What defines a dealer in financial markets?

A dealer in financial markets is defined primarily by their role as market participants who hold inventory and assume risk for their own benefit. This means that dealers buy and sell financial instruments, such as stocks or bonds, taking ownership of these assets in the process. They profit from the difference between the prices they pay for these instruments (the bid price) and the prices at which they sell them (the ask price). This active involvement in holding inventory allows dealers to provide liquidity to the market, as they can facilitate trades even when other participants may be less active.

By holding inventory, dealers take on the risk associated with fluctuations in market prices. If the value of the assets they own decreases, they face potential losses. Conversely, if prices rise, they can benefit significantly. This characteristic sets dealers apart from other market participants, such as brokers, who primarily facilitate trades on behalf of others without taking on such risks. Understanding the dealer's role elucidates how they contribute to market efficiency and liquidity, making them essential players in the financial markets.