Question

In your own words, explain the differences between a broker, a dealer, and a specialist. When can a specialist act like a dealer and when can he act like a broker? Provide an example.

Answer 1

The difference in broker, dealer & market maker is listed below :

Broker	Dealer	Market maker
A broker executes trades on behalf of others	A dealer trades o his own behalf	Market maker acts as a wholesaler providing liquidity to buyers and sellers
A broker earns brokerage on the trades done by his clients (Commission) - either a buy or a sell.	A Dealer earns profit or loss on the trades done by him	A Market maker earns by charging spreads on Buy & Sell. He provides the Bid /Ask rates. The differential in bid/ ask is his earning
Broker makes purchases / sales on the wish of clients	Dealer makes purchase / sale on his own wish	Market maker provides liquidity (acts as a buyer for sellers and seller for buyers, if they are not available) and prices for both buyers and sellers
Brokers are regulated and licensed by regulatory Authorities	Dealers need to follow the Regulatory guidelines	Market makers need to follow regulatory guidelines

A market maker acts as a broker when he is executing orders on behalf of his clients or brokers

A market maker acts as a dealer when he is buying or selling in his own account. If there are no buyers, but sellers only, market maker becomes a buyer. If market doesn't have sellers and only buyers, market maker becomes the seller (the counter party to a trade)

If Buy/ sell rates are 45.02 / 45.04, the spread of 0.02 per share is the earning of market maker