How Does Liquidity In Dealer Markets Relate To The Auction Market?
Dealers are very important financial figures in the stock market. They make markets transaction possible by buying and selling securities, underwriting securities, and offer investment advice to investors. So, dealers are essentially the market makers that give you the ask and bid prices you’ll find when you search for a particular security on the over-the-shelf market. However, unlike stockbrokers and other financial professionals, dealers do not make stock trades on their own. Instead, they act as intermediaries, or link buyers and sellers through brokers.
How does a broker go about buying and selling securities? In order to answer that question, one must take a step back and consider how the process actually works. A dealer is someone who goes out, finds the right car for the person looking to buy, finds the right car dealer to buy from, provides all the necessary information to the potential buyer, and closes the deal. The process would be completed smoothly and productively with no personal intervention on the part of either the person seeking the loan or the person selling the car. However, the role that dealers play on the stock market floor is more complex and far-reaching.
First, a dealer can fill a gap in liquidity between when a buyer is seeking financing and when they’re actually searching for a new car. Most buyers don’t have access to enough liquid cash to pay for a brand new vehicle. Some may be able to get an auto loan from their existing financial institution, but this may not be an option everyone is aware of. Then, what do some dealers do? They seek out financial institutions who deal in financing and/or loans, place orders for car lots, and wait for them to respond to them, before selling the securities that the banks are providing to cover the loan.
This last example is just one of the many ways how a dealer can “sell” the security to a financial professional. If a dealer finds themselves with enough cars to meet the demand and needs of the public, they may choose to move their operation to a different city or jurisdiction altogether. If the area doesn’t support their operation, they will be forced to sell the securities in order to receive funding. While it’s difficult to imagine any scenario where a dealer won’t be making money by selling its inventory, it is also important to recognize that not all dealers operate in this same manner. A dealer can sell a lot more tickets than the company that is actually financing the car, even if the car salesmen are technically “buying” the cars from the dealer – and that is where the difference in liquidity lies.
So how does this affect liquidity in dealer markets? One consequence is that some dealers can create an imbalance between supply and demand. Simply put, if there is more buying than selling, then the dealership isn’t generating enough cash flow to satisfy the demand. That could lead to problems for the dealer. It could lead to bankruptcy, which would negatively impact investors, as well. (Of course, ultimately, it may end up being the dealer who ends up filing for bankruptcy.)
The other consequence is related to the way the dealer enters and exits the auction market. In order to generate profits, a dealer will typically buy a car at the bidding price, negotiate the purchase price, and then resell the vehicle to the general public. The dealer has no obligation to the public, nor is there any risk of loss. In order to do so, a dealer typically enters into an agreement with a private party to enter into a dealer-to-dealer contract. Because the dealer typically enters the auction market with a financial investment in a vehicle, the dealer may use this capital to either make purchases in the auction market more efficiently, or to take advantage of the benefits associated with capital appreciation.