There was an article over at Bloomberg today that I found interesting. They talk about the inability to auction off US debt if the Volcker Rule were enacted.
I have been a proponent in spirit of the Volcker Rule. In general, we need to get all trading out of dark pools of liquidity, out of back offices and into the sunshine of a public marketplace.
Currently, the way the Treasury auctions off its debt is to hold a Dutch auction. There is a list of primary dealers that can participate. If the Volcker Rule were to be enacted, then the primary dealer list would have to be radically expanded. In fact, why is it so short today? Wouldn’t it behoove the Federal Reserve or Treasury to approve of more firms? More competitive bidding would ensure better prices. Would an entity like PIMCO or Citidel buy more treasuries if they didn’t have to do it in a secondary market? All the primary dealers get to mark up the securities and make a little juice, simply because they are designated dealers. Perhaps there should be a capital requirement for people to be able to join in an auction.
If the Volcker Rule were put into effect, there would be a lot of sacred cows of finance that would get gored. A lot would have to change for it to be implemented correctly. Markets, and the general public would benefit. Bid/Ask spreads would be more competitive, and the market would be less fragmented.
The traders at the banks would be out of business. But they would re-assemble, and set up their own independent trading firms or hedge funds. There would be a period of adjustment. But as long as the rules of the game were clear and written to ensure that markets were transparent and accessible to all, the period would be short.
Many people will put up all kinds of road blocks to change in banking and structure. There is a new reality in finance with the internet, electronic trading, algorithmic trading and these road blocks just don’t take those changes into account. There is no imagination, or thinking out of the box to solve problems. Instead, old oligopolies are allowed to take more control, exposing us to more risk.