Dealer Market
Candlefocus EditorIn a dealer market, dealers act with their own capital to offer either buy or sell quotes to investors. The dealers compete with each other quote prices they are willing to buy or sell a specific security. They must ensure that these quotes remain up-to-date and within fair market value, based on current market drops. The dealers in these markets provide liquidity for investors – that is, liquidity refers to the ability of assets to be converted into cash quickly and easily.
Investors may also use the dealer market to trade more freely. This type of market does away with the need for a broker, thus eliminating any brokerage fees as well as reducing the total number of parties trading with each other. The trader may simply enter the market and search for dealers offering the best quotes for the securities he or she is interested in buying or selling.
Dealer markets differ from auction markets, in which parties submit bids or offers in a price-determined auction format. In auction markets, the market prices are setup by the system, and dealers are publically visible. By contrast, brokered markets involve both a dealer and a broker. The broker is the middleman used in secured transactions and helps buyers connect with sellers. The broker is typically a separate entity that provides liquidity and assists in the completion of trades.
In summary, a dealer market is a transparent financial market mechanism in which dealers offering buyers and sellers quotes on securities, without the need of a broker. This market provides liquidity and enables direct trading between investors and dealers, helping to reduce brokerage fees. Trader’s should be aware of the differences between dealer markets, auction markets, and brokered markets.