Comparative Analysis of Market Structures and Functions

This report provides an overview of three main types of markets: direct, broker, and dealer markets. It details the features, characteristics, and suitability of each market type. The direct market, exemplified by exchanges like the NYSE, facilitates direct interaction between buyers and sellers for standardized securities. The dealer market, often seen in over-the-counter transactions, involves dealers setting bid and ask prices, providing liquidity, and is suitable for bonds and currencies. The broker market, where brokers act as intermediaries, is suitable for tailored securities like bonds and IPOs. The report highlights the key differences in liquidity, trading mechanisms, and the types of securities traded in each market. References from CFI Education Inc. and Pocketsense are included to support the analysis.

TYPES OF MARKET
There are three types of market namely:
(a) Direct Market;
(b) Broker Market;
(c) Dealer Market.
The features of the market has been detailed here-in-below:
Direct Market
Direct Market or Exchange Market is the most automate market wherein the buyer finds the seller
automatically and no intermediary is required. However, if the buyers and seller are not able to arrive
at a settlement price, no trade shall be executed is a term used in the financial markets. Trades are
executed on the basis of order book which shall match buyer and seller. Under this type of market,
buyer and seller find their counterparties.
Suitability: The market is suitable for standardised securities, otherwise it shall be cumbersome to
find appropriate buyer with the same need. The market is suitable for bonds, futures, contracts and
options. The securities under these type of market are traded on exchanges and the most common
example are National Stock Exchange, London Stock Exchange, Australia Stock Exchange etc. (CFI
Education Inc., 2018)
The market is liquid and standardised and counterparty default is tried to be brought down by taking
margin money or the amount of security purchased.
Dealer Market
Under a dealer market, the dealer act as a counterparty for both buyer and seller. Under these type of
market, the dealer is responsible for setting bid and asking prices for the security in question and
dealer shall trade with investor who are going to pay such price. The securities which are offered by
the seller are commonly known as traded over the counter securities.
The dealer is responsible for maintaining liquidity or injecting the same at a cost of small premium.
Thus, he shall always set the bid price a slight lower compared to ask price of security. The gap or
spread between bid and ask is the profit of the dealer. For this premium or profit, the dealer bears the
risk of counterparty default. The market is generally used for bonds and currency and less often for
stocks.
Suitability: The market is generally suitable for future and options and other contracts or derivative
instruments which are standardised. Example: Foreign Exchange Market. Dealer market is highly
liquid compared to other markets. (Highland, 2017)
Broker Market
Under a Broker Market, the broker act as a counterparty for both buyer and seller. Under these type of
market, the liquidity is low on account of delay by broker to find an appropriate counterparty.
Initially Stock brokers were broker market and the brokers often try to find an appropriate
counterparty on the trading floor. Under these mechanism, the men and women use to stand on the
trading floor yelling at each other while holding piece of paper stating client’ order.

In the present time, the most common example of broker market shall be the Initial Public Offer
which is brokered by an Investment Bank. The Investment Bank act as a broker and tries to find the
counterparty who shall subscribe to the share issue.
Suitability: The market is suitable for tailored or custom securities. For example: bond market and
Initial Public Offer.
References:
CFI Education Inc., 2018. Types of Markets – Dealers, Brokers, Exchanges. [Online]
Available at: https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/types-
of-markets/
[Accessed 16 November 2018].
Highland, J., 2017. What Is the Difference Between a Broker and a Dealer?. [Online]
Available at: https://pocketsense.com/121443-difference-between-broker-dealer.html
[Accessed 16 November 2018].