Dealers

Dealers

Primary Activities
1. Quotes: Set prices and volumes
2. Market their services
3. Manage their inventory
4. Act as intermediary between investors and exchange
5. Methods of attracting order flow
  1. Quote aggressive prices and sizes
  2. Reputation for high quality execution
  3. Advertising
  4. Cultivating relationships with customers
  5. Side payment
Functions
1. Supply liquidity ("make a market")
2. Trade on their own account
Types of dealers
1. Scalpers
2. Day traders
3. Local traders
4. Market makers
5. Registered traders
6. Specialists
  1. Continuously display bid-ask quotes
  2. Quotes posted in limit order book
    1. Management of book not monopolistic
    2. Competition with intermediaries
  3. Provide financial info on designated stocks
7. Principal traders
Benefits to exchange
1. Enhance market quality
2. Attract and supply liquidity
  1. Increase trader profits from enhanced activity
3. Increase investor confidence
4. Generates more fees for exchange
Make or take pricing (rebates for order flow)
Obligations
1. Affirmative
  1. Narrow bid-ask
  2. Maintain price continuity (less price volatility)
  3. Agent for limit order book
2. Negative
  1. Public order precedence rule
    1. Must yield to public customers first
  2. Public liquidity preservation principle
    1. Trades must be inside the spread
      1. Necessary, but costly
    2. Minimising dealer's use of limit orders
Trading Styles
1. Passive (spread trader)
2. Active (position trader)
Quote setting
1. Where to place bid and offer prices
2. The spread between bid and offer
  1. Narrow or tight
  2. Wide
3. Size of the bid-offer
4. Two sided vs one sided
5. Firm vs Soft (indicative)

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	Created by Vhia Rose over 10 years ago