in laymens terms, can you describe what the difference between the dealer 2 customer and a dealer 2 dealer?

Question

in laymens terms, can you describe what the difference between the dealer 2 customer and a dealer 2 dealer market?

Answer 1

Dealers -- or market-makers -- work for themselves or large investment banks. While they may sometimes take positions in securities, they make most of their money by acting as an intermediary between a buyer and a seller.

The ultimate buyers and sellers of instruments fall into two categories -- hedgers and speculators. That is, those who buy the instrument to lessen risk and those who are making a bet. These two groups fall into your "customer" category. A dealer would love nothing more than to buy from a hedger and sell to a speculator -- or vice verse. These transactions fall into the the Dealer-Customer category.

Sometimes a customer wants to buy or sell a security, but the dealer doesn't have another customer to take on the other side of the deal. In that case, he has two choices. He can take on the risk himself, selling or buying from his inventory. The other choice he has is to lay that risk off to another dealer. Dealer A may have a client who wants to sell a security. Dealer B might have one who wants to buy it. If A buys from the customer, sells to B who then sells to his customer, then everyone gets what he wants. The transaction between dealer A and dealer B is done in the Dealer-to-Dealer market.

For bonds, about half of a financial institution's trades are done with customers and about half are done with other dealers.