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Dealer markets are markets that differ from the general investment markets, in that traders who focus on particular commodities engage in buying and selling activity using their own accounts rather than being represented by a third party. Securities dealers who make use of a dealer market are often referred to as Market Makers. In this type of trading environment, the buyers and sellers make use of their own resources in order to conduct trading.
A dealer market is different from an auction market. With auction markets, there is usually one specialist who functions as the gatekeeper for incoming orders to buy and sell. Essentially, the specialist works out of one location and matches the buying and selling orders as they come in. Their sole function is to process the orders. This means a specialist in an auction market does not perform such functions as researching the market trend or providing sales support to investors. A specialist functioning in an auction market is also limited to making use of the capital assets of one firm.
By contrast, a dealer market allows the traders or dealers to make use of their own resources to conduct trading activity, do research, and provide support to their investor customers. In addition, the Market Makers are not limited in the same manner as a specialist in an auction market. Multiple dealers in a dealer market situation may be risking and investing their capital in a given stock.
One of the best examples of this type of market is the NASDAQ. Dealers are able to move quickly to process orders to buy and sell and interact freely when it comes to research and other key functions. This is one of the key advantages of a dealer market; the ability to move quickly in buying and selling securities means a greater opportunity to earn a higher return or minimize loss on any given investment.
A dealer market may be focused on any type of commodity, including stocks and treasuries. Generally, dealers have to meet stringent requirements in order to participate in this type of market, including compliance with regulations that govern their continued participation in the market. Should a Market Maker choose to function outside the regulations associated with trading privileges, the dealer may be temporarily limited in the ability to trade, or barred from trading altogether.