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Charlie Munger mentions something called the "bucket shop system" in this article (click here and see the last sentence of the article on page 1). It was apparently some quasi-fraudulent system of trading derivatives that existed before derivatives (I could be wrong on this).

I've looked around the internet for a simple explanation, and couldn't find one.

What was it?

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    This seems to be a good explanation, as does the Wikipedia article.
    – blm
    Oct 18 '15 at 20:36
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    From this description it sounds very much like fantasy football. Oct 18 '15 at 20:49
  • @blm Wow, good find. Shockingly, I don't seem to recall seeing the Wikipedia article when I searched "bucket shop system." Thanks. Oct 19 '15 at 6:33
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On his biography for Jesse Livermore - Reminiscences of a Stock Operator; Edwin Lefevre describes how the bucket shops used to work. There is a lot of information about them in first few chapters since those where the places where Livermore started his trading career.

A bucket shop was an establishment where you could place "trades". However this trades wouldn't go to the exchange, instead you would be "trading" (or rather, betting) against the house. So the establishment would take the other side of your trades and have an interest for you to lose your money. It was not uncommon for these shops to manipulate the price of a stock (or the price that they reported to customers... ) to trigger margin calls on the accounts, or for them to perform other dirty tricks.

After the 29 crash, these type of shops were banned. The securities and exchange act has several provisions that prevent a broker from giving a price that didn't come from the market to a client. These provisions were put in place, in part, to get rid of bucket shops.

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    Reminiscences of a Stock Operator is in the public domain. It can be downloaded for free from Project Gutenberg: gutenberg.org/ebooks/60979
    – Flux
    Jun 11 at 2:24

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