Bucket shops and market makers

Jesse Livermore spent many years trading in the bucket shops until the day he was too known and not able to trade there anymore.

In a chapter of is marvellous book, Reminiscences of a stock operator, Livermore mentioned that there was a manager in one of the shops who told him that all customers were losers and that his “food” depended on that. Of course, the manager told Livermore to kindly leave the shop.

One of the best lessons of Livermore is that he showed us how the world of bucket shops is, which is nothing else than an old version of the market maker brokers.

Many of those bucket shops used to use strange tactics, the same as the market makers of today.

The bucket shops used to create their own prices, simply following the real price of the markets with some delay.

The market seemed quite fair but actually the room for deceit was huge.

As now I imagine that the bucket shops did not really need to do too much to screw their customers. They simply needed to put some points extra of spread to the real one and business done.

The problem starts when competition increases a lot.

The great business of CFD and Forex market makers.

A good business without entry barriers was what bucket shops enjoyed in the past. That meant that competition spread like flies which made things difficult for them to stay alive.

At first sight the business of Forex and CFDs brokers is excellent. Some of them get the same commissions as the traditional brokers plus they get the whole account and spread since the markets are “synthetic”.

In that sense this bucket shops operate as brokers and market makers at the same time so to speak.

However, as I said, the business was, and still is, open to everybody easily.

Some people opened their broker (bucket shop) and started offering prices.

After that there come several problems: capitalization, fixed costs, financing, etcetera.


Somehow, many market makers need that their customers to lose at certain rate.

If that rate is not achieved in the normal way they will resort to other type of practices.

Then there you have the problem with the starting market makers. Actually the competition is incredible at that stage. Sadly the ones that cheat have an edge. They make more money more rapidly. If they are able to survive until they capitalize themselves they will be able to stay in the business.

The problems arise. Problems as: “we have to check the operations as the prices were not real”, “we have to check again your documents”, etcetera.

At least, in Jesses’s times people used to see each other face to face, hence it was not that easy to reject a payment to a customer. They could not afford to have a spectacle in the middle of the “trading room”.

Today it is more complicated to cause trouble to the broker if it decides to apply dirty tactics. Everything stays, in a way, “online”.

One thing is what we see and other what really does not see, or what really happens.

We can go to trading forums and expose our case, but actually it is very difficult to prove that we have been stolen.

Regulations are not of much help in reality.

The majority of the regulatory bodies will simply give vague answers to the affected people. It is actually very difficult for them to prove that the company cheated.

Although there are cases of investigations in which some brokers have been severely penalized.

In this respect the regulations of United States and England are probably the best (NFA and FCA).

Having said this, I do not mean that all market makers are scammers or anything like that. In fact there are many good and honest market makers. The problem sometimes is that we cannot guarantee this in all cases.

We are in uncharted waters.

In general, we had better avoid trading very heavily, namely huge accounts, with this kind of brokers.

As I said before, even the majority of ECN brokers are, in reality, market makers in disguise.

Therefore, taking this into account, we should do as Livermore.

When he had enough capital, and was not admitted anymore in the bucket shops, he went to New York to trade the real market, to trade the real volume.

Have you ever seen a futures or stocks broker saying they are cancelling the trade because prices were not real?

I find it funny when brokers claim that was the case.

If you cannot guarantee that your prices are real what are you doing in a business like this?

It seems that they actually have free reign to say so when it benefits them.

We have to understand that when we trade with most of the brokers that we see around in the CFDs and Forex markets, we do it in a virtual one. Namely, either the broker creates the market (direct market making) or someone else creates (indirect market making aka many ECNs).

As a matter of fact, when we trade significant amounts of money we should make sure we are using pure ECNs or stocks or futures brokers, or at least the brokers with best reputation.

There are in fact decent CFD and Forex brokers, which can make a living out of their customers bad trading habits, especially trying again and again day trading strategies, courses, robots, signals, etcetera.

Regards and good trading.