Financial Performance of Primary Dealers

The financial performance of primary dealers varies from year to year, depending on a number of factors, including the overall health of the economy, the performance of the government securities market, and the specific activities of each primary dealer.

However, in general, primary dealers have been profitable in recent years. For example, according to data from the Federal Reserve Bank of New York, the average pre-tax return on equity for primary dealers in the United States was 13.6% in 2022.

Primary dealers generate revenue from a number of sources, including:

  • Underwriting fees: Primary dealers earn fees for underwriting new government securities auctions.
  • Market making profits: Primary dealers generate profits when the spread between the bid and ask prices for government securities is greater than their costs.
  • Trading profits: Primary dealers generate profits when they buy government securities at a lower price and sell them at a higher price.
  • Other income: Primary dealers may also generate income from other sources, such as investment banking and advisory fees.

Primary dealers also incur a number of costs, including:

  • Funding costs: Primary dealers must borrow money to finance their inventory of government securities. This can be a significant cost, especially in periods of rising interest rates.
  • Trading costs: Primary dealers incur costs when they buy and sell government securities. These costs include brokerage fees and commissions.
  • Risk management costs: Primary dealers must invest in risk management systems to protect themselves from losses.

MCQs and answers

  1. Which of the following is a source of revenue for primary dealers? (a) Underwriting fees (b) Market making profits (c) Trading profits (d) All of the above
  2. Which of the following is a cost for primary dealers? (a) Funding costs (b) Trading costs (c) Risk management costs (d) All of the above
  3. Which of the following is a factor that can affect the financial performance of primary dealers? (a) The overall health of the economy (b) The performance of the government securities market (c) The specific activities of each primary dealer (d) All of the above

Answers:

  1. (d)
  2. (d)
  3. (d)

Additional notes

The financial performance of primary dealers is important because they play a vital role in the government securities market. By helping to ensure that governments can raise the funds they need and that the market is liquid and orderly, primary dealers contribute to the stability of the financial system as a whole.