Institutional investors are making their voices heard when it comes to the Volcker Rule.

They have made clear that they stand to bear the consequences of the changes, which will translate into higher costs. By one estimate, the proposed regulations on market making would boost total trading costs $41 billion a year. Investors fear that market makers will be forced to slash inventories, with the result being widened spreads, which would reverse a historical trend.

Of course, all that is frankly good news for the market makers, precisely the reason why Goldman Sachs recently suggested that it will benefit from the rule. The costs of hedging against tail-risk offer an interesting case study. Market making in such securities as 10-year variance swaps is already a tough proposition for banks. There’s not a lot of volume, and the costs are already high.

As noted by the Financial Times, if market making restrictions make it even tougher on the broker dealers, some predict that they will abandon the market completely, with the result being that investors have no way of hedging such risk. We could certainly see costs moving higher. Indeed, they already have. Hopefully, banks will come up with other hedging solutions, even as regulators strike the right balance when they finalize the rules later this year.

For more:
- here’s the article

Related articles:
Goldman Sachs might benefit from Volcker Rule
The rise of fat tail funds