Bucket Shops are Back

I recently saw an advertisement on Twitter for a company, who shall remain nameless, offering to trade “fractional shares”. That means instead of buying a whole one share of expensive stocks such as Google (Alphabet) and Amazon which cost more than a thousand dollars, you can buy a fraction of a share. They offer an App which provides this with zero commission trading and CFD trading on 20% margin or less (i.e. you don’t need to put down the whole amount). What immediately sprang to mind when I read the advertisement was the provision of trading by “bucket shops” in the USA in the early 1900s.

I can do no better than to quote a Wikipedia description: “As defined by the U.S. Supreme Court, 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”. See https://en.wikipedia.org/wiki/Bucket_shop_(stock_market) for more background.  They were outlawed in many US states, but if you wish to get some understanding of how they operated it’s worth reading a book called Reminisces of a Stock Operator by Edwin Lefèvre, which was possibly a pseudonym for stock market speculator Jesse Livermore. It was published in 1923 and is still readily available as it’s a book worth reading by any stock market investor.

The company advertising this new trading facility claims to be authorised by the Financial Conduct Authority (FCA) and be based in London although they also have operations and authorisation elsewhere. Their web site makes it clear that 76% of retail investors lose money when trading CFDs with them. It takes a very smart operator, as Jesse Livermore was, to make money in bucket shop operations and he soon moved on to bigger things. When stock markets are buoyant, as they have been of late, inexperienced punters get suckered into share speculation which is really gambling and most are likely to lose money.

The FCA really needs to monitor and regulate such operations a lot more closely.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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