how dealer markets work
a market maker mm in a dealer market stakes his or her 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 but which is also a source of profit to dealers 1a dealer market differs from an auction market primarily in this multiple market maker aspect in an auction market a single specialist in a centralized location think of the trading floor on the new york stock exchange for instance facilitates trading and liquidity by matching buyers and sellers for a specific security dealer markets vs broker marketsin a broker market there must be a defined buyer and seller for a trade to happen in a dealer market buyers and sellers execute buy sell orders separately and independently through dealers who act as market makers the differences between broker and dealer markets also include example of a dealer marketfor example if dealer a has ample inventory of wisewidget co stock which is quoted on the nasdaq market along with other market makers at a national best bid and offer nbbo of 10 10 05 say that dealer a wishes to offload some of its holdings so it posts its own bid ask quote as 9 95 10 03 skewing it lower since they have an axe to sell investors looking to buy wisewidget co would then take dealer a s offer price of 10 03 since it is two cents cheaper than the 10 05 price at which it is offered by other market makers at the same time investors looking to sell wisewidget co stock would have little incentive to hit the bid of 9 95 posted by dealer a since it is 2 cents less than the 10 price that other dealers are willing to pay for the stock 