Treynor dealer model
Treynor’s dealer model explains how broker-dealers keep markets liquid by trading with value-based transactors (VBTs). Both dealers and VBTs provide liquidity and earn from the bid-ask spread, but a VBT’s “outside spread” is usually larger than the dealer’s “inside spread” because they have different motivations and risk tolerances, and because of capital and holding‑period differences.
Dealers are constrained by how much cash and securities they have. They take on price risk (shown in their quotes) and liquidity risk (shown in their yield quotes). They can go short by borrowing securities and selling them above their estimated fundamental value, hoping the price falls when they return the securities. They can also hold long positions to cover liquidity risk. If they think the fundamental price will rise, they buy low and sell high.
In money markets, dealers provide liquidity by bringing buyers and sellers together. Without dealers, VBTs would have to trade at much higher prices. Dealers build up positions over time and, when they hit their limits, lay off risk to VBTs or buy in, which is costly and included in the dealer’s spread. The spread can be large, roughly 30–40% of a security’s value, to cover lay-off costs even if the VBT’s valuation doesn’t change.
New information updates prices for both sides, so bid and ask quotes move together. Treynor also notes that insider rules should protect dealers and investor confidence to keep liquidity strong.
This page was last edited on 3 February 2026, at 12:25 (CET).