A financial market mechanism wherein multiple dealers post prices at which they will buy or sell a specific security of instrument. In a dealer market, a dealer – who is designated as a “market maker” – provides liquidity and transparency by electronically displaying the prices at which it is willing to make a market in a security, indicating both the price at which it will buy the security (the “bid” price) and the price at which it will sell the security (the “offer” price). Bonds and foreign exchange trade primarily in dealer markets, while stock trading on the Nasdaq is a prime example of an equity dealer market.
A market maker in a dealer market stakes its own capital to provide liquidity to investors. The primary mode of risk control for the market maker is therefore the use of the bid-ask spread, which represents a tangible cost to investors.