What is a ‘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.
Explaining ‘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.
Further Reading
- Market structure, informational efficiency and liquidity: An experimental comparison of auction and dealer markets – www.sciencedirect.com [PDF]
- Optimal dealer pricing under transactions and return uncertainty – www.sciencedirect.com [PDF]
- Quote disclosure and price discovery in multiple-dealer financial markets – academic.oup.com [PDF]
- Dynamic order submission strategies with competition between a dealer market and a crossing network – www.sciencedirect.com [PDF]
- An empirical study of bond market transactions – www.tandfonline.com [PDF]
- Risk allocation and inter-dealer trading – www.sciencedirect.com [PDF]
- Tick size, bid-ask spreads, and market structure – www.jstor.org [PDF]
- Is price behavior scaling and multiscaling in a dealer market? Perspectives from multi-agent based experiments – link.springer.com [PDF]
- On dealer markets under competition – www.jstor.org [PDF]
- Intraday behavior of market depth in a competitive dealer market: A note – onlinelibrary.wiley.com [PDF]
