A primary dealer is a financial institution that buys government securities with the intention of selling them to others. Hence, they serve as a market maker. These are typically major investment banks.
The securities are typically sold through the central banks, with whom the commercial banks have accounts.
Since the USD is the reserve currency, the distribution of US Treasuries are crucial to the global financial and banking system. For this reason, the Fed has the most diverse and extensive list of primary dealers.
Banks and broker-dealers trade directly with the Federal Reserve System. The means transacting directly with the Federal Reserve Bank of New York. These are the firms that make bids when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions.
Primary dealers are the ones who purchase the vast majority of government securities. Through the network established by the Fed, these are distributed throughout the world.
Government securities need to be of specific liquidity and quality. For this reason, primary dealers provide valuable information about what is needed by the banking and financial system.
When the Treasury is creating the debt that it is going to sell, it produces bonds, notes or T-bills based upon what the system needs.
