What Is an Interdealer Market?

An interdealer market is a trading market that is typically only accessible by banks and financial institutions. It is an over-the-counter (OTC) market that is not restricted to a physical location, nor does it have a centralized exchange or market maker. Rather, it is a global market made up of a network of dealers, in which representatives of banks and financial institutions execute trades through their trading terminals.

The foreign exchange interdealer market is one of the better-known such markets and is characterized by large transaction sizes, and tight bid/ask spreads. Currency transactions in the interdealer market can either be speculative (initiated with the sole intention of profiting from a currency move) or customer-driven (by an institution's corporate clients, such as exporters and importers, for example).

How Interdealer Markets Work

Though typically well organized, interdealer markets are usually somewhat less formal than exchange markets, since they are centered around trading relationship networks between dealers. These dealers make the market by quoting ask or offer prices for the securities they sell, and by bidding on securities offered by other dealers. The prices they quote to other dealers may differ from those they quote to customers, and they may quote different prices to different customers. Customers of interdealer markets tend to be banks and financial institutions, corporations, hedge funds, institutional investors, and asset managers interested in OTC derivatives, Treasury bonds, or other wholesale-market securities.

To make a trade on an interdealer market, a dealer uses a telephone, email, instant messaging, or e-bulletin boards to ask for price quotes, make bids, and hash out execution prices. When dealers negotiate by phone or email, it’s known as bilateral trading, because only the two market participants involved observe the quotes or execution price. While some interdealer markets may post-execution prices and trade sizes after the deal is done, other market participants may not have access to this information at all, and even when they do, those rates are not available to everyone equally, as they are in exchange markets.

Liquidity in Interdealer Markets

Interdealer markets tend to be far more illiquid than exchange markets because OTC securities dealers can, at any time and without warning, withdraw from market-making activities. When this happens, any liquidity in the market can quickly dry up, leaving other market participants unable to trade. Unlike in exchange markets, interdealer market trades are not conducted in the open; buy/sell orders and execution prices are not exposed or made visible. Neither are certain participants in an interdealer market designated as dedicated market makers, as they are in exchange markets. Therefore, interdealer markets operate with far less transparency than exchange markets, leading to greater anonymity in securities trading for customers. They also operate under fewer regulations.