What is Bucketing?
Bucketing is an unethical practice in which a broker deceives their client about the execution of a trade to generate profit. In this scheme, the broker falsely confirms that a trade has been executed, even though no such transaction has taken place. The broker then waits to execute the trade at a more favorable price than the one originally quoted. The difference between the quoted price and the actual trade price, known as the spread, is pocketed by the broker, who keeps this profit hidden from the client.
Bucketing Explained
Bucketing is a deceptive business practice where brokers prioritize their own interests over those of their clients. This involves misleading clients into believing their trades are executed at the best possible prices while secretly profiting from the difference between the actual and communicated trade prices.
Clients place trust in brokers to obtain the most favorable terms for their trades. However, bucketing brokers exploit this trust by lying about trade prices. For example, when buying shares, they may claim to have purchased at a higher price than they actually paid, pocketing the difference. Similarly, when selling, they may underreport the selling price. This amounts to stealing from clients' profits.
Legitimate Use of Bucketing
While bucketing is often associated with unethical practices, it has legitimate applications in retirement planning and financial management.
Retirement Bucketing Strategies: In retirement planning, bucketing involves categorizing assets based on time horizons and liquidity needs. This ensures retirees have funds for immediate expenses while preserving long-term investment growth.
Financial Planning Bucketing Approach: Financial planners use bucketing to help clients achieve financial goals systematically. This approach typically involves creating separate buckets for emergency funds, short-term goals, and retirement savings, each with a tailored investment strategy based on the client’s risk tolerance and time horizon.