Bucket Shop is a specifically defined term under the criminal law of many states in the United States which make it a crime to operate a bucket shop. Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but there is no transaction made on any exchange. The transaction goes 'in the bucket' and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Operating a bucket shop would also likely involve violations of several provisions of US federal securities or commodity futures laws.
The terms of trade were different for each bucket shop, but bucket shops typically catered to customers who traded on thin margins, even as low as 1%. Most bucket shops refused to make margin calls, so that if the stock price fell even momentarily to the limit of the client's margin, the client would lose his entire investment
The highly leveraged use of margins theoretically gave the speculators equally large upside potential. However, if a bucket shop held a large position on a stock, it might sell the stock on the real stock exchange, causing the price on the ticker tape to momentarily move down enough to wipe out its clients margins, and the bucket shop could take 100% of their investments.
The term "bucketshop" as now applied in the United States, was first used in the late 70s, but it is very evident that it was coined in London as many as fifty years ago, when it had absolutely no reference to any species of speculation or gambling. It appears that beer swillers from the East Side (London) went from street to street with a bucket, draining every keg they came across and picking up cast-off cigar butts. Arriving at a den, they gathered for social amusement around a table and passed the bucket as a loving cup, each taking a 'pull' as it came his way. In the interval there were smoking and rough jokes. The den soon came to be called a bucketshop. Later on the term was applied, both in England and the United States, as a byword of reproach, to small places where grain and stock deals were counterfeited.