Regulators are in the final stages of hammering out the final rule set for the Volcker Rule, which aims to prevent banks with federally insured deposits from engaging in risky proprietary trading.

The rule, part of Dodd-Frank, has been tricky to structure in part because there's a thin line separating proprietary trading from market making. All market makers are tasked with also making money on their trades, and there are some who think that a meaningful delineation will be too difficult.

One interesting trial balloon has just gone up. Bloomberg notes that one idea under discussion is to alter the pay structure of traders in market making units such that they will be paid from the spreads and the commissions on their trades, not on capital gains or losses. This is hardly the only idea under discussion of course. The regulators are considering requiring "that trading positions have near-term demands and no large anticipation positions" and that "firms fall under the Securities and Exchange Commission's guidance of a ‘bona-fide' market-maker." Banks also would be required to institute a raft of compliance measure to monitor all this. We may see some new metrics aimed at helping companies comply.

All this is sure to be controversial. One danger of course is that the market makers who do not have insured funds will unduly benefit. Some have suggested that more money will flow away from the traditional sell-side to these lesser regulated entities.

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