Historically, banks have enjoyed a privileged position as intermediaries between buyers and sellers in the fixed-income markets. Unsurprisingly, these banks argue that their position must be maintained in order to facilitate liquidity during volatile periods. This is a myth intended to preserve their competitive moat around what has been a very lucrative business.
Fortunately for investors, recent reforms and regulatory pressures have dramatically increased the number of participants who can make prices and provide liquidity across many fixed-income markets. Markets that have opened to competition now enjoy better pricing, efficiency and resiliency.
Did Dodd-Frank’s removal of banks from bond market-making activity make our markets less liquid and, hence, prone to a future crisis?
Citadel’s Ken Griffin pens an op-ed in the Wall Street Journal that effectively says “Don’t believe the hype.” Griffin speaks on behalf of the new market makers (HFT shops and hedge funds) who’ve been supplanting systemically important financial institutions over the last few years.
Hit the link above to read his admittedly biased take on the noise around bond market liquidity.