Dealer Market

A dealer market is a financial market structure in which multiple dealers (market makers) post the prices at which they are willing to buy (bid) and sell (ask or offer) a security. Dealers use their own capital to provide liquidity, standing ready to trade against investors rather than simply matching buyers with sellers.

How dealer markets work

• Market makers post two-sided quotes (bid and ask) and commit capital to buy or sell at those prices.
• The bid-ask spread—the difference between the buy and sell quotes—is the primary mechanism dealers use to control risk and earn profit.
• Dealer quotes are often displayed electronically, creating price transparency for participants.
• Common markets that operate as dealer markets include many bond markets, foreign exchange, and equity trading on venues such as Nasdaq.

Dealer market vs. auction market vs. broker market

Dealer market
* Dealers trade on their own accounts and provide immediate liquidity by buying or selling from their inventory.
* Multiple dealers can quote prices for the same security.

Auction market
* A centralized specialist or matching mechanism brings buyers and sellers together (example: traditional trading floor model).
* Liquidity is provided by the interaction of market participants rather than dealers’ capital.

Broker market
* Brokers act as agents, executing trades on behalf of clients for a commission.
* Trades require a buyer and a seller; brokers generally do not take the opposite side of customer trades.

Key distinctions:
* Dealers are principals trading from their own accounts; brokers act as agents for clients.
* Dealers profit from the bid-ask spread; brokers earn commissions or fees.

Example

If multiple market makers quote a stock at a national best bid and offer (NBBO) of $10.00 / $10.05, one dealer that wants to sell inventory might post $9.95 / $10.03. Buyers may accept that dealer’s $10.03 offer because it is cheaper than $10.05, while sellers are less likely to accept the dealer’s lower $9.95 bid. Dealers thus influence prices by adjusting quotes according to their inventory and objectives.

Dealer vs. trader

• Dealer: a specialized trader who continuously posts two-sided markets and profits primarily from capturing the bid-ask spread.
• Trader: may buy or sell for speculative or hedging purposes and does not have the obligation to continuously quote both sides; typically a price taker rather than a price maker.

Types of securities dealers

• Broker-dealers: regulated firms that may act as brokers (agents), dealers (principals), or both.
• Wirehouses: large broker-dealer firms that often sell proprietary products and provide a range of services.
• Independent broker-dealers: firms that sell products from multiple external providers and may operate with more independence from large parent organizations.

Common question

Is Robinhood a dealer market?
* No. Robinhood is a broker (registered as a broker-dealer) that executes trades on behalf of customers. It does not itself operate as a dealer market or an exchange where it takes the opposite side of customer trades.

Key takeaways

• Dealer markets rely on dealers’ capital to provide liquidity and are common in bonds, FX, and certain equity venues.
• Dealers post bid and ask prices and profit from the spread; brokers execute trades for clients and typically earn commissions or fees.
• Understanding whether a market is dealer-based or auction-based helps clarify how liquidity and pricing are supplied.