The Volcker Rule sounds great in theory. Banks that enjoy federal guarantees shouldn't be in the game of risky proprietary trading, which includes investing proprietary funds in hedge funds and other alternative investments. Their main game ought to be lending, according to reform advocates.

Volcker put it well: banking and trading don't mix. A lot of people would agree with that. But the problems crop up in practice, starting with the very definition of proprietary trading. We'll have to see what the language of the final law looks like. But it's likely to be left up to the Treasury of Fed to come up with a working plan. No matter what, it will leave lots of grey areas for Wall Street.

The bottom line is that all market makers are out to make money; it isn't charity. Most assume that their desire to make money outweighs their desire to make markets. In any sort of free-fall, no one assumes they will lose everything to keep prices afloat. So separating what constitutes a profit from a proprietary trade from a market-maker trade becomes blurred.

The Treasury and/or Fed has an opportunity here to think outside of the box and come up with something truly usable. Right now, it's a bit vexing. One approach--a bad one--would be to look at total profits from market-making operations and assume that only so much money can be made from the activity. 

For more:
- here's some background

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