Dealer is an essential participant of the securities market, interacting with buyers and sellers. It can be a person or a company who buys stocks and bonds for the own account and retains them until sold to another.
To individuals and business who trades of a specific type of product, the term “dealer” is also applied (for instance, art dealer, car dealer, etc.).
Functions of a Dealer in the market
The dealer performs the most important function — maintaining the stock market and determination the current prices for a specific security. By assuming obligations for the quotation of securities, dealers form the price level, depending on the emerging demand and supply based on it. When announcing public quotations, the dealer can also provide the number of securities to be bought (sold) and the validity period of the announced prices. Besides of that fact, the dealer potentially increases market growth and adds liquidity to the market.
Whom Dealer is regulated by
Securities and Exchange Commission (SEC) is a governmental registering organization, which performs functions of control and supervision in the securities market and also regulate the activity of dealers. Before starting work, the Securities and Exchange Commission (SEC) must register dealers. All requirements provided by this authority must be complied with, only then dealer will be allowed to work. In addition to this, all companies related to securities must be members of a non-governmental organization, which is called Financial Industry Regulatory Authority (FINRA). A dealer also must be joined to Securities Investor Protection Corporation (SIPC).
Key differences between Dealers and brokers
Brokers do not trade for their portfolio, while dealers make deals with securities for own account. Companies or individuals that organize trades between buyers and sellers, but do not conduct transactions on their own behalf, are not considered as dealers.
The main function of the broker is to provide access to the stock market and to connect the buyer and the seller. He charges a commission for his services depending on the amount of the transaction. At the same time, the dealer in the securities market trades first with the seller and then with the buyer. The dealer charges on the spread between the selling and buying prices of the securities.
Another type of financial market participant is a broker-dealer, combining the functions of a broker (mediation) and a dealer (principal).
A dealer market is a financial market mechanism in which several dealers set prices for buying and selling a particular instrument or security. This market is not intended for brokers who are prohibited from trading there.