What are Primary Dealers?

Primary dealers are financial entities which are qualified to trade directly with the Federal Reserve Bank of the United States, nicknamed “the Fed.” There are usually less than three dozen primary dealers at any time, with updated lists being maintained by the Federal Reserve Bank of New York, which handles open market operations and subsequently works directly with the primary dealers. Institutions which operate as primary dealers are generally very active in other areas of the financial market, and the list often includes the names of some of the largest and most powerful banks and broker-dealers in the United States.

In order to be a primary dealer, an institution must meet a number of requirements. It must regularly submit information about its financial activities, including trading volume, to the Fed, and demonstrate that it is maintaining a currency reserve set by the Fed. It must also agree to participate in auctions of Treasury securities, and to work with the Fed when it is involved in open market operations. Failure to meet these qualifications can lead to the decision to remove an institution from the list.

Primary dealers are used to underwrite new government debt, to stabilize the economy, and to promote other financial goals. The Fed needs these organizations to make its operations effective, and primary dealers rely on the Fed for billions of dollars in annual business. Once the dealers purchase securities, they can resell them to customers, or utilize them in their own operations, and they often generate substantial profits in the process.

These pre-approved banks and brokerages also benefit by being listed as primary dealers because their listing acts as a flag to alert other companies to the fact that they are regarded as stable and reliable companies by the Fed. Companies can be delisted for things like not maintaining adequate reserves, for example, providing some regulation of the primary dealer system by ensuring that only institutions in good financial health are listed.

People who are curious about which institutions are currently primary dealers can find the list at the Federal Reserve Bank of New York's website. The New York Fed also maintains general information about primary dealers including statistics and data pertaining to their activities and financial filings with the Fed. People should note that the Fed does not audit self-reporting from primary dealers and therefore does not guarantee the accuracy of information available on its website.