What Is a Dealer?
Dealers are people or firms who buy and sell securities for their own account, whether through a broker or otherwise. A dealer acts as a principal in trading for its own account, as opposed to a broker who acts as an agent who executes orders on behalf of its clients.
Dealers are important figures in the market. They make markets in securities, underwrite securities, and provide investment services to investors. That means dealers are the market makers who provide the bid and ask quotes you see when you look up the price of a security in the over-the-counter market. They also help create liquidity in the markets and boost long-term growth.
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the bid and ask prices, while also adding liquidity to the market. It neither does business on behalf of a client nor facilitates transactions between parties.
In recent years, the profitability of dealers has been challenged by a number of factors, including increased technology requirements to keep up with rapidly changing markets, industry consolidation, and the heightened regulatory environment, which has increased compliance costs. 1:09
Dealers are regulated by the Securities and Exchange Commission (SEC). As part of the regulation, all dealers and brokers must register with the SEC and must be members of the Financial Industry Regulatory Authority (FINRA).
Anyone engaged in the following activities generally needs to register as a dealer:
- Someone who holds himself/herself out as being willing to buy and sell a specific security on a continuous basis (i.e., is making a market in that security.)
- A person who runs a matched book of repurchase agreements.
- An individual who issues or originates securities that he or she also buys and sells.
Under SEC guidelines, dealers are required to perform certain duties when they deal with clients. These duties include prompt order execution, disclosure of material information and conflicts of interest to investors, and charging reasonable prices in the prevailing market.
Dealers are not allowed to begin conducting business until the SEC has granted registration. They must also join a self-regulatory organization (SRO), become a member of the Securities Investor Protection Corporation (SIPC), and comply with all state requirements.
While dealers are in a separate registration category in the U.S., the term is used in Canada as the shortened version of “investment dealer”—the equivalent of a broker-dealer in the U.S.
- Dealers buy and sell securities for their own account.
- Dealers are important figures in the market as they are market makers, create liquidity, and help promote long-term growth in the market.
- Dealers must be registered with the Securities and Exchange Commission and must comply with all state requirements before they can begin working.
- Dealers are different from traders and brokers—the former buys and sells for his or her own account, while the latter does not trade for its portfolio.
Dealers Versus Brokers
These are two terms that are generally associated with securities. Although they may function in a similar capacity, they do have distinctions between them.
Contrary to a dealer, a broker does not trade for its portfolio but instead facilitates transactions by bringing buyers and sellers together. In practice, most dealers also act as brokers and are known as broker-dealers. Broker-dealers range in size from small independent houses to subsidiaries of some of the largest banks. Firms operating as broker-dealers perform both services depending on the market conditions and on the size, type, and security involved in a particular transaction.
Another key difference between the two is how they charge for their services. A dealer will charge a markup when selling from his or her own inventory because the dealer is a principal in the account, while a broker charges clients a commission for executing trades on their behalf.
Dealers are also different from investment advisors, who are required to put their clients’ interests above their own.
The environment in which multiple dealers come together to buy and sell securities for their own accounts is called a dealer market. In this market, dealers can deal with each other and use their own funds to close the transaction—as opposed to a broker’s market, wherein they work as agents of buyers and sellers. Brokers are not permitted to trade in a dealer market. Dealers provide all the terms of the transaction including price.
Other Dealers in the Market
While the term dealer is used predominantly in the securities market, there are others who use this distinction. Dealers can also refer to a business or person who trades in or executes the purchase or sale of a specific product or service. For example, someone who sells automobiles is called a car dealer, while a person who deals in the sale of antiquities is called an antique dealer.
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