Dealer Market

AAA

DEFINITION of 'Dealer Market'

A financial market mechanism wherein multiple dealers post prices at which they will buy or sell a specific security of instrument. In a dealer market, a dealer – who is designated as a “market maker” – provides liquidity and transparency by electronically displaying the prices at which it is willing to make a market in a security, indicating 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 exchange trade primarily in dealer markets, while stock trading on the Nasdaq is a prime example of an equity dealer market.

INVESTOPEDIA EXPLAINS 'Dealer Market'

A market maker in a dealer market stakes its own capital to provide liquidity to investors. The primary mode of risk control for the market maker is therefore the use of the bid-ask spread, which represents a tangible cost to investors.

For example, if Dealer A has ample inventory of WiseWidget Co. stock – which is quoted in the market by other market makers at $10 / $10.05 – and wishes to offload some of its holdings, it can post its bid-ask quote as $9.98 / $10.03. Rational investors looking to buy WiseWidget Co. would then take Dealer A’s offer price of $10.03, since it is 2 cents cheaper than the $10.05 price at which it is offered by other market makers. Conversely, investors looking to sell WiseWidget Co. stock would have little incentive to “hit the bid” of $9.98 posted by Dealer A, since it is 2 cents less than the $10 price that other dealers are willing to pay for the stock.

A dealer market differs from an auction market primarily in this multiple market maker aspect. In an auction market, a single specialist in a centralized location (think of the trading floor on the New York Stock Exchange, for instance) facilitates trading and liquidity by matching buyers and sellers for a specific security.
 

RELATED TERMS
  1. Treasury Direct

    The online market where investors can purchase federal government ...
  2. Nasdaq

    A global electronic marketplace for buying and selling securities, ...
  3. Workable Indication

    A nominal quote in the municipal bond market at which price a ...
  4. Auction Market

    A market in which buyers enter competitive bids and sellers enter ...
  5. Liquid Market

    A market with many bid and ask offers, low spreads and low volatility. ...
  6. New York Stock Exchange - NYSE

    A stock exchange based in New York City, which is considered ...
RELATED FAQS
  1. A hypothecation agreement allows a broker-dealer to

    A. approve the client for "hot" IPOs. B. hold the margined securities in a street name loan - using the securities as collateral ... Read Full Answer >>
  2. What does it mean when my broker says that shares are for auction?

    An auction market is one in which stock buyers enter competitive bids and stock sellers enter competitive offers at the same ... Read Full Answer >>
Related Articles
  1. Investing Basics

    An Introduction To Stock Market Indexes

    Investopedia explains the five most talked about indexes and what makes them all different.
  2. Investing Basics

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks trade.
  3. Professionals

    Broker Commissions Are Here To Stay

    With two developed nations adopting a firm anti-commission stance, questions have arisen over whether or not the United States should follow suit. Find out why such a development is unlikely.
  4. Options & Futures

    The NYSE And Nasdaq: How They Work

    Learn some of the important differences in the way these exchanges operate and the securities that trade on them.
  5. Professionals

    Decline Of The Independent Broker-Dealer

    Since the financial crisis of 2008-2009 the numbers of independent broker-dealers have been steadily declining. Find out why, and if the trend will continue.
  6. Professionals

    Working For An Independent Broker-Dealer Vs. A Big Bank

    Here is an overview of what broker-dealers and big banks have to offer to employees and the different opportunities available.
  7. Personal Finance

    How The Auction Market Works

    Here's a look into the online auction market and how to get yourself the best value possible on sites like eBay and Quibids.
  8. Professionals

    Tips For Fitting In At Your Brokerage Firm

    Part of starting a successful career as a broker is finding the right place to work.
  9. Investing Basics

    What is the Stock Market?

    A stock market is where shares in corporations are issued and traded. Stock markets are key components of a free market economy.
  10. Investing

    Commercial Paper

    Commercial paper is a short-term debt security issued by financial companies and large corporations. The corporation promises the buyer a return, or profit, for making the loan. The return is ...

You May Also Like

Hot Definitions
  1. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  2. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  3. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  4. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  5. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center