Bank Market Making Pre-2008
Before the 2008 financial crisis, large investment banks were the dominant market makers in most asset classes — equities, bonds, derivatives. Bank market makers had large balance sheets, extensive client relationships, and regulatory frameworks designed for banking. Banks took risk as principal market makers, holding inventory and providing liquidity to institutional clients.
Post-2008 Regulatory Changes
Dodd-Frank and Basel III substantially increased the capital and liquidity requirements for banks, particularly for trading activities. The Volcker Rule restricted bank proprietary trading. These requirements made traditional bank market-making more expensive, creating opportunities for non-bank market makers like Citadel Securities to expand into markets where banks reduced activity.
Non-Bank Advantages
Non-bank market makers like Citadel Securities have structural advantages over bank market makers: they are not subject to bank capital requirements, can operate with different leverage structures, have no deposit-taking obligations, and can focus exclusively on market-making efficiency without the regulatory burden of banking. These advantages allowed Citadel to gain market share as banks retreated.
Regulatory Asymmetry
The fundamental concern about non-bank market makers is regulatory asymmetry: they can engage in activities similar to banks — providing liquidity, taking market risk at scale, operating with significant leverage — without being subject to equivalent regulatory requirements. This asymmetry may create systemic risk that is not adequately managed by existing frameworks.