Increased capital requirements on dealers, combined with the prohibition on bank dealers taking material positions, should significantly increase market volatility because market makers are much less likely, and are less able, to dampen such volatility. In fact, with a system of strict capital regulation, one should expect to see market makers very quickly being forced to liquidate into declining markets. 

To counter the possibility of a market crash, the report suggests…

 To her credit, Commissioner Bowen advances the discussion of technology change and the markets by simply acknowledging that algorithmic trading is here to stay. Many of her recommendations seem entirely reasonable; e.g., that there is no reason for market-makers to be provided with economic incentives to self-trade, even when the self-trades are accidental (as is virtually always the case). 

One fundamental question for the Commissioner is this: whether she sees her…

This case should serve as a reminder to firms of the benefits of occasional independent reviews of the value of collateral used to secure margin loans. Independent valuations can serve an important compliance function in lending activities, just as they do in proprietary trading activities.

The fact that the leverage ratio is simple does not mean that it is clever. Simple solutions share one attribute with complex solutions: both can be completely wrong. As Vice Chair Hoenig concedes, it is not only market participants who believe the leverage ratio (as proposed) to be impractical; many of his fellow regulators believe that, too. At some point, the argument that because there was a financial crisis, Rule X is good stops being persuasive (although it never should have been). The…