Who Are Dealers?
Dealers are individuals or firms that buy and sell securities for their own accounts. Unlike brokers, who execute orders on behalf of clients, dealers act as principals in their own trading activities.
The Marketplace Architects
Dealers are pivotal in the financial ecosystem. They “make markets” in securities, underwrite new issues, and provide various investment services, adding crucial liquidity and promoting long-term market growth.
Key Takeaways
- Principals in Trading: Dealers buy and sell for their own accounts.
- Market Liquidity: By making markets, dealers ensure securities can be bought and sold with ease.
- Regulation: Dealers are heavily regulated by the SEC and must comply with state requirements.
- Distinct Roles: Unlike traders or brokers, dealers engage in proprietary trading.
The Mechanics of Dealers
A dealer’s primary profits come from the spread between the bid and ask prices. They enhance market liquidity while seeking profits from these spreads, without facilitating transactions for clients. Unlike dealers, brokers don’t hold securities but connect buyers to sellers.
Evolution and Challenges
Dealers face challenges such as the need for advanced technology, market consolidations, and regulatory changes that increase compliance costs.
Regulatory Landscape
Dealers must register with the SEC and be members of FINRA. Activities requiring dealer registration include market making in specific securities, operating matched book repurchase agreements, and dealing origination of securities.
Duties of Registered Dealers
- Transparency: Disclosure of material and conflict of interest information.
- Order Execution: Prompt and fair execution of trades.
- Fair Pricing: Charging reasonable prices in the prevailing market conditions.
Dealers vs. Brokers
Understanding the nuanced differences:
- Functionality: Dealers use their own inventories; brokers facilitate transactions.
- Compensation: Dealers profit from markups; brokers earn commissions.
- Dual Role: Broker-dealers can operate in both capacities, changing roles based on conditions and securities.
Dealer Markets
In dealer markets, dealers trade directly with each other using personal funds. This environment stands in contrast to broker markets where transactions are executed on behalf of clients.
Other Types of Dealers
Apart from securities, the term ‘dealer’ is used in different contexts. For instance, car dealers in the automobile industry or antique dealers in the antiquities market.
FAQs About Dealers
How Do Dealers Make Profits?
Dealers profit from the spread between the bid price (purchase price) and ask price (selling price), known as the dealer’s spread.
Opening an Account with a Broker-Dealer
Before opening a broker-dealer account, ensure you review the broker’s background and provide required personal details. Decide the type of account (cash or margin) and your investment choices.
Major Dealers and Broker-Dealers
Notable broker-dealers include firms like Fidelity Investments, Charles Schwab, and Edward Jones. These entities operate both as individual and institutional players.
Conclusion
Dealers play a critical role in the securities market by adding liquidity, underwriting securities, and offering investment services. They operate under stringent regulations, which distinguish their activities from those of brokers and traders.
Related Terms: market makers, bid and ask, brokers, registered investment advisors, FINRA.
References
- [“FINRA. Registered Financial Professionals.
- [“SEC. Guide to Broker-Dealer Registration.
- [“SEC. Guide to Broker-Dealer Registration.
- [“SEC. How to Open a Brokerage Account.
- FINRA. “Statistics”.
- FINRA. “Statistics”.
