Dealers: Definition, Role, and Regulation

Key takeaways

• A dealer buys and sells securities for its own account and acts as a principal in trades.
• Dealers help create liquidity and make markets by posting bid and ask quotes.
• Dealers must register with the SEC, join self‑regulatory organizations (e.g., FINRA), and meet other regulatory requirements.
• Dealers differ from brokers (agents for clients), traders (individuals trading for personal gain), and registered investment advisors (fiduciaries).

What is a dealer?

A dealer is an individual or firm that stands ready to buy securities into its own inventory (at the bid) and sell from that inventory (at the ask). Dealers profit from the spread between bid and ask prices while providing liquidity—allowing other market participants to buy or sell without waiting for a matching counterparty.

Dealers operate as principals (trading for their account), not as agents executing orders on behalf of clients.

How dealers operate

• Post bid and ask quotes for securities, showing prices at which they will buy or sell.
• Hold inventory of securities and manage that inventory to facilitate transactions.
• Seek profit from the bid–ask spread and sometimes from underwriting or proprietary trading.
• Add liquidity to markets, which supports price discovery and smoother trading.

Regulation and requirements

Dealers are regulated by the Securities and Exchange Commission (SEC) and typically must:
* Register with the SEC before conducting business.
Become members of a self‑regulatory organization such as FINRA.
Join the Securities Investor Protection Corporation (SIPC) where applicable.
* Comply with state rules and any additional SRO obligations.

Regulatory duties commonly include prompt order execution, disclosure of material information and conflicts of interest, and charging reasonable prices relative to prevailing market conditions.

Activities that generally require dealer registration include continuously quoting a security as a market maker, operating matched books of repurchase agreements, or issuing and trading securities the entity originates.

Dealers vs. brokers, traders, and RIAs

• Broker: Acts as an agent to match buyers and sellers and earns commissions; does not trade from its own inventory (except when also acting as a dealer).
• Dealer: Trades from its own account as principal and earns markups/markdowns (the spread).
• Trader: An individual who buys and sells securities for personal or proprietary gain; not necessarily engaged in market‑making as a business.
• Registered Investment Advisor (RIA): Owes a fiduciary duty to clients and must put clients’ interests first; may use brokers or dealers to execute trades.

Many firms operate as broker‑dealers, performing both agency and principal functions depending on the transaction.

Dealer markets

A dealer market is an environment where multiple dealers interact, buying and selling securities from their own accounts. In such markets:
* Dealers set transaction terms, including price.
They may trade with one another or with other market participants.
Brokers act as agents and generally do not trade for their own account in a pure dealer market.

Other uses of “dealer”

Outside finance, “dealer” commonly denotes a person or business that buys and sells a particular product—examples include car dealers or antique dealers.

How dealers make money

Dealers typically earn profits from the spread—the difference between the price they pay to buy (bid) and the price at which they sell (ask). They may also generate revenue from underwriting, trading profits, and fees when acting in a brokerage capacity.

Opening an account with a broker‑dealer (what to expect)

When you open an account with a broker‑dealer, you will normally provide:
* Personal identification (name, address, date of birth, government ID).
Taxpayer identification (Social Security number or TIN).
Contact information (phone, email).
Employment status and occupation.
Financial information (annual income, net worth).
Investment objectives and risk tolerance.
Disclosure of any brokerage employment or other relevant affiliations.

You’ll typically choose between account types such as a cash account or a margin account, and you may grant discretionary authority to allow someone else to trade on your behalf.

Examples and market size

Broker‑dealers range from small independent firms to large financial institutions. There are thousands of securities firms and broker‑dealers operating in the U.S., including well‑known firms that offer both brokerage and dealer services.

Bottom line

Dealers play a central role in financial markets by trading as principals, making markets, and supplying liquidity. They are subject to SEC regulation and additional self‑regulatory requirements designed to protect market integrity and investors.