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Discussion Paper
What's Driving Dealer Balance Sheet Stagnation?
Securities brokers and dealers (“dealers”) engage in the business of trading securities on behalf of their customers and for their own account, and use their balance sheets primarily for trading operations, particularly for market making. Total financial assets of dealers in the United States have not shown any growth since 2009. This stagnation in their balance sheets raises the worry that dealers’ market-making capacity could be constrained, adversely affecting market liquidity. In this post, we investigate the stagnation of dealer balance sheets, focusing particularly on the boom and ...
Discussion Paper
Changes in the Returns to Market Making
Since the financial crisis, major U.S. banking institutions have increased their capital ratios in response to tighter capital requirements. Some market analysts have asserted that the higher capital and liquidity requirements are driving up the costs of market making and reducing market liquidity. If regulations were, in fact, increasing the cost of market making, one would expect to see a rise in the expected returns to that activity. In this post, we estimate market-making returns in equity and corporate bond markets to assess the impact of regulations.