Banking Regulation and Market Making

44 Pages Posted: 10 Dec 2016 Last revised: 8 Aug 2018

See all articles by David Cimon

David Cimon

Wilfrid Laurier University - School of Business & Economics

Corey Garriott

Bank of Canada

Date Written: August 6, 2018

Abstract

Motivated by recent banking regulation, we study how securities dealers respond to constraints on the balance sheet. The constraints lead dealers to reduce their market making, specifically by refusing principal positions and instead matching clients on an agency basis. As a result, asset prices exhibit greater price impact and price pressure, since clients require price concessions to motivate them to be matched. While balance-sheet regulation in the style of Basel III decreases the risk of dealer default, the Volcker Rule does not necessarily.

Keywords: market making, market microstructure, fixed income, liquidity, regulation, Basel III, Volcker rule, securities financing

JEL Classification: G14, G20, L10

Suggested Citation

Cimon, David and Garriott, Corey, Banking Regulation and Market Making (August 6, 2018). Available at SSRN: https://ssrn.com/abstract=2882594 or http://dx.doi.org/10.2139/ssrn.2882594

David Cimon (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Corey Garriott

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

HOME PAGE: http://https://cgarriott.wordpress.com/

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