Mnuchin Blames Volcker Rule, High-Speed Trading for Volatility

MKTrader said:
The Volcker Rule is a typical government regulation: it sounds good to some ("let's take it to the banks!") but has all sorts of unintended consequences no one thought about.
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Actually, banks not providing liquidity is exactly what the rule is all about. It is designed to prevent undue risk-taking by systematically important institutions. There are plenty of liquidity providers that are not systematically important like hedge funds.
 
MKTrader said:
Simply saying what "it's about" or what it's designed to do is tautological. The devil is in the details.
https://www.brookings.edu/opinions/the-volcker-rule-is-still-a-bad-idea/
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It's an opinion and it brings up some valid points, but there are flaws in any approach and Volcker rule is not an exception. However, there is certainly evidence that when the banks were allowed to warehouse risks, they have fucked it up big time (having worked as a prop trader at multiple major IBs, I've witnessed it first-hand).

The general logic is that the banks are systemically important. Preventing them from directly warehousing risk does probably decrease liquidity, but that's the cost we (as an economy) are willing to bear to avoid bank failures. Pretty much any other approach like regulatory capital, systematic risk stress-tests etc would have very similar implications.
 
sle said:
It's an opinion and it brings up some valid points, but there are flaws in any approach and Volcker rule is not an exception. However, there is certainly evidence that when the banks were allowed to warehouse risks, they have fucked it up big time (having worked as a prop trader at multiple major IBs, I've witnessed it first-hand).

The general logic is that the banks are systemically important. Preventing them from directly warehousing risk does probably decrease liquidity, but that's the cost we (as an economy) are willing to bear to avoid bank failures. Pretty much any other approach like regulatory capital, systematic risk stress-tests etc would have very similar implications.
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Banks are margins of failure. Last resort is more printing or outright confiscation of assets.
 
@sle

Just looking for a guess - how much of the liquidity in equities and equity derivs would you guess has been moved/removed under the Volker rule.
 
ajacobson said:
@sle

Just looking for a guess - how much of the liquidity in equities and equity derivs would you guess has been moved/removed under the Volker rule.
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I would wager it didn't reduce it much. Explicit prop groups were killed off (or transferred to hedgefunds) but risk taking within the customer books were still allowed under the rule.

I personally always got the sense the rule was a red herring and distracted from real reform. That's why banks didn't fight it. They knew they got off easy.
 
newwurldmn said:
I would wager it didn't reduce it much. Explicit prop groups were killed off (or transferred to hedgefunds) but risk taking within the customer books were still allowed under the rule.

I personally always got the sense the rule was a red herring and distracted from real reform. That's why banks didn't fight it. They knew they got off easy.
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I seem to remember they were also in the mood to reduce their prop trading anyway at the time given the volatility it introduced to their earnings?
 
Sig said:
I seem to remember they were also in the mood to reduce their prop trading anyway at the time given the volatility it introduced to their earnings?
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Managers loved prop trading. it typically had a higher return than their core businesses which required more infrastructure. I was trading an embedded prop book and our combined pnl was 10% of the entire group (but we were 4 people and the group was 50 people and a huge technology infrastructure).

It did add volatility which punished the stocks' PE's (with the exception of Goldman)
 
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