With the return of prop trading following a potential repeal/modification of the Volcker rule in Dodd-Frank, what would be the impact on market opportunities in general? Some things that came to mind were: Positives - More active participants in the markets - more volumes, more short-term volatility? - "More liquidity"? - that's the commonly cited one, but not sure if i really buy it, in the sense that the FX, index markets, etc are already trading hundreds of billions, and provide more than enough liquidity for all practical purposes, so the marginal increment makes no difference Negatives - With less regulation, more likelihood of market manipulation? eg. rigging in rates (usd libor, yen libor), currencies, precious metals markets among others, all came to light within the past couple years...raises the question of what other activities are out there - Related to above, with prop trading resuming in-house at banks, the "black edge" of information flow can really help some unsavory participants generate massive profits (ie. at the expense of other traders)...as an ironic indication of this, you just have to look at how prop traders circa 2006 generated 100s+ millions in profits at the banks (supposedly trading on their prop books, not agency flow trading), then after they decamped to their own separate hedge funds, their returns shriveled to <5% a year
I think banks were getting out of it anyway before the rule. Probably too much uncertainty to stand back up only to have it potentially reinstated in 2 or 4 years.