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KemmbaraXtra-Islamic Finance-Islamic Capital Market – Dealer Market
A dealer market is a category of the secondary market where trading takes place electronically through dealers, rather than by direct interaction between buyers and sellers, as seen in auction markets.
1. No physical convergence of investors
• Unlike auction markets, dealer markets do not require buyers and sellers to meet or converge in one place.
• Trading is conducted electronically through dealer networks.
Example: Investors trade shares online through dealer platforms without meeting each other.
2. Trading is facilitated by dealers
• Dealers act as intermediaries who stand ready to buy and sell securities.
• Investors trade with dealers, not directly with other investors.
Example: An investor buys shares from a dealer instead of another investor.
3. Example of a dealer market
• NASDAQ is a well-known dealer market.
• It operates through an electronic system where multiple dealers quote prices.
Example: Technology stocks traded on NASDAQ are bought and sold through dealers.
4. Dealers maintain an inventory of securities
• Dealers keep a stock (inventory) of securities that they are willing to trade at any time.
• This allows immediate buying or selling without waiting for another investor.
Example: A bond dealer holds government and corporate bonds ready for sale.
5. Dealers quote buy and sell prices
• Dealers announce:
6. Dealers provide liquidity
• By being ready to trade at all times, dealers provide liquidity to the market.
• Investors can buy or sell securities without delay.
Example: An investor can sell a bond immediately because a dealer is willing to buy it.
7. Dealers use their own capital
• Dealers risk their own money by holding securities in inventory.
• This exposes them to price changes.
Example: If bond prices fall, the dealer may incur a loss on inventory held.
8. Dealers earn profits through spreads
• Dealers make profits from the difference between the buying and selling price.
• This difference is called the spread.
Example: Buying a bond at $99 and selling it at $101 gives the dealer a $2 profit.
9. Transparency in pricing
• Dealer prices are publicly displayed, ensuring transparency.
• Investors can compare prices offered by different dealers.
Example: Online trading platforms show multiple dealer quotes for the same security.
10. Competition among dealers
• Multiple dealers compete by offering better prices.
• Competition helps ensure fair pricing for investors.
Example: One dealer lowers the selling price to attract more buyers.
11. Strong presence in currency and bond markets
• Dealer markets are more active in:
12. Use in derivatives and standardised contracts
• Dealer markets are preferred for:
13. Foreign exchange market as a dealer market
• The foreign exchange (FX) market operates mainly through dealers.
• Banks and currency exchanges act as dealer intermediaries.
Example: A bank quotes exchange rates and trades currencies with clients.
One-Line Exam Answer
A dealer market is a secondary market where dealers trade securities from their own inventories, provide liquidity, quote transparent prices, and earn profits through bid–ask spreads, with strong application in bond, currency, and derivative markets.
A dealer market is a category of the secondary market where trading takes place electronically through dealers, rather than by direct interaction between buyers and sellers, as seen in auction markets.
1. No physical convergence of investors
• Unlike auction markets, dealer markets do not require buyers and sellers to meet or converge in one place.
• Trading is conducted electronically through dealer networks.
Example: Investors trade shares online through dealer platforms without meeting each other.
2. Trading is facilitated by dealers
• Dealers act as intermediaries who stand ready to buy and sell securities.
• Investors trade with dealers, not directly with other investors.
Example: An investor buys shares from a dealer instead of another investor.
3. Example of a dealer market
• NASDAQ is a well-known dealer market.
• It operates through an electronic system where multiple dealers quote prices.
Example: Technology stocks traded on NASDAQ are bought and sold through dealers.
4. Dealers maintain an inventory of securities
• Dealers keep a stock (inventory) of securities that they are willing to trade at any time.
• This allows immediate buying or selling without waiting for another investor.
Example: A bond dealer holds government and corporate bonds ready for sale.
5. Dealers quote buy and sell prices
• Dealers announce:
- a bid price (price at which they will buy)
- an ask price (price at which they will sell)
• This quoted range is known as the price spread.
Example: A dealer may quote $99 to buy a bond and $101 to sell it.
6. Dealers provide liquidity
• By being ready to trade at all times, dealers provide liquidity to the market.
• Investors can buy or sell securities without delay.
Example: An investor can sell a bond immediately because a dealer is willing to buy it.
7. Dealers use their own capital
• Dealers risk their own money by holding securities in inventory.
• This exposes them to price changes.
Example: If bond prices fall, the dealer may incur a loss on inventory held.
8. Dealers earn profits through spreads
• Dealers make profits from the difference between the buying and selling price.
• This difference is called the spread.
Example: Buying a bond at $99 and selling it at $101 gives the dealer a $2 profit.
9. Transparency in pricing
• Dealer prices are publicly displayed, ensuring transparency.
• Investors can compare prices offered by different dealers.
Example: Online trading platforms show multiple dealer quotes for the same security.
10. Competition among dealers
• Multiple dealers compete by offering better prices.
• Competition helps ensure fair pricing for investors.
Example: One dealer lowers the selling price to attract more buyers.
11. Strong presence in currency and bond markets
• Dealer markets are more active in:
- foreign exchange
- bond markets
• These markets require high liquidity and continuous trading.
Example: Government bonds are commonly traded through dealers.
12. Use in derivatives and standardised contracts
• Dealer markets are preferred for:
- futures
- options
- derivatives
• Standardisation makes dealer-based trading efficient.
Example: Currency futures are traded through dealer systems.
13. Foreign exchange market as a dealer market
• The foreign exchange (FX) market operates mainly through dealers.
• Banks and currency exchanges act as dealer intermediaries.
Example: A bank quotes exchange rates and trades currencies with clients.
One-Line Exam Answer
A dealer market is a secondary market where dealers trade securities from their own inventories, provide liquidity, quote transparent prices, and earn profits through bid–ask spreads, with strong application in bond, currency, and derivative markets.
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