publication . Other literature type . Research . Article . 2019

Banking regulation and market making

David Cimon; Corey Garriott;
  • Published: 01 Dec 2019
  • Publisher: Elsevier BV
Abstract
We present a model of market makers subject to recent banking regulations: liquidity and capital constraints in the style of Basel III and a position limit in the style of the Volcker Rule. Regulation causes market makers to reduce their intermediation by refusing principal positions. However, it can improve the bid-ask spread because it induces new market makers to enter. Since market makers intermediate less, asset prices exhibit a liquidity premium. Costs of regulation can be assessed by measuring principal positions and asset prices but not by measuring bid-ask spreads.
Subjects
free text keywords: G14, G20, L10, Financial markets, Market structure and pricing, Financial system regulation and policies, ddc:330, Economics and Econometrics, Finance, Market microstructure, Economics, Liquidity crisis, Financial system, Liquidity risk, Market impact, Basel III, Market liquidity, Mark to model, Order (exchange), business.industry, business, Market maker
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