The Banking and Strategy Initiative

Chillin' out till it needs to be funded

Meet the Volckers’ Marathon Pt. VI: How market making is disturbed by the prop trading restrictions

From the fool’s study of quotavble quotes on the mayhem, this superb discussion of the matter from Nobel prize winning Myron Scholes’ :

[A] leveraged market-making business is inherently unstable.  Banks might be the wrong providers of liquidity to markets.  Simply put, leverage can only be reduced by selling assets to raise cash if market makers are making markets in the assets they need to sell and they no longer can continue to do so at times of shock and to make conditions worse, they borrow from each other with short-term financing to hold longer-maturity relatively idiosyncratic assets.

To me, important for the discussion is how this content rich was pushed in the analysis to after layers of CEO speak about the lack of clariy and nothin gabout what the law does..and the a.m. is the basis for all banks being up i n arms with Paul and the SEC and the senators writing the law up for vote. That market making in many sectors or industry’s will be no longer supported as credit spreads in the remaining markets widen and allow bans to get better returns than Goldman Sachs last 3.7% return on equity, with target drawnn lower than Nov 2011’s 20% but still substanially higher than the 2011 result.


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This entry was posted on February 16, 2012 by in Financial Markets and tagged , , , , , , , .


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