Dealer Market

Ever find yourself searching for dog food in your local stores only to find your preferred brand out of stock, and the store at the mall 45 minutes away wants to charge $5 more? You then look at Amazon or Chewy.com and find the same brand $2.50 cheaper than you normally pay, including shipping.

That is the power of a dealer market.

One of the egalitarian aspects of platforms like Amazon and eBay is that they are both relatively free market dealer markets, and there are no outside third parties that are intervening in price fixing (at least as far as we know). Sellers compete on quality, speed of delivery, and price. A dealer market in the financial world is one where the dealer uses their own capital as a principal to be a direct market maker, posting bids and offers on various securities to offer liquidity to the market.

The competition among dealers allows for the highest bids for sellers and the lowest offers for buyers. Dealers trade directly with other dealers, so the bid/ask spreads are transparent and competitive. Forex and futures markets are representative of a dealer market. Quotes from brokers, such as a TD Ameritrade or eTrade, are broker markets, so the spreads will be a bit wider to account for their mark ups.