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What is the Treynor dealer model?

Treynor dealer model

It explores the role of the broker-dealer in providing market liquidity through exchanges with value investors. In this model, the dealer will buy or sell from investors at a relatively narrow spread, but they have limits on how much risk they’ll take.

Where have you heard about the Treynor dealer model?

The model was developed by Jack L Treynor, an esteemed American investment professional who studied at Harvard University and helped to create the capital asset pricing model. He wrote about his theory in 1987 publication The Economics of the Dealer Function.

What you need to know about the Treynor dealer model.

According to Treynor, both dealers and value investors can provide market liquidity while profiting from a bid-ask spread. But the ‘outside spread’ (the prices at which value investors will deal) is much larger than the dealer’s ‘inside spread’ (the difference between the best bid and best ask) owing to differences in the motivations and risk preferences of the two market makers.

Find out more about the Treynor dealer model.

Read our definition of dealer to discover more about their role in the market.

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