Dealer definition

A dealer is a person or firm that buys and sells instruments using its own capital. In trading it acts as a principal rather than an agent, taking the other side of a transaction from its own inventory.

A dealer supplies liquidity by quoting prices it will buy and sell at. The buying price is the bid, the selling price is the ask, and the gap between them is the bid-ask spread, which is where the dealer earns. It also carries market risk on the positions it holds.

A dealer differs from a broker: a broker arranges trades for clients and earns a commission, while a dealer trades for its own book. A market maker is a type of dealer that commits to quoting continuous two-sided prices in an instrument, so every market maker is a dealer, but not every dealer makes markets.