MANY ASPECTS of the Dodd-Frank Wall Street Reform and Consumer Protection Act could go a long way toward safeguarding investors and taxpayers from a repeat of the 2008 financial crisis. But as written, some provisions of the law and proposed regulations could significantly harm investors by driving up trading costs and reducing liquidity.
These investors are not just hedge funds and the wealthy. The overwhelming majority are pension funds, 401(k) plans, annuities and mutual funds that benefit ordinary individuals and families — our clients, whose interests we are committed to protecting.
We estimate that the proposed regulations regarding proprietary trading and market making would drive up total trading costs in the U.S. by about $41 billion a year. That’s like paying a $41 billion annual insurance premium against a recurrence of the 2008 crisis. It’s quite possible that the proposed limits on market making could actually make a financial crisis worse by draining liquidity from the markets at times when it is most needed. ....