Trading is an activity whereby everyone who trades will think that he is better than the average trader. (same goes for driving)
But by the definition of average, it is impossible for everybody to be above average.
Most traders end up losing money and the percentage can run to as high as 80-90% of traders.
It takes hard work to be in that top 10%. You need mental resolve, money management and a system.
One fine day, someone realized that there is actually an easier way to make money from trading.
If 90% of traders actually lose money, then all it takes to be a profitable trader is to trade against that 90%. No need to have any system, money management skills or mental resolve.
Just book every trade against the masses and you will win. Be the house.
And so we have the birth of bucket shops.
A bucket shop is a broker/platform that takes the opposite side of a retail customer’s order without actually having them executed on an exchange. A bucket shop will make money when you lose and vice versa. Spreads and commissions can be kept very low because that is not where they make the money.
Years ago, we have many such bucket shops in Singapore
People will be enticed to trade commodities with these bucket shops through advertisements of job recruitment or promises of great wealth.
Some of these bucket shops even rig the prices in an dishonest way. It is already hard enough to be a profitable trader in the market, but to be profitable in a rigged system is next to impossible. Ultimately, people who trade with bucket shops end up losing most of their money.
You can read this advisory posted by CAD on bucket shops.
Fast forward to now. Do we still see such bucket shops around?
We can argue that they still exist but in a different form.
Today, there are many platforms (both legal and illegal) that allow you to trade CFDs and forex.
Do the trades pass through to the market or are the providers actually making money from your losing trades?
For CFDs, the provider is actually the counter-party to all your trades so it is a matter of whether they hedge your position by squaring it off with other clients, passing them through to the market or taking on the market risk themselves.
The one that offers you the best commission rate might very well be the one that takes on the opposite side of your trade and does no hedging on your position.
Be careful of who you trade with.