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Comment by olefoo | Hacker News Reader

If you read the Businessweek article he quotes from, the investors are buying shares in an entity that does nothing but own shares of facebook. Shares that they presumably bought on a private secondary market like the one detailed in http://www.avc.com/a_vc/2008/08/a-secondary-mar.html It sounds rather like a bucket shop to me, and those were made illegal for some fairly good reasons.

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No Bucket Shops are where an entity says trades are going to take place and then doesn't execute them.

This is just a pretty standard private investment setup, that just happens to own a single stock.

Even if owning the single stock was a problem - and I don't think it is - working around it would be trivial. They could invest small amounts in a number of very low value stocks or in very stable stocks. Both those strategies would meet any hypothetical "diversification requirement" (which I don't think exists) without materially changing their exposure to Facebook.

Embarrassingly, I always though bucket shops meant something else. (I thought that this is what you call brokers with heavy flow that could cross much of their traffic internally without going to the exchange.)

That's pretty funny. If you'd said that was what it was I'd have believed it (it sounds right, and you worked in finance in NY didn't you?)

I did, but only at legitimate ones :)

> (I thought that this is what you call brokers with heavy flow that could cross much of their traffic internally without going to the exchange.)

What you describe here sounds like dark pools[1].

[1] http://en.wikipedia.org/wiki/Dark_pools_of_liquidity

I think they generally don't go to the exchange, but yeah, pretty similar.

I believe your definition is correct. My understanding is that the way bucket shops operate is that they are the customer's counterparty. So if you buy stock, they short it in equal amounts.

The business model, at least in the 1920's, was to get customers to take big positions on margin, then to manipulate the actual stock (on an actual exchange) to the point that customers were wiped out. If the manipulation cost less than what the customers put up, the bucket shop would win.

People occasionally accuse forex companies of doing something similar, but the market is probably too deep for any retail-facing forex company to successfully manipulate prices like this.

Reminisces of a Stock Market Operator talks about bucket shops--and trading against them--in detail.

...an entity that does nothing but own shares of facebook

You just described an index fund (albeit with only one stock in the index).

Bucket shops are nothing like this - bucket shops are casinos where the source of random numbers is the stock market, but no shares are ever traded.

is an index with just one underlying company actually possible?

I don't think so - we're not talking commodities here, but equity. Every index fund I've seen or traded had multiple underlying assets, even if some of them were derivatives...

BTW, stock market must be pretty bad random number generator...

Slightly off topic, but bucket shops are not dead.

Most, if not all of low end forex (at least the more honest ones spell it out in fine print) is basically a bucket shop.

You are buying(betting) against the house, that is all.

Also legal in the UK. Many retail investors use them, since they offer tax advantages.

http://www.tradefair.com/

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