How Bucket Shops Democratized Access to the Financial Markets

Crowd outside a bucket shop. People wore a lot of hats back then.
Crowd outside a bucket shop. People wore a lot of hats back then.
Once upon a time, the stock market was an exclusive upper-class arena reserved for the 5% of the population who could afford high margins and round-lot order sizes.

The other 95% could only spectate as the nation underwent a 3-decade secular bull market.

With the invention of the telegraph came streaming price quotes. The common citizens set up bucket shops in the late 1870s to bet on quotes so that they, too, could feel like a player in the stock market.

This didn’t democratize financial market access, of course, but it democratized the feeling of access. Bucket shops were decorated to look just as swanky as legitimate brokers, and for a few dollars, the middle class could do just as the rich people could.

The bucket shops soon began attracting wealthier customers with their low margins and odd-lot sizes. Today, we might call this market disruption. By 1900, some accounts reckoned that bucket-shop betting exceeded trading volume on the New York Stock Exchange.

The exchanges were unhappy about the lost business and lobbied to ban gambling. Unfortunately, no one could credibly differentiate between bucket shop gambling and exchange-based gambling, which was called speculation.

Bucket shop owners claimed that the Chicago exchange was the biggest bucket shop on earth.

In 1905, a Supreme Court ruling by Justice Oliver Wendell Holmes deemed: Speculation by competent men* is the self-adjustment of society to the probable…incompetent persons bring themselves to ruin by undertaking to speculate in their turn. Four years later, bucket shops were banned.

The ban wasn’t really about protecting poor people from their gambling problems, and it wasn’t about the shady ass bucket shops whose owners manipulated market prices to magnify customer losses. The ruling preserved the elitist premise that somehow, speculation is not gambling if it is done by competent people. And just like today, competence is determined by wealth.

It wasn’t until 1917 that the common class began to own securities. The government needed money for WWI and couldn’t raise enough by selling bonds to the wealthy, so they sent Liberty Bond brokers to small towns across the nation. We won the war, the bonds were redeemed, and the brokers directed their new little cash-rich clients straight to the stock market.

At the end of the day, the 95% just wanted the same opportunities as the 5%, whether that opportunity was investment, speculation, or gambling.

from The Ticker, Oct. 1910
from The Ticker, Oct. 1910
*”Competent men” banned women from the trading floor until 1943. It wasn’t until 1967 that the first woman bought a seat on NYSE.

1. Bucket Shop Systems. New York Times, Nov 19, 1905.
2. No Bucket Shops for New Law to Hit. New York Times, Sep 02, 1908.
3. D. Hochfelder. Where the Common People Could Speculate: The Ticker, Bucket Shops, and the Origins of Popular Participation in Financial Markets, 1880-1920. The Journal of American History, Vol. 93, No. 2 (Sep., 2006)

Warren Buffett is Loveable

I measure success by how many people love me. And the best way to be loved is to be loveable. –Warren Buffett

Every single media figure should study Warren Buffett. Buffett has curated the greatest public image of all time.

Look at how adorable he is. He sensibly buys value stocks! …with 28% of his portfolio. The other 72% is for highly leveraged bets (what, did you really think that he could become the richest man in the world through value investing alone?)

Warren Buffett is a value investor in the same way that payday loan sharks are value investors. Sure, they’re acquiring assets from distressed debtors on the cheap. The only difference is that corporations aren’t people.

See Also:
7 Easy Steps to Invest Like Warren Buffett –PragCap

Your Twitter Feed is a Circle Jerk

If you are like me, then you get most of your ideas from Twitter, and you get most of your ideas while on the toilet.

Pre-IPO, Ben Thompson made the argument that Twitter is valuable not for the product but for its interest graph.

Twitter knows exactly what I like and what I’m interested in. It’s obvious both from what I tweet about, but especially based on who I follow.

I wanted to find out if my interests are really so obvious based on whom I follow.

Several hours later, I made this Twitter network analyzer. It grabs the list of people I’m following and builds a network graph based on whom they follow.

Screen Shot 2015-04-30 at 1.55.22 AM

My Twitter network has a clustering coefficient of 0.133. A network is considered “small-world” if the clustering coefficient is higher than that of a random graph constructed on the same set. A fully-connected graph would have a clustering coefficient of 1.0. Tightly-connected insular networks are bad because they breed confirmation bias. I need a disperse network to introduce new opinions into my brain.

Compare @eiaine with @VCFriendFinder, a Twitter bot that follows every venture capitalist and angel investor it can find. @VCFriendFinder has a clustering coefficient of 0.258. The number is high because investors are are herd animals.

Geez, @pmarca is connected to everybody.
Geez, @pmarca is connected to everybody.

Here’s one for the well-networked @hunterwalk:

Screen Shot 2015-05-01 at 10.20.50 AM

One of my favorite twits, @ritholtz:

Screen Shot 2015-05-01 at 3.29.55 PM

Now go play with it.

This was originally going to be a post about how Twitter shat the bed earlier this week. NASDAQ accidentally posted $TWTR earnings report too soon, and the information leaked all over Twitter itself. I thought that was rather funny, except the stock price crashed 20% before close and shareholders like the ones below are pretty bummed.

In Which George Explains Contracts for Difference


My colleague George recently returned from North Korea, where he oversees Sand Hill Exchange market operations.

George is an active CFD (contract for difference) trader, a thing I have long been curious about. I asked him to explain CFDs to me. Here is how the conversation went.

George, what is a Contract for Difference?

A contract for difference (CFD) is a derivative that allows investors to speculate on the movement of the price of a stock without owning the asset.

Wait a minute, what’s a derivative? I thought a derivative was just a bet.

Here George spends the next four hours explaining derivatives to me using ponies and jellybeans.

Oh, I get it now. A derivative is a contract that specifies payment conditions based on an independent thing. Like a bet, but enforceable in court.

Yes. For an equity-based CFD, it’s an agreement that the seller will pay the buyer the difference between the current value of a stock and its value when the contract was made. If the difference turns out to be negative, the buyer pays the seller.

CFDs generally have no expiry date and track the prices of their underlying asset.

Why don’t I just buy the stock instead of doing this CFD thing?

With CFDs, you don’t have to pay the full price of the stock. You can trade on margin. With my IG account, I can leverage my money 10x when trading equity CFDs.

Plus, I can trade on all sorts of things in one place. I don’t need to wait until markets are open, which is hard because I spend a lot of time in North Korea. I can also trade on things where public markets don’t even exist, such as pre-IPO companies.

CFDs sound awesome. How do I get started?

CFDs are pretty awesome, but you should be aware of the risks. The CFD provider serves as the counterparty for all the bets you make. As the “house”, they will charge a spread which could trim your profits.

Also the CFD industry is not very regulated. Be careful that your CFD broker isn’t some fly-by-night bucket shop.

To get started, move to some country that is not the United States.

What the hell man?

Yeah sorry. Under the Dodd-Frank Act, CFDs are considered security-based swaps. Transactions in security-based swaps must be done on a registered national securities exchange and offers and sales to retail investors must be registered under the Securities Act of 1933.

This is probably an important lesson for you to learn.