In a report to Congress, the SEC wrote that evidence for the impact of regulatory reforms on market liquidity is mixed, with different measures of market liquidity showing different trends.
Many of the observed changes in these measures are consistent with the combined impacts of several factors besides new rules and regulations, including, among others, electronification of markets, changes in macroeconomic conditions, and post-crisis changes in dealer risk preferences that pre-date the passage of either the Dodd-Frank Act or Basel III. As noted above with respect to primary securities issuance, DERA (Division of Economic and Risk Analysis) has not attempted to estimate a counterfactual level of trading activity or average transaction costs in the absence of the recent regulatory reforms.
In US Treasury markets, the SEC finds no empirical evidence consistent with the hypothesis that liquidity has deteriorated after regulatory reforms. More specifically, there is no support for a causal link between the Volcker Rule and US Treasury market liquidity conditions. Changes in Treasury market liquidity are unlikely to be directly attributable to the Volcker Rule because US cash Treasuries are exempt from the Volcker Rule’s prohibitions on proprietary trading.