What is a Dealer
A dealer is a person or firm in the business of buying and selling securities for their own account, whether through a broker or otherwise. A dealer is defined by the fact that it acts as a principal in trading for its own account, as opposed to a broker who acts as an agent in executing orders on behalf of its clients. A dealer is also distinct from a trader in that a dealer buys and sells securities as part of its regular business, while a trader buys and sells securities for his or her own account but not on a business basis.
BREAKING DOWN Dealer
A dealer in the securities market is an individual or firm that stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the bid and ask prices, while also adding liquidity to the market. It neither does business on behalf of a client nor facilitates transactions between parties. Other than buying and selling securities, a dealer also makes markets in securities, underwrites securities and provides investment services to investors. For example, dealers are the market makers that provide the bid and ask quotes you see when you look up the price of a security in the over-the-counter market.
The Securities and Exchange Commission (SEC) regulates dealers and requires that all brokers and dealers generally register with it and also be members of the Financial Industry Regulatory Authority (FINRA). The SEC requires that individuals who engage in the following activities may need to register as a dealer:
- Someone who holds himself/herself out as being willing to buy and sell a specific security on a continuous basis, i.e., is making a market in that security;
- A person who runs a matched book of repurchase agreements; or
- An individual who issues or originates securities that he or she also buys and sells.
The SEC requires dealers to perform certain duties in their dealings with clients. These duties include prompt order execution, disclosure of material information and conflicts of interest to investors, and charging prices that are reasonable in the prevailing market.
As opposed to a dealer, a broker does not trade for its portfolio but, instead, facilitates transactions by bringing buyers and sellers together. In practice, most dealers also act as brokers and are therefore known as broker-dealers. Broker-dealers range in size from small independent houses to subsidiaries of the largest banks. Firms operating as broker-dealers perform both services depending on the market conditions and on the size, type and security involved in a particular transaction.
In recent years, the profitability of dealers has been challenged by a number of factors, including the heightened regulatory environment (which has increased compliance costs), increased technology requirements to keep up with rapidly changing markets, and industry consolidation.
While “dealer” is a separate registration category in the U.S., in Canada the term is used as the shortened version of “investment dealer,” which is the equivalent of a broker-dealer in the U.S.