A bucket shop broker is just a glorified bookmaker.
In the old days a bucket shop was your local downtown stock broker... nothing more than a seedy betting shop. All a trader did was walk into a bucket shop and bet on fluctuations in stock prices as they were printed out on a ticker tape. It was extremely profitable for the Broker (bucket shop) Even if they played legitimately the fluctuations on the tape created a great profit. Most of the traders were betting on a margin of only ¾ of a point, and it didn't take much of a move in price to wipe a trader's position out.
If you were a small trader, you had no choice but to accept the terms of the bucket shop. You needed a lot of money to go and trade in New York, Chicago or the Boston Stock Exchanges which were the only alternatives.
It's no different today.
Today the Forex bucket shops are those Forex brokers that you are dealing with on the Internet from the comfort of your own home. They offer you a free trading platform, an account that you can start with as little as $250 and up to 400/1 leverage, and they wait for you to go broke. it doesn't take long, usually less than a month. That's OK, because it was only $250, and you get payed every week from your job. However the bucket shop broker is making his pip on every $ traded through the spread.
Why do I call these Forex brokers bucket shops?
Because they are doing exactly what those seedy brokers were doing back a hundred years ago in downtown america. They are serving you a redirected price into a set of charts that they give you for free. The feeds that bring those prices into your charts are capable of being manipulated by the brokers, and they do it all the time.
There's two ways a bucket shop broker can cover his risk in the market:
- he can operate a dealing desk, and trade against you.
- he can manipulate the feed into his charts and trading station, and give you false price fluctuations to suit himself.
Bucket shop brokers do at least one, but often both. If you don't believe me, download a trading station from a Electronics Communications Network (ECN) broker and compare price, especially around announcements. I've seen as much as a 50 pip variation with one of the largest brokers in the Forex arena.
What can you do to combat this?
Not much at the moment if you are a small trader.
- You should have at least 2 screens and 2 sets of charts. The feeds going into the charts must be from different sourses... with at least one being an ECN feed.
- If you have the funds to open an account with an ECN broker, do so.ECN brokers are in the minority at present, but they are growing in numbers. It costs a lot more to open an account, and the leverage won't be 400:1 but will be more likely 100:1 or 200:1 at best.
Many of the ECN's are already large players in the Equity's markets, and they're only just beginning to move into Forex.
I predict that within 12 to 18 months these new brokers (ECN's) will move into the lower end of the market by offering accounts below $1,000 and up to 400:1 leverage. When they do, they'll wipe out the bucket shops. I believe that some of the largest bucket shop brokers are already in financial trouble, and it will only get worse.