What is the Dealer Market?

A dealer in this market is referred to as a market makersMarket MakersMarket makers are the financial institution and investment banks which ensures enough amount of liquidity in the market by maintaining enough trading volume in the market so that trading can be done without any problem.read more because they offer the securities for buying or selling at the bid or offer price. As a result, the market provides greater liquidity to investors. It comprises many market makers connected through a telecommunication network; it does not have a centralized trading floorTrading FloorTrading Floor is a place where traders buy and sell shares, fixed income securities, commodities, foreign exchange, bonds, options, etc. It is the market segment in which dealers trade financial instruments in various exchanges, for example, Bombay Stock Exchange (BSE) and the New York Stock Exchange (NYSE).read more. A dealer makes the market in securities by offering either buy or sell them at offer or bid price. It is also called (OTC) market(OTC) MarketOTC markets are the markets where trading of financial securities such as commodities, currencies, stocks, and other non-financial trading instruments takes place over the counter (instead of a recognized stock exchange), directly between the two parties involved, with or without the help of private securities dealers.read more.

Example of Dealer Market

Bonds and foreign exchanges primarily trade in the Over-the-Counter (OTC) market. NASDAQ (National Association of Securities and Dealer Automated Quotation System) is a prominent dealer market in equity stocks. The NASDAQNASDAQThe full form of NASDAQ is the National Association of Securities Dealers Automated Quotation. The NASDAQ is a global electronic marketplace for the buying and selling of securities via an automated network that was founded in 1971 by the NASD i.e., National Association of Securities Dealers, and it is also the benchmark index of U.S. technology stocks.read more system, founded in 1971 as part of the Over-the-Counter (OTC) market, is now considered a separate entity. In this market, a buyer and seller are never together. Instead, their orders are (buy/sell) executed through the dealers’ market makers.

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Dealer Market vs. Auction Market

An auction market is a trading platform where buyers and sellers come together and enter bids and offers. The transaction happens when buyers and sellers agree on a price.

Several benefits are associated with trading in the Over-the-Counter (OTC) market. However, this platform has some limitations, making this trading unsuitable for certain investors.

Advantages

  • There is no third-party involvement in trading. Instead, the dealers buy and sell securities using their accounts.There is quick and easy access to trading activity since the dealer is trading using his account, making the entire process quick and easy. Time is an important factor while trading securities. The amount of time taken for the price fluctuation is very minimal. A trader needs to act quickly to make a maximum return from the transaction without wasting time.There is no centralized floor in the Over-the-Counter (OTC) market. The dealers can do the marketing electronically. It gives easy access to dealers located in different parts.Since there is no third-party involvement, there is no point in brokerage and other fees and commissions.It allows the dealer to conduct research and support investors using their resources.This market can react quickly to market movements, grab the best opportunity, and minimize the loss.

Disadvantages

  • It requires more human intervention than other markets.The pricing of the stock may not be appropriate since there is no scope for bidding.Expert knowledge of a specialist is necessary for some transactions. A specialist has the experience and learning about the market and can utilize the opportunity better. This market cannot use a specialist’s expertise as the third party has no involvement.Stock tradingStock TradingStock trading refers to buying and selling shares of an entity listed on a stock exchange.read more is not common in the Over-the-Counter (OTC) market.Dealers are the market makers, and there is a chance of manipulation and speculation.

Conclusion

The dealer market is a secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more where the dealer acts as the counterpartyCounterpartyA counterparty in a financial transaction is the person or entity on the other side of the agreement. Any trade must have at least two parties who serve as counterparties for each other. For every buyer in a purchasing deal, there must be a seller. And for every seller, there must be a buyer willing to purchase.read more for buyers and sellers. The dealer, considered a market maker, sets the bid price, and investors willing to accept the price can do the transaction. So, it ensures liquidity in the market. Stocks are not commonly traded in this market; bonds and currencies are common securities sold. It is a quote-driven market. The dealer quotes two prices- bid price, which the dealer is willing to buy the security, and Ask PriceAsk PriceThe ask price is the lowest price of the stock at which the prospective seller of the stock is willing to sell the security he holds. In most of the exchanges, the lowest selling prices are quoted for the purpose of the trading. Along with the price, ask quote might stipulate the amount of security which is available for selling at the given stated price.read more, which the dealer is ready to sell. The dealer makes a profit from the spread between the bid and ask prices. They help to build liquidity in the market and uplift long-term growth.

This article is a guide to the Dealer Market. We discuss the dealer market vs auction market, over-the-counter (OCT) market, advantages, and disadvantages. You can learn more about financial analysis from the following articles: –

  • Market DynamicsMarket OrientationBroker DealerPassive Investing Meaning