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In a dealer market, market participants buy and sell through dealers who are designated as market makers.

A dealer market is not an actual physical space, but rather, electronic networks where market makers keep inventories from which they buy and sell stocks to customers or other dealers. They provide liquidity as well as transparency by displaying the prices at which they will buy a security -- the bid -- and the price at which they will sell -- the offer. The bid-ask spread is the main tool market makers use to control risk.

A dealer market contrasts an auction market, where a single specialist at one physical location, like the New York Stock Exchange, matches buyers and sellers of a single security to facilitate trading.

The Nasdaq is an equity dealer market. Large investment companies buy and sell through the network. These market makers provide the bid and ask prices, and since they compete with one another, individual investors can usually get the best price.

For example, suppose Dealer A wants to offload some of its holdings in WiseWidget Co., which has a bid-ask spread of $10-to-$10.05. Dealer A posts a spread of $9.98-to-$10.03, which entices investors because it’s 2 cents less than the spread other market makers are offering.

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