From Market Making to Matchmaking: Does Bank Regulation Harm Market Liquidity?

69 Pages Posted: 16 Jun 2019 Last revised: 3 Aug 2022

See all articles by Gideon Saar

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management

Jian Sun

Lee Kong Chian School of Business, Singapore Management University

Ron Yang

Stanford Graduate School of Business

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: July 20, 2022

Abstract

Post-crisis bank regulations raised market-making costs for bank-affiliated dealers. We show that this can, somewhat surprisingly, improve overall investor welfare and reduce average transaction costs despite the increased cost of immediacy. Bank dealers in OTC markets optimize between two parallel trading mechanisms: market making and matchmaking. Bank regulations that increase market-making costs change the market structure by intensifying competitive pressure from non-bank dealers and incentivizing bank dealers to shift their business activities toward matchmaking. Thus, post-crisis bank regulations have the (unintended) benefit of replacing costly bank balance sheets with a more efficient form of financial intermediation.

Keywords: bank regulation, financial crisis, corporate bonds, liquidity, over-the-counter markets, broker-dealers, Basel 2.5, Basel III, Volcker Rule, post-crisis regulation, market making, matchmaking, market microstructure

JEL Classification: G01, G12, G21, G24, G28

Suggested Citation

Saar, Gideon and Sun, Jian and Yang, Ron and Zhu, Haoxiang, From Market Making to Matchmaking: Does Bank Regulation Harm Market Liquidity? (July 20, 2022). Available at SSRN: https://ssrn.com/abstract=3399063 or http://dx.doi.org/10.2139/ssrn.3399063

Gideon Saar (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

431 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

Jian Sun

Lee Kong Chian School of Business, Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

Ron Yang

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, 94305
United States

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
578
Abstract Views
4,114
Rank
71,956
PlumX Metrics