Primary dealer
A trading counterparty of the New York Fed, obliged to bid at every Treasury auction and to make markets in government securities — the channel through which open market operations reach the financial system.
The Fed does not buy bonds from the public. It transacts with a small list of primary dealers, and those dealers are the bridge between the central bank's balance sheet and everyone else's.
The obligation runs both ways: dealers get access to Fed operations, and in exchange must participate in auctions and provide market-making even when it is unprofitable to do so.
Dealer balance sheet capacity is a real constraint on the whole system. When leverage rules or risk limits stop dealers from expanding, repo markets seize even though nothing is wrong with the collateral itself.
The mechanics
- Counterparty to
- The New York Fed's Open Market Trading Desk.
- Obligations
- Bid at Treasury auctions; make markets; report positions and flows.
- Why capacity matters
- Intermediation requires balance sheet, and balance sheet is finite and regulated.
The common misreading
That QE puts money directly into the real economy. It reaches a dealer first, and whether anything travels further depends on what the seller does next.
Related terms
- Quantitative easingLarge-scale central bank purchases of bonds, paid for with newly created reserves, used to ease financial conditions once the policy rate is already near its floor.
- Repurchase agreementThe sale of a security combined with an agreement to buy it back at a set price and date — legally a sale, economically a loan secured by collateral.
- Secured Overnight Financing RateA broad measure of the cost of borrowing cash overnight secured by US Treasury collateral, published each morning by the New York Fed and the main US replacement for LIBOR.
Primary sources
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