had grown to $10,000.
I can't think of any winning trade i've had where the bucket shop didn't hold my order for a few seconds or more to give me a worse price.
He had now reached a point where bucket shops began cheating on prices to prevent him winning. It was time, he realized, to move on and begin trading through legitimate stockbrokers.
If anyone knows of a legitimate broker in forex-please let me know.