Legal Definitions - bucketing

Bucketing refers to an illegal and unethical practice in financial markets where a broker or financial firm receives an order from a client to buy or sell securities but deliberately delays executing that order. Instead of immediately fulfilling the client's instruction, the firm waits, hoping for a favorable price movement in the market that will allow them to profit at the client's expense. They then execute the trade at this new, more advantageous price for themselves, but report to the client that the trade was executed at the original, less favorable price the client expected. This practice is a form of fraud and a serious breach of the broker's duty to act in the client's best interest.

• Example 1 (Buying Shares): Imagine a client instructs their broker to buy 500 shares of "Tech Innovations Inc." at $100 per share. The broker receives this order but, instead of executing it immediately, decides to wait. Over the next few minutes, the price of Tech Innovations Inc. stock drops to $98 per share. The broker then purchases the 500 shares at this lower price of $98. However, they report to the client that the shares were bought at the original $100 price. The broker illegally pockets the $2 difference per share, totaling $1,000, which should have been the client's savings. This illustrates bucketing because the broker delayed the order, profited from the price drop, and misrepresented the execution price to the client.

• Example 2 (Selling Shares): Consider a scenario where a client places an order to sell 1,000 shares of "Global Energy Corp." at $50 per share. The broker receives the sell order but holds it without executing. The market then experiences an unexpected surge, and Global Energy Corp. stock rises to $53 per share. The broker then sells the client's 1,000 shares at this higher price of $53. However, they inform the client that the shares were sold at the original $50 price, keeping the $3 per share profit for themselves, amounting to $3,000. This is an instance of bucketing because the broker intentionally delayed the sale, capitalized on the price increase, and defrauded the client by reporting a lower sale price.