Question

In a dealer market, some dealers hold a certain inventory of specific securities and create a liquid market by purchasing and selling their inventories. These dealers make a market and are thus called Market Makers. Agents in the market bring investors to the dealers through a network of terminals and electronic systems. Where do the dealer profits come from in a dealer market?

Answer 1

Answer:

Dealers profit comes from the spread primarily. Spread is the differential amount between buying and selling.

Explanation:

Let us assume the price of security X is USD 100 (last trade price)

A dealer will purchase this security at discounted price from the investor say USD 99 and will sell the same security in the market at USD 100, thus earning spread.

Further being market markers, dealers often use multiple strategies to prop up the price of  particular security and earn gains on inventory held.