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Business

January 11, 2013

COMMENTARY: How Bucket Shops Lured the Masses Into the Stock Market

Today, more than half of American families own stock, up from about 5 percent at the turn of the 20th century. Thanks to the Internet and smartphones, investors today can place trades instantly from almost anywhere.

But widespread access to stock ownership — for better and for worse — arguably began with another technology, one as revolutionary in its day as the Internet is today.

In 1863, electrician Edward A. Calahan invented the stock ticker, a telegraph receiver capable of printing letters and numbers onto paper tape. At first, almost all ticker customers were brokers and bankers. By around 1880, however, the ticker had spawned a new kind of business, called bucket shops.

Bucket shops were the equivalent of off-track betting parlors where customers placed wagers on the price movements of stocks, offering a kind of vicarious participation in the market. Although bucket shops subscribed to the same ticker service that bankers and brokers did, no securities changed hands and the wagers didn't affect share prices on stock exchanges. Several hundred of these shops were operating around the country by the turn of the 20th century.

Before their rise, the public had typically viewed the stock market from the sidelines, as fascinated but disinterested spectators. Financial failure was something that high-profile speculators suffered, not ordinary people. The bucket shops changed that. After 1880, stories began appearing in newspapers about reckless men who had squandered tens of thousands of dollars, bankrupted themselves, ruined their reputations and destroyed their families.

Although some contemporaries blamed the amateur investors for their own failures, others blamed the big exchanges for fostering a get-rich-quick mentality. In 1903, federal appellate judges prevented the Chicago Board of Trade from cutting off the flow of its quotations to bucket shops. The vast majority of transactions on the Board of Trade were "in all essentials gambling transactions," they ruled. "The Board of Trade does not come with clean hands, nor for a lawful purpose, and for these reasons its prayer for aid must be denied."

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