Sunday, April 25, 2010

MODERN BUCKETEERING


A bucket shop is a brokerage firm that “books" (i.e., takes the opposite side of) retail customer orders without actually having them executed on an exchange. These brokerages are also often called boiler rooms. The term is a defined term under the criminal law of many states in the United States which make it a crime to operate a bucket shop.  Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but there is no transaction made on any exchange. The transaction goes 'in the bucket' and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Alternatively, the bucket shop operator "literally 'plays the bank,' as in a gambling house, against the customer."  Operating a bucket shop in the United States would also likely involve violations of several provisions of federal securities or commodity futures laws. [Source: Wikipedia]

George Soros on the ABACUS Synthetic CDOs:

"Whether or not Goldman is guilty, the transaction in question clearly had no social benefit. It involved a complex synthetic security that was derived from existing mortgage-backed securities by cloning them into imaginary units that mimicked the originals. This synthetic collateralized debt obligation (CDO) did not finance the ownership of any additional homes or allocate capital more efficiently; it merely swelled the volume of mortgage-backed securities that lost value when the housing bubble burst. The primary purpose of the transaction was to generate fees and commissions."

WB7:

Q: What is the difference between Goldman Squid's exotic credit derivatives group and a good old fashioned bucket shop?

A: The contents of the bucket.

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