Primary dealers are banks and securities broker-dealers that trade in U.S. Government securities with the Federal Reserve Bank of New York (FRBNY). On behalf of the Federal Reserve System, the FRBNY Open Market Desk engages in the trades in order to implement monetary policy. The purchase of Government securities in the secondary market by the Open Market Desk adds reserves to the banking system; the sale of securities drains reserves.
The primary dealer system was established by the FRBNY in 1960 and began with 18 primary dealers. In 1988, the number of dealers grew to a peak of 46. As of November 2010 there were 18 primary dealers. The most important reason for the decreasing number of dealers is consolidation, as Government securities trading firms have merged or refocused their core lines of business.