A market in which transactions occur between principals acting as dealers buying and selling for their own accounts, rather than between brokers acting as agents for buyers and sellers. One example is the market for Treasuries.
Nasdaq and the OTC market are considered dealer markets. Dealers are not assembled in a centralized place like an exchange, but, rather, are located across the U.S. in different offices. Dealers are linked electronically by phone and computer which enables them to review and record stock prices. Nasdaq dealers also execute transactions for buying and selling Nasdaq securities.
Nasdaq is a competing dealer market, different from an auction market in that many dealers, called Market Makers, use their own capital, research, retail, and/or systems resources to represent a stock. Many Market Makers can represent the same stock; thus, they compete with each other to buy and sell that stock. Auction markets have only one person, a specialist, who in a centralized location or "floor," matches incoming orders to buy and sell each stock. Specialists are not allowed to provide research or retail sales support, and are limited to only one firm's available capital. The average Nasdaq stock has eleven Market Making firms that risk and invest their capital.