Difference between Dealer Market and Auction Market

Dealer Market

Auction Markeet

1. A financial market mechanism wherein multiple dealers post prices at which they will buy or sell a specific security of instrument. 2. In a dealer market, a dealer – who is designated as a “market maker” – provides liquidity and transparency by electronically displaying the prices at which it is willing to make a market in a security, indicating both the price at which it will buy the security (the “bid” price) and the price at which it will sell the security (the “offer” price). 3. The government securities market and all OTC markets are dealer market. 4. Dealer market are Quote driven. 5. For example, if dealer A has ample inventory of ABC co. Stock – which is quoted in the market by other market makers at $100 / $100.5 – and wishes to offload some of its holdings, it can post its bid-ask quote as $99.8 / $100.3. Rational investors looking to buy ABC co. Would then take dealer a’s offer price of $100.3, since it is 20 cents cheaper than the $100.5 price at which it is offered by other market makers. Conversely, investors looking to sell ABC co. Stock would have little incentive to “hit the bid” of $99.8 posted by dealer a, since it is 20 cents less than the $100 price that other dealers are willing to pay for the stock.

1. A market in which buyers enter competitive bids and sellers enter competitive offers at the same time. 2. On an auction market, the current price for a share in a security is the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. Matching bids and offers are then paired together and the orders are executed.  3. All future markets are auction market. 4.  Auction market are Order-driven. 5. For example, if potential buyers for Security A enter bids of $100, $101, and $102, and potential sellers enter offers of $102, $103, and $104. In this scenario, only the bids/offers for Security A at $102 will be executed. All remaining orders will not immediately be executed and the current price of security A will then be $102.