Financial Education

Brokers and dealers play different roles in securities markets.

The broker is an agent of the investor. He represents the order, finding opposite sides of the trade. Brokers also supply market information, provide discretion and secrecy, and sometimes provide other supporting services such as margin, record-keeping, custody, etc.)

Dealers are adversaries of the investor. They benefit from a higher bid/ask spread, where the investor covets a lower one. Since their profits are small on a given trade, they are unwilling to trade against informed investors (those who have specific information that the security is mispriced) or those with a reputation for finding mispriced securities. The informed investors want to maintain their ability to trade, and thus don’t want dealers to know they are behind the order.

For more information, see all articles on: Active Management, Investing in Stocks, Portfolio Management, Security Selection, Trading Execution

See also:

Prime Brokers

Types of Securities Markets

Bid-Ask Spreads: Effective versus Quoted

Indications of Interest

Excerpt from Reminiscences of a Stock Operator