INTRODUCTION AN IMPORTANT, if not critical, element in almost every financial market is the dealer who stands ready to trade for his own account and thereby provides to the public the convenience of being able to trade immediately. The dealer incurs costs of holding an inventory of securities, certain costs of handling each order and costs due to adverse information possessed by those that trade with him. He is compensated for the costs by selling at the ask price (above the "true" price) and buying at the bid price (below the "true" price).I Dealers are to be distinguished from brokers who do not bear risk and who usually charge a commission. Since healthy financial markets are viewed as critical to a healthy economy and since dealers stand at the center of many financial markets, dealers have been the focus of many regulatory inquiries and some empirical studies by academicians. Today, competitive forces (instiutional trading, third market, block trading), Justice Department pressures, and technological change (the computer) are in the process of producing major changes in the structure of securities markets. As part of this restructuring a major issue is the way in which the dealer function should be
The Journal of Finance – Wiley
Published: Sep 1, 1978
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