Publication Type
Journal Article
Version
submittedVersion
Publication Date
1-2023
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 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, market making, matchmaking, financial crisis, corporate bonds, liquidity, over-the-counter markets, broker-dealers, Basel 2.5, Basel III, Volcker Rule, post-crisis regulation, market microstructure
Discipline
Finance and Financial Management
Research Areas
Finance
Publication
Review of Financial Studies
Volume
36
Issue
2
First Page
678
Last Page
732
ISSN
0893-9454
Identifier
10.1093/rfs/hhac068
Publisher
Oxford University Press (OUP)
Citation
SAAR, Gideon; SUN, Jian; YANG, Ron; and ZHU, Haoxiang.
From market making to matchmaking: Does bank regulation harm market liquidity?. (2023). Review of Financial Studies. 36, (2), 678-732.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7099
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1093/rfs/hhac068