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Bucketing, an unethical and illegal practice in the financial community, involves a broker confirming a customer’s order without executing it, with the hope of making enough profit to compensate the client later. It can be done by executing the transaction on the broker’s own account or confirming the order without fulfilling it. Penalties for bucketing range from fines to revocation of credentials and even imprisonment.
A practice considered unethical by most of the financial community, investing involves a broker’s attempt to use deception to generate investment gains for your personal portfolio. Essentially, the deposit involves confirmation of a customer’s order without actually executing the order on the customer’s behalf. The anticipation is that the broker will be able to make enough profit to make up the difference to the client at a future date, either due to order execution at a later date or through profits generated on other trades.
Bucketing can be done in two different ways. While all forms of deposit involve the broker(s) confirming the execution of orders to the client that have not actually been filled, some forms of deposit involve the broker executing the transaction on their own trading account. If the price increases, the broker makes a profit and then late fills the order for the client, but charges the higher rate. With this arrangement, there is a good chance that the investor will simply assume that the price increased between the time of the decision to execute the transaction and the confirmation received from the broker that the transaction has been completed.
In other investment cases, the broker does not execute the order for the client, or as part of a personal investment transaction. Instead, the order is confirmed, but not fulfilled. If the price increases, the broker executes the order and charges the higher price to the client. If the price goes down, the broker still fills the order late and pays the lower price, but still charges the client the original higher price. This type of offset transaction does not benefit the brokers personally, but it generates additional revenue for the brokerage.
In addition to being considered unethical, the practice of investing is also illegal in almost all of the world’s financial markets. Many countries have strict laws against the practice of investing, with penalties ranging from substantial fines per transaction to the revocation of legal credentials to function within the financial community. In some cases, brokers may be jailed for engaging in investment practices in addition to incurring other penalties.
Smart Asset.
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