You’re assuming a complex strategy is needed when a simple one can easily suffice: simply pretend that you executed the trades, give the clients their profits, and keep the losses. In other words, the broker can take the opposite side of every deal and keep the spread and commissions. If, indeed, the client is trading based on no information whatsoever, then the broker wins and the client loses.
To improve this, the broker can throw out the best performing clients, since they might genuinely know what they’re doing.
I’m not suggesting that this is what any particular broker does, but it’s a strategy that works very well, at least in principle.
I guess the difference is that in a market third parties eat the spread by market making whereas in a bucket shop the market itself profits off the spread?
They offered the 'service' of being able to trade large nominal amounts at the last market price, without market impact, but had incredible levels of margin -- 50-1+ or something like that.
This meant that customers often hit margin limits, incurring additional 'commissions' to close out their positions.
Operationally, the bucket shop netted long and short positions, and either actually traded the residual or, occasionally, would use market orders (e.g. aggressive sells) to push the punters into margin calls, which they would then execute. They would then buy low and cover their earlier positions.
Jesse Livermore managed to beat them through astute technical analysis and through the installation of a direct telegraph line from the exchange, thus beating his 'brokers', who promptly kicked him out.
It matters when things go badly wrong, because with a Bucket Shop you're left penniless, it was all imaginary anyway. Whereas with a futures market even if the exchange blows up those are real contracts you can sell to somebody who wants the commodity you were trading in, at worst a mild inconvenience and a small haircut to your final profit.
In the US, securities brokers are very heavily regulated — see “regulation NMS”.
In a parallel space this is happening in the UK with bookmakers. Winning punters either have their accounts heavily restricted, i.e. only able to place small value bets, or their accounts closed entirely.
Certain states in Australia had to introduce legislation to guarantee a bet size the bookmakers must stand. From memory it was $500 on country race meetings and $1000 on metropolitan meetings.
To improve this, the broker can throw out the best
performing clients, since they might genuinely
know what they’re doing.
https://augur.net is an Ethereum-based betting market that will help traders/bettors avoid these kinds of malicious practices. Augur v2 is being developed now, you can expect it to be Really Cool by about April 2020. Millions of dollars will be wagered on Augur for the 2020 election.
Maybe front-run them a bit if you're into that.
If this were the case, wouldnt both sides just make 0$ on average over a long period of time? (or whatever the avg growth of the market was during this period)
I guess the broker would earn fees, but that still doesn't exactly sound lucrative
Every time someone comes up with a "get rich with this training/tool/etc." it's very unlikely to make you rich, because if it would work that great then why isn't the seller of the training/tool using it to get rich, instead of selling whatever they're selling?
Send them $10, and you get a letter that says: "Place a classified ad that says: How to make money at home! Send XXX $10 for information."
If the proposed strategy really really works, then you would get investors and offer them a share of the pie. "Teaching" them accomplishes nothing and reduces your profits.
My experience from the dot com day trading frenzy was that there were three kinds of investors;
Those that had no clue and just followed a bunch of investment "tip" sources and did what ever was the investment of the day (these people were essentially gamblers, and like gamblers were up one day and down the next, only to eventually bottom out).
Then there were the folks who had read up on how the markets worked, maybe taken a finance class or two, and read a bunch of Morningstar reports on various funds and their strategies and tried to create some sort of meta strategy that was a mix of the funds they found impressive. These people had good days and bad days and over the course of a couple of years basically matched the S&P500 or other widely diversified stock indexes in gains. What I learned from them is that if the market in general is up 9% and you're up 10% you are only doing slightly better than the market, even though you feel like "hey I'm getting 10% a year, I'll double my money in 7 years!"
Then there were the very serious folks, these folks read annual reports and 10-Q statements and prospectuses. They kept a databases of people who were executives, board members, and advisors of different companies. They consumed four or five different regional news streams (usually London, Tokyo, New York, Chicago, and Washington) They kept indexes and stock price histories in their own databases and mapped current events to stock motion. They broadly characterized every stock they watched closely by who managed the entity, what markets it was most effected by, and least effected by, and what government policies could help or hurt it. I'm sure if they could afford a Bloomberg Terminal subscription they had one of those too. They did well for themselves but they invested 80 hours a week into doing well.
Not surprisingly there are lots of people in the first group, fewer in the second, and fewer still in the hard core group. I personally see myself in the second group, and over the years my own portfolio has done slightly better than the market.
A unique strategy one person I knew took during the dot com bubble was to convert gains into "things" on a regular basis. At one time he had about a dozen different Porsche sports cars, two houses, and some acreage in the Livermore valley that he rented out as a vineyard. He did pretty well selling that stuff to recover losses from the crash.
Brazillians, you can ask any American about this. We've been there. It does not end well.
I'm a Brazilian software developer for the financial market. I also made some financial courses on the same university that the authors.
Brazilian stock exchange market has exploded in the last years and most of my friends decided to 'work' as traders. None of them with prior knowledge or experience in the market. All of the posts on Instagram every time they earn some money.
The cause for this fever was the marketing around 3 or 4 companies who sell the dream of financial independence through high-risk financial market lessons. Normally they offered courses to famous people for free and use their image to convince the rest of us.
One interesting thing: they normally sell the course with a private platform to trade the stocks included. I believe that they use that platform to collect data and operate against the traders that use that platform. They know the strategy that they are going to use (because they teach them), so it is easy to operate against.