upgrade

💼intro to business review

Dealer Market

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

A dealer market is a type of securities exchange where securities are bought and sold through a network of dealers or market makers, rather than on a centralized exchange. In a dealer market, dealers maintain an inventory of securities and quote prices at which they are willing to buy and sell, providing liquidity to the market.

5 Must Know Facts For Your Next Test

  1. Dealer markets are decentralized, meaning there is no single physical location where trading occurs, unlike a centralized exchange like the New York Stock Exchange.
  2. Market makers in a dealer market are required to provide continuous buy and sell quotes, ensuring liquidity in the market.
  3. Prices in a dealer market are determined by the interaction of supply and demand, as well as the bid-ask spread set by the market makers.
  4. The over-the-counter (OTC) market is a prominent example of a dealer market, where securities are traded directly between dealers and investors.
  5. Dealer markets are typically less regulated than centralized exchanges, allowing for more flexibility in trading practices but potentially higher risk for investors.

Review Questions

  • Explain the role of market makers in a dealer market and how they contribute to market liquidity.
    • In a dealer market, market makers play a crucial role by maintaining an inventory of securities and continuously providing buy and sell quotes. This ensures that there is always a buyer and a seller available, even when there may not be a matching order on the other side. By providing this liquidity, market makers help to facilitate trading and keep the market functioning smoothly. Their ability to quickly execute trades and absorb temporary imbalances between buyers and sellers is a key feature of dealer markets.
  • Describe the differences between a dealer market and a centralized exchange in terms of price discovery and trading mechanisms.
    • The primary difference between a dealer market and a centralized exchange is the way prices are determined and trades are executed. In a centralized exchange, prices are set through a transparent auction process where buyers and sellers submit orders that are matched by the exchange. In a dealer market, prices are determined by the market makers, who set the bid and ask prices based on their own inventory, supply and demand, and other factors. This decentralized structure of dealer markets can lead to less transparent price discovery, but also allows for more flexibility in trading practices and potentially faster execution of trades.
  • Analyze the potential advantages and disadvantages of the dealer market structure compared to a centralized exchange, and how these factors may impact investors.
    • The dealer market structure can offer some advantages, such as increased flexibility, faster trade execution, and potentially tighter bid-ask spreads due to competition among market makers. However, the decentralized nature of dealer markets can also lead to less transparency, higher information asymmetry, and potentially higher risks for investors. Centralized exchanges, on the other hand, often have more robust regulatory oversight and standardized trading practices, which can provide greater investor protection but may also result in slower execution times and wider bid-ask spreads. Ultimately, the choice between a dealer market and a centralized exchange depends on the specific needs and risk preferences of the investor, as well as the liquidity and characteristics of the securities being traded.