Investor's wiki
en English
Navigation
Home Glossary
InvestingStocksBondsCryptoPersonal FinanceFundamental AnalysisTechnical AnalysisTradingBankingTaxes
Disclaimer Terms of Use Privacy Policy Cookie Policy
Navigation
Home Glossary
InvestingStocksBondsCryptoPersonal FinanceFundamental AnalysisTechnical AnalysisTradingBankingTaxes
Disclaimer Terms of Use Privacy Policy Cookie Policy

Dealer Market

Dealer Market
InvestingBrokers

What Is a Dealer Market?

A dealer market is a financial market mechanism wherein different dealers post prices at which they will buy or sell a specific security or instrument. In a dealer market, a dealer (who is designated as a "market maker") gives liquidity and transparency by electronically showing the prices at which it is ready to make a market in a security, demonstrating both the price at which it will buy the security (the "bid" price) and the price at which it will sell the security (the "offer" price).

Bonds and foreign exchanges trade principally in dealer markets, and stock trading on the Nasdaq is a prime illustration of an equity dealer market.

How Dealer Markets Work

A market maker (MM) in a dealer market stakes their own capital to give liquidity to investors. The primary mode of risk control for the market maker is, in this way, the utilization of the bid-ask spread, which addresses a [tangible cost](/unmistakable cost) to investors, yet which is likewise a source of profit to dealers.

A dealer market varies from a auction market fundamentally in this various market maker viewpoint. In an auction market, a single specialist in a centralized location (think of the trading floor on the New York Stock Exchange, for example) works with trading and liquidity by matching buyers and sellers for a specific security.

Dealer Markets versus Broker Markets

In a broker market, there must be a defined buyer and seller for a trade to occur. In a dealer market, buyers and sellers execute buy/sell orders separately and independently through dealers, who act as market makers. The differences among broker and dealer markets likewise include:

  • Brokers execute a trade for other people, while dealers execute trades for their own benefit.
  • Brokers buy and sell securities for their clients, yet dealers buy and sell on their own accounts.
  • Brokers don't have the rights and opportunities to buy or sell securities, yet dealers have that multitude of rights to buy and sell.
  • Brokers get commissions for transacting business, yet dealers don't get commissions since they are primary principals.

Illustration of a Dealer Market

For instance, if Dealer A has adequate inventory of WiseWidget Co. stock - which is quoted on the Nasdaq market alongside other market makers at a national best bid and offer (NBBO) of $10/$10.05.

Say that Dealer A desires to offload a portion of its holdings, so it posts its own bid-ask quote as $9.95/$10.03, slanting it lower since they have an axe to sell.

Investors hoping to buy WiseWidget Co. would then take Dealer An's offer price of $10.03 since it is two pennies less expensive than the $10.05 price at which it is offered by other market makers. Simultaneously, investors hoping to sell WiseWidget Co. stock would have minimal incentive to "hit the bid" of $9.95 posted by Dealer A, since it is 2 pennies not exactly the $10 price that different dealers will pay for the stock.

Features

  • Prominently, dealer markets stake the capital of a dealer to give liquidity to investors and eliminate the middle man, the broker, from transactions.
  • Dealer markets can be contrasted with auction markets and brokered markets.
  • Bonds and foreign exchanges trade principally in dealer markets.
  • A few stock exchanges like the Nasdaq operate as equity dealer markets.
  • A dealer market is a transparent financial market mechanism where different dealers post the prices they will buy or sell a specific security.

FAQ

What Are the Types of Securities Dealers?

In the present financial markets, broker-dealers (BDs) are regulated substances that can participate in securities trading for both their own accounts and for clients. A few broker-dealers act as agent (pure broker), facilitating trades just for customers and taking a commission. Others act as both principal and agent, trading against customers from their own accounts.There are large number of broker-dealers falling into one of two broad categories: a wirehouse, which sells its own products, or an independent broker-dealer, which sells products from outside sources

What Is the Difference Between a Trader and a Dealer?

A dealer is a particular type of trader who commits to continuously make two-sided markets in the securities that they deal in. This means that they will constantly be posting both a bid and an offer. The goal is to trade much of the time enough with the two buyers and sellers in the market to produce profit from the bid-ask spread.Traders, then again, need not make two-sided markets and can buy or sell however they see fit. In this respect, non-dealer traders are considered to be price takers (rather than market makers). Traders don't profit from the bid-ask spread, yet rather hope for the market to move in support of themselves to exit the trade at a positive price later on.

Is Robinhood a Dealer Market?

No. Robinhood, as other online trading platforms, is a broker. As a broker, it is registered as a broker-dealer with FINRA, however it executes trades just for the benefit of customers and doesn't take the opposite side of those trades. Nor doesn't constitute its own marketplace or exchange.