Glossary term
Dealer
A dealer is a market participant that buys and sells securities or other assets for its own account as part of a business.
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What Is a Dealer?
A dealer is a person or firm that buys and sells securities or other financial assets for its own account as part of a regular business. In securities markets, dealers often provide liquidity by quoting prices at which they are willing to buy or sell.
A dealer differs from an agent who acts only on behalf of a customer. Many firms are broker-dealers because they may act as brokers in some transactions and dealers in others.
Key Takeaways
- A dealer trades for its own account as part of a business.
- Dealers may quote bid and ask prices and earn the spread.
- A broker acts for a customer, while a dealer acts as principal.
- Broker-dealers are subject to securities registration, supervision, and conduct rules.
- Dealer activity can improve liquidity but can also create conflicts that require disclosure and controls.
How Dealers Work
When a dealer buys a bond into inventory and later sells it to a customer, the dealer is acting as principal. The dealer's compensation may come from the markup, markdown, spread, or other transaction economics rather than a separately stated commission.
Dealers are important in markets that trade over the counter, where buyers and sellers may not meet on a centralized exchange. They can help customers transact when there is no immediate natural counterparty.
Dealer vs. Broker
Role | Acts for | Common compensation |
|---|---|---|
Dealer | Its own account as principal | Spread, markup, markdown |
Broker | Customer as agent | Commission or fee |
Market maker | Quotes continuous or regular prices | Bid-ask spread |
Trader | May trade for personal or institutional account | Investment gain or loss |
Why It Matters
Dealers affect transaction costs, liquidity, execution quality, and price discovery. In bond and other OTC markets, customers often rely on dealer quotes to understand available prices.
The role also matters for conflicts. A dealer may have inventory, hedging needs, or pricing incentives that differ from the customer's goals, which is why regulatory obligations and disclosures matter.
Limits and Misunderstandings
A dealer is not simply anyone who trades. Under securities law, dealer status generally turns on whether the person or firm is engaged in the business of buying and selling securities for its own account.
A dealer is also not always taking large directional risk. Many dealers hedge inventory or turn over positions quickly, though they still face market, credit, operational, and liquidity risk.
The Bottom Line
A dealer is a market participant that trades as principal as part of a business. Dealers can support liquidity and execution, but customers should understand when a firm is acting for itself rather than solely as an agent.