Start the conversation
Money Morning Liquidity Tracking Specialist Lee Adler showed us how the U.S. Federal Reserve's "sweetheart deal" with some of the world's biggest banks could introduce some extreme volatility as their relationships change.
The Fed needs these relationships – mechanisms, if you will – to help it run more efficiently.
That's the theory, at any rate…
The truth is, the Fed probably couldn't get much done without its "accomplices," the primary dealers. This is the secret to the Fed's outsized influence on the markets.
Let me show you how it works…
Here Are the Fed's Primary Dealers
Primary dealers can be thought of as the Fed's trading counterparties, but they have to be. They're tasked by the Fed to assist in implementing monetary policy. They are either banks or broker-dealers of securities who have accounts at the Fed and use them to trade directly with the Fed, purchasing U.S. Treasury bonds or securities.
Currently, there are 23 primary dealers based all around the world, including the United States, Canada, the United Kingdom, France, Switzerland, Germany, and Japan. You can see the complete list on the right.
In addition, primary dealers are expected to make markets for the Fed on behalf of its official account holders as deemed necessary.
In order to "make" a market, investment banks employ people – the market makers – to provide liquidity in tradeable instruments. They're obligated to buy and/or sell accordingly.