Bucketing Explained 2025: Costs, Examples & How It Works

What Is Bucketing in Trading and Finance?

Bucketing is a deceptive practice where a broker profits by misleading clients about the execution of their trades. This occurs when the broker confirms a trade has been completed but does not actually execute the order on the market. Instead, the broker attempts to fill the order at a better price for themselves, keeping the difference as undisclosed profit.

Such firms engaging in this malpractice are commonly known as bucket shops.

Key Insights

• Bucketing is an unethical act where brokers exploit clients by falsifying trade execution details.
• It involves misreporting buy or sell order prices to pocket the price difference.
• Bucket shops are brokerage firms known for engaging in bucketing and similar unethical practices.
• Aside from unethical trading, bucketing also refers to a strategic method of dividing retirement assets into different 'buckets' for financial planning.

How Bucketing Works and Why It’s Unethical

This practice prioritizes brokers’ profits over clients’ interests by exploiting client trust. Clients expect brokers to secure the best possible trade prices—lowest for buys and highest for sells. However, brokers involved in bucketing lie about the trade prices, executing transactions at less favorable prices and keeping the difference.

For instance, a broker might claim to buy shares at $10 each but actually purchase them at $9, pocketing the $1 difference per share without informing the client. This effectively steals from the client’s potential earnings.

Historical Context

Originally, “bucket shop” referred to illegal or borderline gambling operations. Today, it denotes brokerage firms that engage in unethical practices like bucketing.

Bucketing as a Retirement Strategy

Separately, bucketing is a popular retirement planning approach where retirees divide assets into multiple buckets based on when funds will be needed. This contrasts with traditional retirement income methods that distribute funds regularly from a single portfolio.

For example, a near-term bucket holds assets to cover immediate expenses, a medium-term bucket supports mid-range needs, and a long-term bucket is reserved for future use, helping ensure financial security throughout retirement.

Financial planning with buckets often involves three steps: building an emergency fund, achieving financial goals, and preparing for retirement.

Did You Know?

Certified Financial Planner Harold Evensky pioneered the bucket strategy, recommending a two-bucket system with a cash reserve for five years of expenses and a long-term investment bucket mainly in stocks.

Practical Example of Bucketing in Trading

Consider Steve, a broker who practices bucketing. His client Linda requests to buy 100 shares of XYZ Corporation at $10 or less per share. Steve confirms the trade executed at $10, but in reality, he purchased the shares at $9 each and kept the $1 difference per share, earning $100 at Linda's expense without disclosure.

Understanding Bucket Portfolios

A bucket portfolio segments investments into categories within a portfolio. For example, a 60/40 portfolio allocates 60% to stocks and 40% to bonds. Alternatively, equity-only portfolios might bucket investments by stock type, such as value, growth, or dividend stocks. Bond portfolios might bucket by maturity length: short, medium, or long term.

What Does Bucketing Mean in Accounting?

In accounting, 'aging buckets' classify unpaid receivables based on how long they’ve been overdue, such as 30, 60, 90 days, etc. This helps companies manage collections and determine when debts may need to be written off as bad debt.

Bucketing in Banking and Money Management

Many individuals use bucketing by maintaining multiple bank accounts earmarked for specific expenses like bills, entertainment, or emergencies. Automatically allocating funds to these 'buckets' monthly simplifies budgeting and helps improve savings and debt management without complex software.

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