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As a practice that is considered by most of the financial community to be unethical, bucketing involves the attempt of a broker to use deception in order to generate investment profits for his or her personal portfolio. Essentially, bucketing involves the confirmation of an order from a client without actually executing the order on the client’s behalf. The anticipation is that the broker will be able to realize enough profit to offset the difference to the client at a future date, either due to executing the order at a later date or through profits generated on other transactions.
Bucketing can take place in a couple of different ways. While all forms of bucketing involve the broker or brokers confirmation the execution of orders to the client that have not actually been completed, some forms of bucketing involve the broker executing the transaction on his or her own investment account. If the price rises, the broker realizes a profit and then belatedly executes the order for the client, but charging the higher rate. With this arrangement, there is a good chance that the investor will simply assume the price rose between the time of the decision to execute the transaction and the confirmation received from the broker that the transaction is complete.
In other instances of bucketing, the broker does not execute the order for the client, or as part of a transaction on personal investments. Instead, the order is confirmed, but not placed. If the price rises, the broker executes the order and charges the higher price to the client. Should the price drop, the broker still executes the order belatedly and pays the lower price, but still charges the client the original higher price. This type of offsetting transaction does not benefit the brokers personally, but does create additional revenue for the brokerage.
Along with being considered unethical, the practice of bucketing is also illegal in just about every financial market around the world. Many countries have strict laws against the practice of bucketing, with the penalties ranging from substantial fines per transaction to the revocation of legal credentials to function within the financial community. In some cases, it is possible for brokers to be imprisoned for engaging in bucketing practices in addition to incurring other penalties.
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