Explain the role of primary dealers in the money market.

Primary dealers are large commercial banks which operate
under the supervision of the U.S. Federal bank or broker-dealers registered with the
SEC. They are required to have a capital base in accord with Tier 1 and Tier 2
capitalization, which covers both equity capitalization and core capitalization.
Capitalization is a significant qualification for being a primary dealer because PDs
keep the Federal Reserve trading desk operations running
efficiently.

Primary dealers buy securities from those
issuing them and then sell them to smaller investors. The system of dealing through
primary dealers gives the sellers an assurance that all the securities on issue will be
sold. But at the same time it gives the primary dealers a lot of power and the ability
to manipulate the process of buying and selling
securities.

For this reason strict laws have been enacted
to prevent any collusion between dealers and to ensure that they cannot take undue
advantage of their monetary power.