Government Securities Dealers and Brokers

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

Dealers purchase and sell government securities for their own accounts as well as arrange transactions with customers and other dealers.  Dealers work closely with the Federal Reserve System and the Treasury.  They are authorized to purchase debt directly from the Treasury for resale.  Primary dealers can purchase government securities directly from the Federal Reserve System in return for maintaining markets in Treasury debt.  Generally, dealers must maintain average customer trading volume in government securities of at least ¾ of 1% of total primary dealer customer volume.  Dealers do not charge commission on their own trades, but strive to sell securities at prices above the cost of the securities.  There is a broad secondary market for U.S. Treasury securities.

Brokers specialize in bringing together (matching) buyers and sellers among the dealers in the government securities market.  Most of the trading is done by phone since there is no centralized marketplace.

Transactions often involve large amounts.  Differences between bid and ask prices are often as low as 1 basis point ($25 per $1 million face value on a 90-day bill).  Interest rate expectations and the state of the market usually determine the spread.  The Treasury market is the largest securities market in the world, with more than five times the dollar volume of the New York Stock Exchange.  Interdealer trading is highly organized.  Electronic brokerage screens are commonly used to provide immediate bids and offerings on active issues traded.

Government securities are generally considered to be riskless assets.  However, market prices can change rapidly and frequently, resulting in the possibility of trading risks.  Interest rate risks remain because government securities are sensitive to changes in interest rates.

Note:  Blueprint for Reform:  The Report of the Task Group on Regulation of Financial Services (The Bush Report) (Washington, D.C.:  U.S. Government Printing Office, 1984), p.52.

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