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Understanding the Role of a Dealer in the Indian Financial Market

Abanti Chattopadhyay

4 min Read

27 Dec 2020

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Introduction

A dealer is an individual, financial institution, or securities firm that actively buys, sells, and distributes securities, including bonds, stocks, and derivatives. Dealers play a crucial role in market liquidity, underwriting securities, and investment services.

In India, dealers act as market makers, providing bid and ask quotes for securities in the over-the-counter (OTC) market and stock exchanges. They operate under the regulations of the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), ensuring fair trading practices and financial stability.

This article explores the role of dealers, their functions, differences from brokers, and their impact on the Indian financial market.

Who Is a Dealer?

A dealer is a financial entity that trades securities on its own behalf, rather than executing trades for clients like a broker.

Dealers:

Buy and sell securities at market prices, earning profits from the spread between the buying and selling price.
Create liquidity in financial markets, ensuring smooth trading.
Underwrite and distribute securities, helping companies raise capital.
Participate in government securities (G-Secs) auctions, playing a role in debt markets.
For example, if an investor wants to buy ₹10 lakh worth of corporate bonds, a dealer can sell them from its own inventory, rather than waiting for another investor to place a matching order.

Functions of a Dealer in the Indian Market

1. Market Making

Dealers provide buy (bid) and sell (ask) quotes to facilitate trading.
They help maintain liquidity in the stock, bond, and derivatives markets.
For example, in the government bond market, Primary Dealers (PDs) ensure continuous buying and selling of government securities.

2. Underwriting of Securities

Dealers act as underwriters for new stock and bond issuances, purchasing securities from issuers and selling them to investors.
This helps companies and governments raise capital efficiently.
For example, during an Initial Public Offering (IPO), a dealer may commit to buying shares if demand is low, ensuring the company meets its fundraising target.

3. Proprietary Trading

Dealers trade securities on their own accounts to generate profits.
They take positions in stocks, bonds, and derivatives based on market trends.

4. Distribution of Securities

Dealers help in selling and distributing bonds, mutual funds, and structured products to investors.
They work with investment banks, mutual funds, and high-net-worth individuals (HNIs).

5. Over-the-Counter (OTC) Trading

Many bonds, foreign exchange, and derivatives are traded in OTC markets, where dealers act as intermediaries.
They set market prices and facilitate bulk trades for institutional investors.
For example, in the corporate bond market, dealers help investors buy and sell large quantities of bonds without affecting market prices.

Types of Dealers in India

1. Primary Dealers (PDs)

Licensed by the Reserve Bank of India (RBI) to trade in government securities (G-Secs).
Ensure smooth functioning of the bond market by participating in auctions and secondary market trading.
Example: State Bank of India (SBI) Primary Dealer, ICICI Securities Primary Dealership.

2. Bond and Fixed-Income Dealers

Specialize in government bonds, corporate bonds, and municipal bonds.
Provide liquidity in fixed-income markets and help investors trade bonds.
Example: HDFC Securities, Kotak Securities.

3. Equity Dealers

Buy and sell stocks on stock exchanges.
Act as market makers for specific stocks to ensure liquidity.
Example: Angel One, Motilal Oswal Securities.

4. Derivatives and Foreign Exchange (Forex) Dealers

Specialize in currency, commodity, and stock derivatives.
Help businesses hedge risks in currency exchange and commodity pricing.
Example: Forex dealers in banks like HDFC Bank, ICICI Bank, and CitiBank.

Role of Dealers in Bond Markets

The bond market in India operates through a dealer-based system, where dealers:

Quote buy (bid) and sell (ask) prices for government and corporate bonds.
Facilitate large trades for institutional investors.
Participate in government bond auctions through RBI’s Primary Dealers.
For example, a corporate bond with a face value of ₹1,000 may be bought at ₹990 and sold at ₹1,005, allowing the dealer to earn a ₹15 spread per bond.

How Do Dealers Earn Profits?

Dealers make money through:

Bid-Ask Spread – The difference between the buying and selling price of a security.
Market Making Fees – Dealers receive fees for providing liquidity.
Trading Profits – Dealers buy low and sell high in proprietary trading.
Underwriting Fees – Dealers earn fees from underwriting IPOs and bond issuances.

For example, if a dealer buys a bond at ₹995 and sells it at ₹1,010, they earn a ₹15 profit per bond.

Regulations Governing Dealers in India

Dealers in India operate under strict regulatory frameworks to ensure market stability:

1. SEBI Regulations

Regulates equity and corporate bond dealers under SEBI (Stock Brokers and Sub-Brokers) Regulations.
Ensures fair trading practices and investor protection.

2. RBI Guidelines for Primary Dealers

Primary Dealers in government securities are regulated by RBI’s PD Licensing Framework.
They must maintain minimum capital requirements and adhere to liquidity norms.

3. Stock Exchange Rules

Dealers registered with NSE and BSE must follow exchange guidelines on trade execution and reporting.
These regulations ensure that dealers operate transparently, reduce market manipulation, and maintain financial stability.

Conclusion

Dealers play a critical role in India’s financial markets, ensuring liquidity, price stability, and efficient trading across stocks, bonds, and derivatives. They act as market makers, underwriters, and investment facilitators, helping businesses and governments raise capital.

With SEBI and RBI regulations ensuring fair practices, dealers continue to be the backbone of financial markets, supporting economic growth and investment opportunities in India.

References used:

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