There's a lot of confusion out there about the term "bucket shop", and what makes an exchange a bucket shop and what makes a place a legitimate exchange.
Let's clear up one thing: high leverage does NOT a bucketshop make. Just because an exchange is offering high leverage, does not mean that they are betting against you.
Bucket shops are problematic because at their core, the owner of the "exchange" is taking the opposite side of your position.
Legitimate exchanges, on the other hand, have an orderbook which matches counterparties who are customers of the exchange. Thus the high leverage is being provided between counterparties who put margin down to back it up.
Let's clear up one thing: high leverage does NOT a bucketshop make. Just because an exchange is offering high leverage, does not mean that they are betting against you.
Bucket shops are problematic because at their core, the owner of the "exchange" is taking the opposite side of your position.
Legitimate exchanges, on the other hand, have an orderbook which matches counterparties who are customers of the exchange. Thus the high leverage is being provided between counterparties who put margin down to back it up.
Can I trust bucket shops?
Some bucket shops are honest, others are not. If a bucketshop is taking the opposite position of all its customers, then some of that exposure will cancel itself out, since different customer will be going long and short. There are many bucketshops which have been operating for years and built a trustworthy relationship.
The principle they rely on is that at high leverage, most traders lose money. Most traders are unable to overcome the psychological limitations of being human which make one behave irrationally in times of market volatility. This allows a rational marketmaking system to be consistently profitable in the face of what otherwise would be chaos.
The bottom line is that the exchange being counterparty rather than providing an orderbook to match counterparties is simply a business model difference. There are some exchanges with orderbooks which are not highly trusted, like OKCoin. They are known to run bots which fake volume, and are suspected to hunt margin calls because they have bots taking the other side of many trades. This in effect creates a bucketshop incentive in an orderbook exchange model. So trust each company on a case by case basis. Look them up on BitcoinTalk and see if there's any complaints. Always do your research.
The principle they rely on is that at high leverage, most traders lose money. Most traders are unable to overcome the psychological limitations of being human which make one behave irrationally in times of market volatility. This allows a rational marketmaking system to be consistently profitable in the face of what otherwise would be chaos.
The bottom line is that the exchange being counterparty rather than providing an orderbook to match counterparties is simply a business model difference. There are some exchanges with orderbooks which are not highly trusted, like OKCoin. They are known to run bots which fake volume, and are suspected to hunt margin calls because they have bots taking the other side of many trades. This in effect creates a bucketshop incentive in an orderbook exchange model. So trust each company on a case by case basis. Look them up on BitcoinTalk and see if there's any complaints. Always do your research.
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