Discussion Topic: Forex Bucket Shops
We have already learned about how to choose the best forex broker and there we have discussed about checking the authenticity and reliability of the broker. Forex Bucket Shop is the negative face of such an unreliable broker. In this article, we will discuss what are forex bucket shops? And how you can identify a forex bucket shop?
What is a Forex Bucket Shop?
As quoted by U.S. Supreme Courte a bucket shop is -
"An establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in."
Finding it too complex to understand? We will make it simpler.
In a simple sentence, forex bucket shops are brokerage firms that have “questionable” trading practices such as unnecessary frequent delays in order execution, frequent price misquotes or re-quotes, and frequent price slippages that are only favorable to the broker.
How Do These Bucket Shops work?
The name bucket shop comes from brokers back in 60's who used to put their clients’ phone-in trading orders on slips (a little piece of paper) and then drop them off (the slips, not the clients) in a tiny bucket instead of actually sending them to the market for execution. Instead, they used to create a dummy marketplace for traders to place their trades.
Without sending the orders out to the free market, the client was actually forced to do betting against the forex bucket shop operators who were also known as bucketeers.
These bucketeers did not generally reveal the real price of the assets that their client is trading, which means that they could inform their clients that the price has moved or didn’t move – whatever goes in favor of the broker!
Though after the invention of the internet and improving regulations the number of bucket shops decreases in numbers, they do exists in other formats.
What is the Present Workflow of Bucket Shops?
Scenario 1: A fraudulent brokerage firm that takes an approach of aggressive telephone sales (also sends SMS) to sell securities that the brokerage owns and wants to get rid of. Usually, the securities they promote are poor investment opportunities, and almost always penny stocks.
Scenario 2: A brokerage firm that makes trades on behalf of their clients and promises a certain price. The broker, however, delays the order until a different price arises and then executes the trade, keeping the price difference as profit.
Scenario 3: A total fraud company that traps you by saying that they are legit forex broker. If you start trading with them they will create a virtual trading environment for you and will intentionally direct a majority of your trades towards losses by manipulating exchange prices.
All of these above practices are called as bucketing, and brokers that practice this are known as bucket shops.
How to Identify a Forex Bucket Shop?
Now the question is that how can you differentiate between a market maker, who may also be taking the other side of your trade, and a bucket shop?
One of the best ways to detect bucket shops is whether your orders are actually filled in the real market. You can check if the price charts or candlestick chart is matching with other bog name brokers. Especially in the time of news breakout, when the EUR/USD moves nearly 50 points in 10 minutes, you should compare your broker’s prices if their price also moves in parallel.
If the price data of broker does not move that much, or If your broker implies any restriction on trades at those critical points in time, or anytime declines to withdraw your profits to you, then chances are it is a bucket shop.
Some more things you may observer are:
- Hardly matches the real market flow or does not send/offset the majority of their unmatched volume to a real market (wholesaler / ECN / exchange / etc.),
- Make profits directly from client losses,
- Frequent asymmetric slippage in executing orders at a specific price point,
- Frequent re-quotes or cancels deals without a specific reason.
- Cannot fully process withdrawal requests within 24 hours (one working day).
Forex Bucket Shops - Conclusion
It is very hard to identify a bucket shop; that is why we always recommend you to deal with reputed brokers only. If possible, select brokers who are registered in a strictly regulated country such as USA, UK, Germany, Australia, India etc.
Ignore any unknown broker who promotes their services heavily or shows you the opportunity of making huge profits just by trading with them. Moreover, ignore brokers who make you greedy by offering you bonus finds just for opening an account or depositing money in your account.
These are all related to forex scams, which is a bigger problem. Check our article on how to identify a forex scam and stay out of it.
So, before depositing your hard-earned money with just anyone, be sure to do your own research so that you avoid fraudulent brokers and forex scams. Mind you, despite strict regulations, there are plenty out there.
We hope that you have enjoyed the above article describing the forex bucket shop. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts about any of these scams. Also, let us know if you have any time offered with any of the above opportunities by a scammer. This will help others to stay safe from a forex trading scam.