Bucket shop history

A term originally used in the late 19th century to describe a place where small investors would place bets on stocks and commodity futures contracts. Bucket shops took orders from customers beginning with small odd lots, sometimes on margin as low as 10 percent of a stock or commodity’s value, and would pretend to invest the money in the market. In fact, they usually did not invest it at all but simply paid the investor based on the stock’s movement or sometimes disappeared, stealing investors’ funds.

Often, the stock or commodity futures exchanges would find bucket shop operators on the floor of their exchanges, attempting to determine the direction of prices so that they would know what tips to give investors or how to invest their own money without assuming risk. The exchanges finally passed rules to eliminate them. Before World War I, the Chicago commodities exchanges, and particularly the CHICAGO BOARD OF TRADE, declared open warfare on the bucket shops in the courts in an attempt to drive them out of business. Often, the bucket shops would take customers’ money and open a contrary position in the market, ensuring that the customers would lose their money while the bucket shop profited. The public’s use of bucket shops in the pre-1920 period was relatively widespread since the shops appeared to be offering “leverage” to the man in the street.

The futures exchanges won a major victory against the bucket shops in a landmark Supreme Court case, Board of Trade of City of Chicago v. Christie Grain & Stock Co. in 1905. The bucket shops claimed that the exchanges and WESTERN UNION, the company that provided the wire services, were restraining trade by refusing them access to their transmitted prices. The Court ruled that the bucket shops could not use prices transmitted by the Chicago Board of Trade in their own business, pretending to be legitimate in the process. Although suffering a setback, bucket shops continued to thrive through the 1920s.

In the 1920s, their presence began to fade as the exchanges became more organized and less tolerant of their activities. Finally, the securities laws passed during the 1930s put an end to their activities. Today, the term is used to imply that a company deals for itself first rather than the clients it is supposed to represent as broker. During more recent bull markets and periods of intense speculation, many “boiler rooms” have appeared, selling worthless stocks and derivatives to unsuspecting investors, keeping the bucket shop tradition alive and well.

See also FUTURES MARKETS; STOCK MARKETS.

Further reading

• Hill, John, Jr. Gold Bricks of Speculation. Chicago: Lincoln Book Concern, 1904. 
• Lefevre, Edwin. Reminiscences of a Stock Operator. Chicago: George Doran & Co., 1923.