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Market making and the Volcker rule

Written by Mukul Pareek

I came across a recent paper on the Volcker rule by Darrell Duffie, who is a professor at the business school at Stanford University.  It is a brilliant piece of writing, with no equations and a writing style that is easy to understand.  A key nugget I found in this article was the author's explanation of market making.  In the first part of this paper, Dr. Darrel Duffie explains how market making actually works in practice, and how large banks and broker-dealers make markets in securities.  If you have ever been intrigued by how market making works, and what factors market makers have to think about as they offer bid-offer quotes on a security at all times, this is a great read.

Professor Duffie of course then goes to provide his opinion on the Volcker rule, and how it might be better to use capital cushions to protect against the risks from proprietary trading by regulated institutions rather than something as complex as the Volcker rule and its implementation is turning out to be.

Here is the link to the article: http://www.darrellduffie.com/uploads/policy/duffievolckerrule.pdf