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