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Banking Regulation and Market Making

David Cimon () and Corey Garriott ()

Staff Working Papers from Bank of Canada

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.

Keywords: Financial markets; Financial system regulation and policies; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: G14 G20 L10 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2017
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mst
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Journal Article: Banking regulation and market making (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-7

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